UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended  January 31, 2020

 

OR

 

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

 

For the transition period from ________   to ________.

 

Commission File Number: 000-54520

 

XT Energy Group, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   98-0632932

(State or other jurisdiction of

incorporation or organization)

  (IRS Employer
Identification No.)
     

No.1, Fuqiao Village, Henggouqiao Town

Xianning, Hubei, China

  437012
(Address of principal executive offices)   (Zip Code)

 

+ (86715) 8719899

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None   None   None

 

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

 

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

 

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

 

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

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

   

As of May 26, 2020, there were 531,042,000 shares of the issuer’s common stock, par value $0.001 per share, outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS  
   
PART I – FINANCIAL INFORMATION 1
   
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 44
Item 3. Quantitative and Qualitative Disclosures About Market Risk 66
Item 4. Controls and Procedures 66
     
PART II – OTHER INFORMATION 68
   
Item 1. Legal Proceedings 68
Item 1A.  Risk Factors 69
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 70
Item 3. Defaults Upon Senior Securities 70
Item 4. Mine Safety Disclosures 70
Item 5. Other Information 70
Item 6. Exhibits 70
   
SIGNATURES 71

 

i

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains forward-looking statements that relate to future events or our future financial performance. Some discussions in this report may contain forward-looking statements that involve risk and uncertainty.

 

A number of important factors could cause our actual results to differ materially from those expressed in any forward-looking statements made in this report. Forward-looking statements are often identified by words like: “believe,” “could,” “expect,” “estimate,” “anticipate,” “intend,” “project” and similar expressions or words which, by their nature, refer to future events. In some cases, you can also identify forward-looking statements by terminology such as “may,” “will,” “should,” “plans,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” contained in our annual report on Form 10-K filed with the Securities and Exchange Commission on January 30, 2020, which may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include, without limitation:

 

  our ability to generate revenue and profit;
     
  our ability to market our synthetic fuel and related products to more customers;
     
  our ability to identify and acquire access to additional facilities suitable for production of our synthetic fuel and related products;

 

  The effect that changes of government regulations affecting fossil fuel and renewable energy have on the solar power and synthetic fuel industry;
     
  future demand for solar energy solutions;
     
  fluctuations in the market price of petroleum and natural gases;
     
  unexpected delays, operational difficulties, cost-overruns or failures in our production processes;
     
  our ability to effectively design, launch, market, and sell new generations of our products and services;
     
  our ability to manage or expand operations and to fill customers’ orders on time;
     
  the effect of prices of raw materials and components and our ability to source raw materials and components at reasonable prices;
     
  our ability to maintain adequate control of our expenses as we seek to grow;
     
  our ability to establish or protect our intellectual property;
     
  the impact of significant government regulation in China;
     
  our ability to implement marketing and sales strategies and adapt and modify them as needed; and
     
  our implementation of required financial, accounting and disclosure controls and procedures and related corporate governance policies.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

The cautions outlined made in this statement and elsewhere in this document should not be construed as complete or exhaustive. In many cases, we cannot predict factors which could cause results to differ materially from those indicated by the forward-looking statements. Additionally, many items or factors that could cause actual results to differ materially from forward-looking statements are beyond our ability to control. We will not undertake an obligation to further update or change any forward-looking statement, whether as a result of new information, future developments, or otherwise.

 

ii

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements 

 

XT Energy Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(Stated in U.S. Dollars) 

 

    January 31,
2020
    July 31,
2019
 
ASSETS            
Current assets            
Cash   $ 2,903,098     $ 3,459,783  
Restricted cash    
-
      76,698  
Short-term investment    
-
      435,787  
Notes receivable     1,238,104       2,064,405  
Accounts receivable, net     1,634,445       3,928,854  
Inventories, net     6,149,341       6,839,579  
Advances to suppliers     2,114,122       4,723,258  
Prepaid expenses     1,306,057       1,551,203  
Other receivables, net     211,886       509,426  
Other receivables from sale of discontinued operations     9,800,221      
-
 
Other receivables - related parties     668,660       6,537  
Current assets of discontinued operations    
-
      4,441,772  
Total current assets    

26,025,934

      28,037,302  
                 
Other assets                
Property, plant and equipment, net     11,807,176       15,061,856  
Right-of-use assets     2,266,981      
-
 
Intangible assets, net     6,874,904       7,789,979  
Prepaid expenses - non-current     200,911       192,327  
Goodwill     3,756,236       3,758,145  
Other assets of discontinued operations    
-
      9,537,179  
Total other assets     24,906,208       36,339,486  
                 
