UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from ________ to ________.
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Securities registered pursuant to Section 12(b) of the Act:
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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
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of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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| ☐ | Smaller reporting company | |||
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As of May 26, 2020, there were
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 | $ | $ | ||||||
| Restricted cash | ||||||||
| Short-term investment | ||||||||
| Notes receivable | ||||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Advances to suppliers | ||||||||
| Prepaid expenses | ||||||||
| Other receivables, net | ||||||||
| Other receivables from sale of discontinued operations | ||||||||
| Other receivables - related parties | ||||||||
| Current assets of discontinued operations | ||||||||
| Total current assets | ||||||||
| Other assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Prepaid expenses - non-current | ||||||||
| Goodwill | ||||||||
| Other assets of discontinued operations | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable - related party | ||||||||
| Advance from customers | ||||||||
| Other payables and accrued liabilities | ||||||||
| Other payables - related parties and director | ||||||||
| Lease liabilities - current | - | |||||||
| Income taxes payable | ||||||||
| Current maturities of investment payable | ||||||||
| Current maturities of investment payable - related parties | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Other liabilities | ||||||||
| Investment payable - related parties | ||||||||
| Lease liabilities - noncurrent | - | |||||||
| Total other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Equity | ||||||||
| Preferred stock: $ | ||||||||
| Common stock: $ | ||||||||
| Additional paid-in capital | ||||||||
| Subscription receivable | ( | ) | ( | ) | ||||
| Statutory reserves | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total XT Energy Group, Inc. common stockholders’ equity | ||||||||
| Noncontrolling interests | ( | ) | ||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
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 | $ | $ | $ | $ | ||||||||||||
| Revenue-installation of power systems | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Cost of sales-products | ||||||||||||||||
| Cost of sales-installation of power systems | ||||||||||||||||
| Total cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Research and development expenses | ||||||||||||||||
| (Recovery) provision for doubtful accounts | ( | ) | ( | ) | ||||||||||||
| Change in estimated contingent liabilities | ||||||||||||||||
| Impairment of advances to suppliers | ||||||||||||||||
| Impairment loss of long-lives assets | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| (Loss) income from operations | ( | ) | ( | ) | ||||||||||||
| Other income (expenses) | ||||||||||||||||
| Other income (expenses), net | ( | ) | ( | ) | ||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Loss) income before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| (Loss) income from continuing operations | ( | ) | ( | ) | ||||||||||||
| Discontinued operations: | ||||||||||||||||
| (Loss) income from discontinued operations, net of applicable income taxes | ( | ) | ( | ) | ||||||||||||
| Loss on sale of discontinued operations, net of applicable income taxes | ( | ) | ( | ) | ||||||||||||
| (Loss) income from discontinued operations, net of applicable income taxes | ( | ) | ( | ) | ||||||||||||
| Net (loss) income | ( | ) | ( | ) | ||||||||||||
| Less: Net (loss) income attributable to noncontrolling interests from continuing operations | ( | ) | ( | ) | ||||||||||||
| Less: Net (loss) income attributable to noncontrolling interests from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Net (loss) income attributable to XT Energy Group, Inc. | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Foreign currency translation adjustment | ( | ) | ||||||||||||||
| Total comprehensive (loss) income | ( | ) | ( | ) | ||||||||||||
| Less: Comprehensive (loss) income attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||
| Comprehensive (loss) income attributable to XT Energy Group, Inc. | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| (Loss) earnings per common share - basic and diluted | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Discontinued operations | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted average number of common shares outstanding - basic and diluted | ||||||||||||||||
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 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||
| Contribution by shareholder | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Statutory reserves | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net income attributable to XT Energy Group, Inc. | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | - | - | ||||||||||||||||||||||||||||||||||||||||||
| BALANCE, October 31, 2018 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Contribution by shareholder | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Statutory reserves | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to XT Energy Group, Inc. | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest from acquisition | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | - | - | ||||||||||||||||||||||||||||||||||||||||||