Total assets   $

50,932,142

    $ 64,376,788  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities                
Accounts payable   $ 3,484,598     $ 3,164,927  
Accounts payable - related party    
-
      9,554  
Advance from customers    

14,553,791

      15,599,402  
Other payables and accrued liabilities     2,493,936       2,117,660  
Other payables - related parties and director     7,511,270       6,375,385  
Lease liabilities - current     820,928       -  
Income taxes payable     853,755       858,662  
Current maturities of investment payable     136,245       136,314  
Current maturities of investment payable - related parties     113,479       204,648  
Current liabilities of discontinued operations    
-
      1,499,012  
Total current liabilities    

29,968,002

      29,965,564  
                 
Other liabilities                
Investment payable - related parties    
-
      279,764  
Lease liabilities - noncurrent     866,382       -  
Total other liabilities     866,382       279,764  
                 
Total liabilities    

30,834,384

      30,245,328  
                 
Commitments and contingencies    
 
     
 
 
                 
Equity                
Preferred stock:  $0.001 par value, 100,000,000 shares authorized, none issued and outstanding    
-
     
-
 
Common stock:  $0.001 par value, 1,000,000,000 shares authorized, 531,042,000 shares issued and outstanding as of January 31, 2020 and July 31, 2019     531,042       531,042  
Additional paid-in capital     40,680,195       40,680,195  
Subscription receivable     (250,000 )     (250,000 )
Statutory reserves     572,642       572,642  
Accumulated deficit     (19,660,546 )     (8,292,847 )
Accumulated other comprehensive loss     (1,654,227 )     (1,425,617 )
Total XT Energy Group, Inc. common stockholders’ equity     20,219,106       31,815,415  
                 
Noncontrolling interests     (121,348 )     2,316,045  
                 
Total equity     20,097,758       34,131,460  
                 
Total liabilities and equity   $

50,932,142

    $ 64,376,788  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1

 

 

XT Energy Group, Inc. and Subsidiaries

 Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(Stated in U.S. Dollars)

 

    For the
Three Months Ended
January 31,
    For the
Six Months Ended
January 31,
 
    2020     2019     2020     2019  
                         
Revenue-products   $ 2,971,667     $ 21,412,050     $ 6,138,503     $ 41,011,006  
Revenue-installation of power systems    
-
     
-
     
-
      389,482  
Total revenue     2,971,667       21,412,050       6,138,503       41,400,488  
                                 
Cost of sales-products     2,245,313       16,035,930       6,019,093       31,471,145  
Cost of sales-installation of power systems    
-
     
-
     
-
      357,708  
Total cost of sales     2,245,313       16,035,930       6,019,093       31,828,853  
                                 
Gross profit     726,354       5,376,120       119,410       9,571,635  
                                 
Operating expenses:                                
Selling expenses     654,866       690,044       878,158       803,106  
General and administrative expenses     2,395,601       1,863,457       4,271,010       3,566,119  
Research and development expenses     421,738       76,126       518,861       79,173  
(Recovery) provision for doubtful accounts     (432,235 )     60,959       687,896       (103,928 )
Change in estimated contingent liabilities    
-
      155,744      
-
      155,744  
Impairment of advances to suppliers     538,809      
-
      538,809      
-
 
Impairment loss of long-lives assets     4,999,504      
-
      4,999,504      
-
 
Total operating expenses     8,578,283       2,846,330       11,894,238       4,500,214  
                                 
(Loss) income from operations     (7,851,929 )     2,529,790       (11,774,828 )     5,071,421  
                                 
Other income (expenses)                                
Other income (expenses), net     (100,348 )     99,355       (81,078 )     130,110  
Interest income     10,892       15,540       13,194       24,735  
Interest expense     (29,900 )     (226,353 )     (35,853 )     (703,581 )
Total other expenses, net     (119,356 )     (111,458 )     (103,737 )     (548,736 )
                                 
(Loss) income before income taxes     (7,971,285 )     2,418,332       (11,878,565 )     4,522,685  
                                 
Income tax benefit (expense)     262,678       (959,092 )     216,482       (1,485,236 )
                                 
(Loss) income from continuing operations     (7,708,607 )     1,459,240       (11,662,083 )     3,037,449  
                                 
Discontinued operations:                                
(Loss) income from discontinued operations, net of applicable income taxes     (343,713 )     270,804       (518,475 )     270,804  
Loss on sale of discontinued operations, net of applicable income taxes     (454,067 )    
-
      (454,067 )    
-
 
(Loss) income from discontinued operations, net of applicable income taxes     (797,780 )     270,804       (972,542 )     270,804  
                                 
Net (loss) income     (8,506,387 )     1,730,044       (12,634,625 )     3,308,253  
                                 
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.   $ (7,499,966 )   $ 1,617,499     $ (11,367,699 )   $ 2,993,266  
                                 
Net (loss) income   $ (8,506,387 )   $ 1,730,044     $ (12,634,625 )   $ 3,308,253  
                                 
Foreign currency translation adjustment     699,170       1,046,405       (249,169 )     665,419  
                                 
Total comprehensive (loss) income     (7,807,217 )     2,776,449       (12,883,794 )     3,973,672  
                                 
Less:  Comprehensive (loss) income attributable to noncontrolling interests     (971,784 )     195,287       (1,287,485 )     375,444  
                                 
Comprehensive (loss) income attributable to XT Energy Group, Inc.   $ (6,835,433 )   $ 2,581,162     $ (11,596,309 )   $ 3,598,228  
                                 
(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  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

2

 

 

XT Energy Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Stated in U.S. Dollars)

                                                    Accumulated              
                            Additional           Accumulated deficit     other              
    Preferred stock     Common stock     paid-in     Subscription     Statutory           comprehensive     Noncontrolling        
    Shares     Par Value     Shares     Par value     capital     receivable     reserves     Unrestricted     loss     interests     Total  
BALANCE, August 1, 2018    
-
    $
-
      591,042,000     $ 591,042     $ 9,860,068     $ (310,000 )   $ 108,487     $ (6,743,399 )   $ (932,061 )   $ 882,925     $ 3,457,062  
Contribution by shareholder     -      
-
      -      
-
      14,533,003      
-
     
-
     
-
     
-
     
-
      14,533,003  
Statutory reserves     -      
-
      -      
-
     
-
     
-
      149,543       (149,543 )    
-
     
-
     
-
 
Foreign currency translation adjustment     -      
-
      -      
-
     
-
     
-
     
-
     
-
      (358,701 )     (22,285 )     (380,986 )
Net income attributable to XT Energy Group, Inc.     -      
-
      -      
-
     
-
     
-
     
-
      1,375,767      
-
     
-
      1,375,767  
Net income attributable to noncontrolling interest     -      
-
      -      
-
     
-
     
-
     
-
     
-
     
-
      202,442       202,442  
BALANCE, October 31, 2018    
-
     
-
      591,042,000       591,042       24,393,071       (310,000 )     258,030       (5,517,175 )     (1,290,762 )     1,063,082       19,187,288  
Contribution by shareholder     -      
-
      -      
-
      932,033      
-
     
-
     
-
     
-
     
-
      932,033  
Statutory reserves     -      
-
      -      
-
     
-
     
-
      223,281       (223,281 )    
-
     
-
     
-
 
Foreign currency translation adjustment     -      
-
      -      
-
     
-
     
-
     
-
     
-
      963,663       82,742       1,046,405  
Net income attributable to XT Energy Group, Inc.     -      
-
      -      
-
     
-
     
-
     
-
      1,617,499      
-
     
-
      1,617,499  
Noncontrolling interest from acquisition     -      
-
      -      
-
     
-
     
-
     
-
     
-
     
-
      862,193       862,193  
Net income attributable to noncontrolling interest     -      
-
      -      
-
     
-
     
-
     
-
     
-
     
-
      112,545       112,545  
BALANCE, January 31, 2019    
-
    $
-
      591,042,000     $ 591,042     $ 25,325,104     $ (310,000 )   $ 481,311     $ (4,122,957 )   $ (327,099 )   $ 2,120,562     $ 23,757,963  

                                              Accumulated              
                            Additional           Accumulated deficit     other              
    Preferred stock     Common stock     paid-in     Subscription     Statutory           comprehensive     Noncontrolling        
    Shares     Par Value     Shares     Par value     capital     receivable     reserves     Unrestricted     loss     interests     Total  
BALANCE, August 1, 2019    
-
    $
-
      531,042,000     $ 531,042     $ 40,680,195     $ (250,000 )   $ 572,642     $ (8,292,847 )   $ (1,425,617 )   $ 2,316,045     $ 34,131,460  
Statutory reserves     -      
-
      -      
-
             
-
      20,413       (20,413 )    
-
     
-
     
-
 
Foreign currency translation adjustment     -      
-
      -      
-
     
-
     
-
     
-
     
-
      (893,143 )     (55,196 )     (948,339 )
Net loss attributable to XT Energy Group, Inc.     -      
-
      -      
-
     
-
     
-
     
-
      (3,867,733 )    
-
     
-
      (3,867,733 )
Net loss attributable to noncontrolling interest     -      
-
      -      
-
     