| BALANCE, January 31, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||
| Statutory reserves | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss attributable to XT Energy Group, Inc. | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| BALANCE, October 31, 2019 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Statutory reserves | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to XT Energy Group, Inc. | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Deconsolidation of discontinued operations | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| BALANCE, January 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||
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 | $ | ( | ) | $ | ||||
| Net (loss) income from discontinued operations | ( | ) | ||||||
| Net (loss) income from continuing operations | ( | ) | ||||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization expense | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Allowance for (recovery of) doubtful accounts | ( | ) | ||||||
| Impairment of inventories | ||||||||
| Amortization of debt discount | ||||||||
| Change in estimated contingent liabilities | ||||||||
| Impairment of advances to suppliers | ||||||||
| Impairment loss of long-lives assets | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Notes receivable | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Advances to suppliers | ( | ) | ||||||
| Contract assets | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Other receivables | ||||||||
| Accounts payable | ( | ) | ||||||
| Accounts payable - related party | ( | ) | ||||||
| Advance from customers | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ||||||
| Other payables and accrued liabilities | ( | ) | ||||||
| Income taxes payable | ( | ) | ||||||
| Net cash (used in) provided by operating activities from continuing operations | ( | ) | ||||||
| Net cash used in operating activities from discontinued operations | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Payment to former shareholders on businesses acquired | ( | ) | ( | ) | ||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Refund of long-term investment | ||||||||
| Refund of short-term investment | ||||||||
| Purchase of intangible assets | ( | ) | ||||||
| Collection of loan receivable | ||||||||
| Loan to related party | ( | ) | ||||||
| Net cash used in investing activities from continuing operations | ( | ) | ( | ) | ||||
| Net cash used in investing activities from discontinued operations | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Borrowings from related parties | ||||||||
| Capital contribution from stockholders | ||||||||
| Payments of short-term loan - bank | ( | ) | ||||||
| Payments of from third party loan | ( | ) | ||||||
| Proceeds from related party loans | ||||||||
| Payments of related party loans | ( | ) | ||||||
| Proceeds from note payable | ||||||||
| Net cash provided by (used in) financing activities from continuing operations | ( | ) | ||||||
| Net cash provided by financing activities from discontinued operations | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate change on cash and restricted cash | ( | ) | ||||||
| Net change in cash and restricted cash | ( | ) | ( | ) | ||||
| Cash and restricted cash - beginning of period | ||||||||
| Cash and restricted cash - end of period | ||||||||
| Less: Cash and restricted cash from discontinued operations | ( | ) | ( | ) | ||||
| Cash and restricted cash from continuing operations, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | $ | ||||||
| Income tax paid | $ | $ | ||||||
| Supplemental non-cash information: | ||||||||
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
| Unpaid other receivables balance resulted from sale of discontinued operations | $ | $ | ||||||
| Recognition of other payables to former subsidiary upon sale of discontinued operations | $ | $ | ||||||
| Loan to third party offset with investment payable | $ | $ | ||||||
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 | $ | $ | ||||||
| Restricted cash | - | |||||||
| Total cash and restricted cash shown in the consolidated statements of cash flows from continuing operations | ||||||||
| Total cash and restricted cash shown in the consolidated statements of cash flows from discontinued operations | ||||||||
| Total cash and restricted cash shown in the consolidated statements of cash flows | $ | $ | ||||||
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,
On May 30, 2014, the Company purchased
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
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”)
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
On January 6, 2020, the Company entered
into an equity transfer agreement with Kairui Tong and Hao Huang (the “Buyers”), which the
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
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
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
Exclusive Option Agreement
Pursuant to the Exclusive Option Agreement
among Xiangtian Shenzhen, Xiangtian HK, Xianning Xiangtian and the shareholders holding an aggregate of
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
(
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 | ||||
| Xiangtian BVI | ||||
| Xiangtian Shenzhen | ||||