-
     
-
     
-
     
-
     
-
      (260,505 )     (260,505 )
BALANCE, October 31, 2019    
-
     
-
      531,042,000       531,042       40,680,195       (250,000 )     593,055       (12,180,993 )     (2,318,760 )     2,000,344       29,054,883  
Statutory reserves     -      
-
      -      
-
             
-
      (20,413 )     20,413      
-
     
-
     
-
 
Foreign currency translation adjustment     -      
-
      -      
-
     
-
     
-
     
-
     
-
      664,533       34,637       699,170  
Net loss attributable to XT Energy Group, Inc.     -      
-
      -      
-
     
-
     
-
     
-
      (7,499,966 )    
-
     
-
      (7,499,966 )
Net loss attributable to noncontrolling interest     -      
-
      -      
-
     
-
     
-
     
-
     
-
     
-
      (1,006,421 )     (1,006,421 )
Deconsolidation of discontinued operations     -      
-
      -      
-
     
-
     
-
     
-
     
-
     
-
      (1,149,908 )     (1,149,908 )
BALANCE, January 31, 2020    
-
    $
-
      531,042,000     $ 531,042     $ 40,680,195     $ (250,000 )   $ 572,642     $ (19,660,546 )   $ (1,654,227 )   $ (121,348 )   $ 20,097,758  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3

 

  

XT Energy Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(Stated in U.S. Dollars)

 

    For the
Six Months Ended
January 31,
 
    2020     2019  
Cash flows from operating activities:                
Net (loss) income   $ (12,634,625 )   $ 3,308,253  
Net (loss) income from discontinued operations     (972,542 )     270,804  
Net (loss) income from continuing operations     (11,662,083 )     3,037,449  
Adjustments to reconcile net loss to net cash (used in) provided by  operating activities:                
Depreciation expense     584,523       501,307  
Amortization expense     277,326       373,948  
Amortization of operating lease right-of-use assets     528,521      
-
 
Allowance for (recovery of) doubtful accounts     687,896       (103,928 )
Impairment of inventories     1,666,439      
-
 
Amortization of debt discount     35,853       249,175  
Change in estimated contingent liabilities    
-
      155,744  
Impairment of advances to suppliers     538,809      
-
 
Impairment loss of long-lives assets     4,999,504      
-
 
Changes in operating assets and liabilities                
Notes receivable     809,445       1,007,956  
Accounts receivable     1,560,606       (331,626 )
Inventories     (1,000,148 )     (1,350,604 )
Advances to suppliers     2,017,997       (2,524,708 )
Contract assets    
-
      2,860,384  
Prepaid expenses     (331,835 )     (569,228 )
Other receivables     290,319       3,934  
Accounts payable     315,123       (1,753,169 )
Accounts payable - related party     (9,367 )    
-
 
Advance from customers     (1,017,809 )     12,370,392  
Operating lease liabilities     (534,093 )    
-
 
Other payables and accrued liabilities     (115,052 )     393,751  
Income taxes payable     (4,386 )     392,082  
Net cash (used in) provided by operating activities from continuing operations     (362,412 )     14,712,859  
Net cash used in operating activities from discontinued operations     (489,058 )     (6,528,125 )
Net cash (used in) provided by operating activities     (851,470 )     8,184,734  
                 
Cash flows from investing activities:                
Payment to former shareholders on businesses acquired     (399,439 )     (8,838,640 )
Purchases of property, plant and equipment     (1,745,972 )     (1,350,493 )
Refund of long-term investment    
-
      117,813  
Refund of short-term investment     427,223      
-
 
Purchase of intangible assets     (29,556 )    
-
 
Collection of loan receivable    
-
      1,745,378  
Loan to related party     (640,834 )    
-
 
Net cash used in investing activities from continuing operations     (2,388,578 )     (8,325,942 )
Net cash used in investing activities from discontinued operations     (4,800 )     (73,644 )
Net cash used in investing activities     (2,393,378 )     (8,399,586 )
                 
Cash flows from financing activities:                
Borrowings from related parties     1,124,496       1,517,602  
Capital contribution from stockholders    
-
      6,738,144  
Payments of short-term loan - bank    
-
      (455,628 )
Payments of from third party loan    
-
      (174,538 )
Proceeds from related party loans    
-
      2,036,275  
Payments of related party loans    
-
      (22,020,857 )
Proceeds from note payable    
-
      76,797  
Net cash provided by (used in) financing activities from continuing operations     1,124,496       (12,282,205 )
Net cash provided by financing activities from discontinued operations    
-
      6,211,051  
Net cash provided by (used in) financing activities     1,124,496       (6,071,154 )
                 
Effect of exchange rate change on cash and restricted cash     (48,350 )     64,321  
                 
Net change in cash and restricted cash     (2,168,702 )     (6,221,685 )
                 
Cash and restricted cash - beginning of period     5,466,380       14,245,783  
                 
Cash and restricted cash - end of period     3,297,678       8,024,098  
                 
Less: Cash and restricted cash from discontinued operations     (394,580 )     (297,186 )
                 
Cash and restricted cash from continuing operations, end of period   $ 2,903,098     $ 7,726,912  
                 
Supplemental disclosure of cash flow information:                
Interest paid   $
-
    $ 84,548  
Income tax paid   $ 16,370     $ 126,057  
                 
Supplemental non-cash information:                
Operating lease right-of-use assets obtained in exchange for operating lease liabilities   $ 2,752,080     $
-
 
Unpaid other receivables balance resulted from sale of discontinued operations   $

9,612,509

    $
-
 
Recognition of other payables to former subsidiary upon sale of discontinued operations   $ 479,970     $
-
 
Loan to third party offset with investment payable   $
-
    $ 519,286  

 

The following table provides a reconciliation of cash and restricted cash reported within the statements of financial position that sum to the total of the same amounts shown in the statements of cash flows:

 

    January 31,     July, 31  
    2020     2019  
Cash   $ 2,903,098     $ 3,459,783  
Restricted cash    
-
      76,698  
Total cash and restricted cash shown in the consolidated statements of cash flows from continuing operations     2,903,098       3,536,481  
Total cash and restricted cash shown in the consolidated statements of cash flows from discontinued operations     394,580       1,929,899  
Total cash and restricted cash shown in the consolidated statements of cash flows   $ 3,297,678     $ 5,466,380  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1 – Nature of business and organization

 

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.

 

5

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

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.

 

Reorganization

 

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:

 

  Framework Agreement on Business Cooperation, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian;

 

  Exclusive Management, Consulting and Training and Technical Service Agreement, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian;

 

  Exclusive Option Agreement, dated July 25, 2014, by and among Xiangtian Shenzhen, Sanhe Xiangtian and all the shareholders of Sanhe Xiangtian (“Shanhe Xiangtian Shareholders”);

 

  Equity Pledge Agreement, dated July 25, 2014, by and among Xiangtian Shenzhen, Sanhe Xiangtian and the Shanhe Xiangtian Shareholders;

 

  Know-How Sub-License Agreement, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian; and

 

  Powers of Attorney of the Sanhe Xiangtian Shareholders dated July 25, 2014.

 

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:

 

  exercise effective control over Xianning Xiangtian;

 

  receive substantially all of the economic benefits of Xianning Xiangtian; and

 

6

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

  have an exclusive option to purchase all or part of the equity interests in Xianning Xiangtian when and to the extent permitted by the laws of the PRC.

 

The New VIE Agreements include the following: 

 

  Framework Agreement on Business Cooperation, entered between Xiangtian Shenzhen and Xianning Xiangtian.
     
  Agreement of Exclusive Management, Consulting and Training and Technical Service, entered between Xiangtian Shenzhen and Xianning Xiangtian,.
     
  Exclusive Option Agreement, entered among Xiangtian HK, Xiangtian Shenzhen, Fei Wang, Zhou Jian and Xianning Xiangtian,
     
  Equity Pledge Agreement, entered among Xiangtian Shenzhen, Fei Wang, Zhou Jian, and Xianning Xiangtian,.
     
  Know-How Sub-License Agreement, entered between Xiangtian Shenzhen and Xianning Xiangtian, pursuant to which Xiangtian Shenzhen; and
     
  Powers of Attorney of the Xianning Xiangtian stockholders.
     
  Spousal Consent Letters of each of the spouses of the Xianning Xiangtian Shareholders

 

Framework Agreement on Business Cooperation

 

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.

 

Agreement of Exclusive Management, Consulting and Training and Technical Service

 

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.

  

Exclusive Option Agreement

 

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.

 

7

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Equity Pledge Agreement

 

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.

 

Know-How Sub-License 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.

 

Power of Attorney

 

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.

  

Spousal Consent Letters

 

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.

 

8

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

All of the Company’s operations are through its VIEs located in the PRC.