| Sanhe Xiangtian | ● 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 |
|||
| Xianning Xiangtian | ● Incorporated on May 30, 2016 ● Manufacturing and sales of air compression equipment and heat pump products |
|||
| Xiangtian Zhongdian | ● Incorporated on March 7, 2018 ● Manufacturing and sales of PV panels |
|||
| Jingshan Sanhe | ● Incorporated on April 17, 2018 ● Researching, manufacturing and sales of high-grade synthetic fuel products |
|||
| Hubei Jinli | ● Incorporated on December 27, 2004 and acquired on June 30, 2018 ● Manufacturing and sales of hydraulic parts and electronic components |
|||
| Tianjin Jiabaili | ● Incorporated on April 10, 2007 and acquired on June 30, 2018 ● Manufacturing and sales of petroleum products |
|||
| Xiangtian Trade | ● Incorporated on August 9, 2018 ● Expected to engage in trading chemical raw materials to support fuel production |
|||
| Wine Co.* | ● 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.* | ● 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 |
| * |
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 $
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,
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 |
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 | $ | $ | ||||||
| Current assets of discontinued operations | - | |||||||
| Non-current assets | ||||||||
| Non-current assets of discontinued operations | - | |||||||
| Total assets | $ | $ | ||||||
| Current liabilities | $ | $ | ||||||
| Current liabilities of discontinued operations | - | |||||||
| Non-current liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
| 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 | $ | $ | $ | $ | ||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| (Loss) income from continuing operations | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Net (loss) income from continuing operations attributable to XT Energy Group, Inc. | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Net (loss) income from discontinued operations attributable to XT Energy Group, Inc. | ( | ) | $ | ( | ) | $ | ||||||||||
| Net (loss) income attributable to XT Energy Group, Inc. | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
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 $
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, $
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 $
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 | ||||||
| Machinery equipment | ||||||
| Computer and office equipment | ||||||
| Vehicles | ||||||
| Plant improvement and fixtures | Shorter of lease term or estimated useful live of |
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 | ||
| Technology know-hows | ||
| Patents, licenses and certifications | ||
| Software |
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.
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 $
For the three and six months ended January
31, 2020, an impairment of $
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 | $ | $ | $ | $ | ||||||||||||
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 | $ | $ | ||||||
| Change in estimated contingent liabilities | ||||||||
| Release from level 3 measurement due to contingent payments has been finalized | ( | ) | ||||||
| Exchange rate effect | ( | ) | ||||||
| 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 and $
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 $
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 and $
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 | For the Six Months Ended | |||||||||||||
| Revenues (sales returns) – sales of products | ||||||||||||||||
| PV panels and others | $ | $ | $ | $ | ||||||||||||
| Air compression equipment and other components | ||||||||||||||||
| Heat pumps | ||||||||||||||||
| High-grade synthetic fuel | ||||||||||||||||
| Hydraulic parts and electronic components | ||||||||||||||||
| Wine and herbal wine | ( | ) | ( | ) | ||||||||||||
| Total revenue – sales of products | ||||||||||||||||
| Revenues – sales of products from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Revenues – sales of products from continuing operations | $ | $ | $ | $ | ||||||||||||
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 $
Advertising Costs
Advertising costs are expensed as incurred
and included in selling and general and administrative expenses. Advertising costs amounted to $
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 $
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 $
Value Added Taxes
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.
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 $
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
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
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.
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
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 RMB
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,
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 | $ | |||
| Accounts receivable, net | ||||
| Inventories, net | ||||
| Advances to suppliers | ||||
| Other receivables | ||||
| Plant and equipment, net | ||||
| Intangible assets, net | ||||
| Goodwill | ||||
| Total assets | ||||
| Advance from customers | ||||
| Other payables and accrued liabilities | ||||
| Other payables – related parties and director | ||||
| Taxes payable | ||||
| Total liabilities | ||||
| Net assets acquired prior to capital contribution | $ | |||