 

The accompanying unaudited condensed consolidated financial statements reflect the activities of XT Energy and each of the following entities:

 

Name   Background   Ownership
Xiangtian HK   ● A Hong Kong company   100% owned by XT Energy
         
Xiangtian BVI   ● A British Virgin Islands company   100% owned by XT Energy
         
Xiangtian Shenzhen   ● A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)   100% owned by Xiangtian HK
         
Sanhe Xiangtian   ● A PRC limited liability company
● Incorporated on July 8, 2013
● Sales and installation of power generation systems and PV systems and sales of PV Panels, air compression equipment and heat pump products
  VIE of Xiangtian Shenzhen prior to September 30, 2018 and became subsidiary of Xianning Xiangtian on September 30, 2018 and thereafter
         
Xianning Xiangtian   ● A PRC limited liability company
● Incorporated on May 30, 2016
● Manufacturing and sales of air compression equipment and heat pump products
  100% owned by Sanhe Xiangtian prior to September 30, 2018 and became VIE of Xiangtian Shenzhen on September 30, 2018 and thereafter
         
Xiangtian Zhongdian   ● A PRC limited liability company
● Incorporated on March 7, 2018
● Manufacturing and sales of PV panels
  70% owned by Xianning Xiangtian
         
Jingshan Sanhe   ● A PRC limited liability company
● Incorporated on April 17, 2018
● Researching, manufacturing and sales of high-grade synthetic fuel products
  100% owned by Xianning Xiangtian
         
Hubei Jinli   ● A PRC limited liability company
● Incorporated on December 27, 2004 and acquired on June 30, 2018
● Manufacturing and sales of hydraulic parts and electronic components
  100% owned by Xianning Xiangtian
         
Tianjin Jiabaili   ● A PRC limited liability company
● Incorporated on April 10, 2007 and acquired on June 30, 2018
● Manufacturing and sales of petroleum products
  100% owned by Xianning Xiangtian
         
Xiangtian Trade   ● A PRC limited liability company
● Incorporated on August 9, 2018
● Expected to engage in trading chemical raw materials to support fuel production
  100% owned by Xianning Xiangtian
         
Wine Co.*   ● A PRC limited liability company
● Incorporated on August 9, 2011 and acquired on December 14, 2018
● Manufacturing and sales of wine products
 

90% owned by Xianning Xiangtian

Disposed in January 2020

         
Herbal Wine Co.*   ● A PRC limited liability company
● Incorporated on August 9, 2018 and acquired on December 14, 2018
● Manufacturing and sales of herbal wine products
 

90% owned by Xianning Xiangtian

Disposed in January 2020

 

* Xianning Xiangtian sold Rongentang for approximately $9.6 million to a third party in January 2020, resulting in approximately $0.5 million loss from disposal of subsidiary. See Note 4 – Discontinued operations for details.

 

9

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 2 – Summary of significant accounting policies

 

Going concern

 

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 Company will continuously seek equity financing to support its working capital;
     
  other available sources of financing from PRC banks and other financial institutions;
     
  financial support and credit guarantee commitments from the Company’s related parties.

  

Basis of presentation

 

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.

 

Principles of consolidation

 

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.

  

Use of estimates and assumptions

 

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.

 

10

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Variable interest entities

 

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:

 

  Framework Agreement on Business Cooperation, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian;

 

  Exclusive Management, Consulting and Training and Technical Service Agreement, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian;

 

  Exclusive Option Agreement, dated July 25, 2014, by and among Xiangtian Shenzhen, Sanhe Xiangtian and Shanhe Xiangtian Shareholders;

 

  Equity Pledge Agreement, dated July 25, 2014, by and among Xiangtian Shenzhen, Sanhe Xiangtian and the Shanhe Xiangtian Shareholders;

 

  Know-How Sub-License Agreement, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian; and

 

  Powers of Attorney of the Sanhe Xiangtian Shareholders dated July 25, 2014.

 

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:

 

  Framework Agreement on Business Cooperation, entered between Xiangtian Shenzhen and Xianning Xiangtian, pursuant to which Xiangtian Shenzhen and Xianning Xiangtian have agreed to enter into a series of VIE agreements and to cooperate in all prospective of Xianning Xiangtian’s business operation and management.

 

  Agreement of Exclusive Management, Consulting and Training and Technical Service, entered between Xiangtian Shenzhen and Xianning Xiangtian, pursuant to which Xiangtian Shenzhen has agreed to provide Xianning Xiangtian with complete business support and technical support and related management, training and consulting services. In consideration for such services, Xiangtian Shenzhen is entitled to receive an amount equal to 100% of Xianning Xiangtian’s net income.

 

11

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

  Exclusive Option Agreement, entered among Xiangtian HK, Xiangtian Shenzhen, Fei Wang, Zhou Jian and Xianning Xiangtian, pursuant to which Fei Wang and Zhou Jian, the owners of Xianning Xiangtian, have granted to Xiangtian Shenzhen and Xiangtian HK the irrevocable right and option to acquire all of their equity interests in Xianning Xiangtian.
     
  Equity Pledge Agreement, entered among Xiangtian Shenzhen, Fei Wang, Zhou Jian, and Xianning Xiangtian, pursuant to which Fei Wang and Zhou Jian, the owners of Xianning Xiangtian, have pledged all of their rights, titles and interests in Xianning Xiangtian to Xiangtian Shenzhen to guarantee Xianning Xiangtian’s performance of its obligations under all the other VIE Agreements.

 

  Know-How Sub-License Agreement, entered between Xiangtian Shenzhen and Xianning Xiangtian, pursuant to which Xiangtian Shenzhen has granted Xianning Xiangtian an exclusive right to use and develop a series of aerodynamics related patents and technologies with respect to electrical generation for commercial and residential structures, not including automobile and wind towers. Xiangtian Shenzhen possesses the rights licensed under this agreement through two license agreements dated September 30, 2018 with Fei Wang, Zhou Jian and Xianning Lucksky Aerodynamic Electricity (“Xianning Lucksky”), the owners of the aforesaid patents and technologies. For the sublicense contemplated under this agreement, Xianning Xiangtian will pay Xiangtian Shenzhen a quarterly royalty fee of five percent of revenue. For the six months ended January 31, 2020, the quarterly royalty fee was waived by Xiangtian Shenzhen; and

 

  Power of Attorney. Pursuant to a power of attorney, each of the Xianning Xiangtian stockholders agreed to irrevocably entrust Xiangtian Shenzhen with the stockholder voting rights and other stockholder rights for representing them to exercise such rights at the stockholders’ meeting of Xianning Xiangtian in accordance with applicable laws and its Article of Association, including, but not limited to, the right to sell or transfer all or any of their equity interest in Xianning Xiangtian, and appoint and vote for the directors and Chairman of Xianning Xiangtian as the authorized representative of the Xianning Xiangtian stockholders. The term of each proxy and voting agreement is as long as each of the Xianning Xiangtian stockholders is a shareholder of Xianning Xiangtian and is binding on any transferee.

 

  Spousal Consent Letters. 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.

  

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.

  

12

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

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:

 

    January 31,
2020
    July 31,
2019
 
             
Current assets   $ 25,407,774     $ 22,287,078  
Current assets of discontinued operations     -       4,441,772  
Non-current assets     24,887,708       26,783,807  
Non-current assets of discontinued operations     -       9,537,179  
Total assets   $ 50,295,482     $ 63,049,836  
                 
Current liabilities   $ 25,202,984     $ 23,617,149  
Current liabilities of discontinued operations     -       1,499,012  
Non-current liabilities     866,382       279,764  
Total liabilities   $ 26,069,366     $ 25,395,925  

  

    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   $ 2,971,667     $ 21,412,050     $ 6,138,503     $ 41,400,488  
Gross profit   $ 726,354     $ 5,376,120     $ 119,410     $ 9,571,635  
(Loss) income from continuing operations   $ (7,042,842 )   $ 3,137,324     $ (10,649,994 )   $ 6,174,386  
Net (loss) income from continuing operations attributable to XT Energy Group, Inc.   $ (6,468,159 )   $ 1,980,320     $ (9,864,428 )   $ 3,850,104  
Net (loss) income from discontinued operations attributable to XT Energy Group, Inc.     (763,408 )     243,723     $ (920,694 )   $ 243,723  
Net (loss) income attributable to XT Energy Group, Inc.   $ (7,231,567 )   $ 2,224,043     $ (10,785,122 )   $ 4,093,827  

 

Business Combinations

 

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

 

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).

 

13

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Restricted Cash

 

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

 

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

 

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 Receivable, net

 

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

 

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.

 

14

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

   

Advances to Suppliers

 

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.

  

Contract Assets

 

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

 

Prepaid expenses represent advance payments made to vendors for services such as rent, internet, consulting, maintenance and certification.

 

Other Receivables, net

 

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

 

Other receivables – related parties present advances to the management of the Company for business development and travel advances.

 

Property, Plant and Equipment, net

 

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:

 

Classification   Estimated Useful Life     Estimated Residual Value  
Plant and buildings   5-20 years     0-5%  
Machinery equipment   5-10 years     0-5%  
Computer and office equipment   3-10 years     0-5%  
Vehicles   5-10 years     0-5%  
Plant improvement and fixtures   Shorter of lease term or estimated useful live of 5 - 20 years     0-5%  

 

 

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

 

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:

 

15

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Classification   Estimated Useful Life
Land use rights   50 years
Technology know-hows   10 years
Patents, licenses and certifications   3-10 years
Software   3 years

  

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

 

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.

 

16

 

 

XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Impairment for Long-Lived Assets

 

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

 

Subscription receivable represents unpaid capital contribution from its shareholders.

  

Fair Value Measurement

 

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:

 

  Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
     
  Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
     
  Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

17

 

 

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.

 

18

 

 

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.

 

19

 

 

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  

 

20

 

 

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.

 

21

 

 

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.

 

22

 

 

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.

 

23

 

 

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.

 

24

 

 

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.

 

25

 

 

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.

  

26

 

 

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.

 

27

 

 

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  

 

28

 

 

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  

 

29

 

 

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  

 

30

 

 

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.

 

31

 

 

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  

 

32

 

 

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  

 

33

 

 

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  

 

34

 

 

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.

 

35

 

 

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.

 

36

 

 

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.

 

37

 

 

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.

 

 

38

 

 

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  

 

39

 

 

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.

 

40

 

 

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  

 

41

 

 

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  

 

42

 

 

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  

 

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

  

The following discussion and analysis of our results of operations and financial condition should be read together with our unaudited condensed consolidated financial statements and the notes thereto, which are included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended July 31, 2019 (the “Annual Report”) filed with SEC. Our financial statements have been prepared in accordance with U.S. GAAP. In addition, our financial statements and the financial information included in this report reflect our organizational transactions and have been prepared as if our current corporate structure had been in place throughout the relevant periods.

  

Overview

 

We are engaged in a variety of energy-related businesses through our subsidiaries and controlled entities in China. One of the businesses is in the field of compressed air energy storage in China and 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 the Company’s variable interest entities (“VIEs”), formerly Sanhe Luck Sky Electrical Engineering Co., Ltd. (“Sanhe Xiangtian”) and currently Xianning Xiangtian Energy Holding Group Co. Ltd. (“Xianning Xiangtian”), formerly known as Xianning Sanhe Power Equipment Manufacturing Co. Ltd.

 

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 (Note 3 – Business combinations). In August 2018, Xianning Xiangtian formed a wholly owned subsidiary, Xianning Xiangtian Trade Co. Ltd. (“Xiangtian Trade”), which engaged in trading general merchandise.

 

In December 2018, Xianning Xiangtian acquired Hubei Rongentang Wine Co., Ltd. (“Wine Co.”), which is engaged in the business of manufacturing and sales of wine, and acquired Hubei Rongentang Herbal Wine Co., Ltd. (“Herbal Wine Co.”), which is engaged in the business of manufacturing and sales of herbal wine products.

 

The table below illustrates the businesses we conduct through our subsidiaries and consolidated affiliated entities:

 

Subsidiary   Principal Business   Location
Sanhe  Xiangtian   Sales of PV panels, air compression equipment and heat pump products  and sale and installation of power generation systems and PV systems   Hebei Province
Xiangtian Zhongdian   Manufacture and sales of PV panels   Hubei Province
Jingshan Sanhe   Manufacturing and sales of Synthetic fuel products   Hubei Province
Hubei Jinli   Manufacture and sales of hydraulic parts and electronic components   Hubei Province
Tianjin Jiabaili   Synthetic fuel production   Tianjin
Xianning Xiangtian   Manufacturing and sales of air compression equipment and heat pump products   Hubei Province
Xiangtian Trade   Sale of synthetic fuel products   Hubei Province
Rongentang Wine*   Wine production   Hubei Province
Rongentang Herbal Wine*   Herbal Wine production   Hubei Province

 

* Disposed in January 2020

    

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In September and October 2018, January 2019 and March 2019, Mr. Jian Zhou, our 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 RMB 209,260,000 (approximately $30.8 million) as capital contribution to Xianning Xiangtian.

 

On November 5, 2018, we changed our name to XT Energy Group, Inc. through a merger with and into our newly formed wholly-owned subsidiary formed for the purpose of affecting the name change.

 

On May 24, 2019, our Board of Directors (the “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 its business focus on its energy related business. Therefore the result of operations was presented as discontinued operations as of and for the three and six months ended January 31, 2020 unaudited condensed consolidated financial statements.

 

On December 16, 2019, the board of directors of Xiangtian Zhongdian made a decision to suspend its current operations temporarily and will further make determination on its future sales plan of PV Panels in Xiangtian Zhongdian. Currently, management is in the negotiation process with the non-controlling shareholder of Xiangtian Zhongdian about acquiring the remaining 30% non-controlling interest of Xiangtian Zhongdian. Our PV panels operations is expected to resume back to the normal level once we acquired the 30% non-controlling interest of Xiangtian Zhongdian.

 

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 m