| Total consideration for capital injection | ||||
| Additional capital contribution by noncontrolling shareholder | ||||
| Net assets acquired after capital contribution | ||||
| Percentage of interest acquired | % | |||
| Total net assets acquired | $ | |||
Approximately $
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
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 | ||||||||||||
| Total | ||||||||||||
| Short-term | ( | ) | ( | ) | ||||||||
| 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) | $ | |||
| Total | $ | |||
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) | $ | $ | ||||||||||
| Heping Zhang | ||||||||||||
| Total | ||||||||||||
| Short-term | ( |
) | ( |
) | ||||||||
| Long-term | $ | $ | ||||||||||
The maturities schedule is as follows as of January 31, 2020:
| Repayment date | Amount | |||
| Due on demand | $ | |||
| Total | $ | |||
Debt discount
Debt discount, net of accumulated amortization,
totaled $
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
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 | $ | |||
| Accounts receivable, net | ||||
| Inventories | ||||
| Advances to suppliers | ||||
| Other current assets | ||||
| Total current assets of discontinued operations | ||||
| OTHER ASSETS: | ||||
| Property, plant and equipment, net | ||||
| Intangible assets, net | ||||
| Goodwill | ||||
| Total other assets of discontinued operations | ||||
| Total assets of the disposal group classified as discontinued operations | $ | |||
| Carrying amounts of major classes of liabilities included as part of discontinued operations: | ||||
| CURRENT LIABILITIES: | ||||
| Accounts payable | $ | |||
| Advance from customers | ||||
| Other payables and accrued liabilities | ||||
| Income taxes payable | ||||
| Total current liabilities of discontinued operations | ||||
| Total liabilities of the disposal group classified as discontinued operations | $ | |||
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 | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Total revenue | ( | ) | ( | ) | ||||||||||||
| Cost of sales (sales returns)-products | ( | ) | ( | ) | ||||||||||||
| Gross (loss) profit | ( | ) | ( | ) | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| (Loss) Income from operations | ( | ) | ( | ) | ||||||||||||
| OTHER INCOME (EXPENSES) | ||||||||||||||||
| Other expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Total other loss, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Loss) Income before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| Net (loss) income from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Less: Net (loss) income attributable to non-controlling interest from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Net (loss) income from discontinued operations attributable to XT Energy Group, Inc. | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
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 | $ | |||
| Accounts receivable, net | ||||
| Inventories | ||||
| Advances to suppliers | ||||
| Other current assets | ||||
| Total current assets | ||||
| OTHER ASSETS: | ||||
| Property, plant and equipment, net | ||||
| Intangible assets, net | ||||
| Goodwill | ||||
| Total other assets | ||||
| Total assets | $ | |||
| CURRENT LIABILITIES: | ||||
| Accounts payable | $ | |||
| Advance from customers | ||||
| Other payables and accrued liabilities | ||||
| Income taxes payable | ||||
| Total current liabilities | ||||
| Total liabilities | $ | |||
| Total net assets | $ | |||
| Noncontrolling interests | ( | ) | ||
| Total consideration | ( | ) | ||
| Exchange rate effect | ||||
| Total loss on sale of discontinued operations | $ | |||
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 | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | ||||||||
| Less: accounts receivable – discontinued operations | ( | ) | ||||||
| Accounts receivable, net – continuing operations | $ | $ | ||||||
Movement of allowance for doubtful accounts is as follows:
| Six Months Ended January 31, 2020 | Year Ended July 31, 2019 | |||||||
| Beginning balance | $ | $ | ||||||
| Provision for doubtful accounts | ||||||||
| Wrote off | ( | ) | ||||||
| Allowance acquired from acquisition | ||||||||
| Exchange rate effect | ( | ) | ( | ) | ||||
| Ending balance | ||||||||
| Less: balance – discontinued operations | ( | ) | ||||||
| Ending balance – continuing operations | $ | $ | ||||||
Note 6 – Inventories, net
Inventories, net, consist of the following:
| January 31, 2020 | July 31, 2019 | |||||||
| Raw materials and parts | $ | $ | ||||||
| Work in progress | ||||||||
| Semi-finished goods | ||||||||
| Finished goods | ||||||||
| Total | ||||||||
| Less: allowance for inventory reserve | ( | ) | ( | ) | ||||
| Inventories, net | ||||||||
| Less: inventories – discontinued operations | ( | ) | ||||||
| Inventories, net – continuing operations | $ | $ | ||||||
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 $
For the six months ended January 31, 2020
and 2019, a provision for inventory reserve of $
Note 7 – Property, plant and equipment, net
Property, plant and equipment consist of the following:
| January 31, 2020 | July 31, 2019 |
|||||||
| Plant and buildings | $ | $ | ||||||
| Machinery equipment | ||||||||
| Computer and office equipment | ||||||||
| Vehicles | ||||||||
| Plant improvement | ||||||||
| Construction in progress | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||||
| Property, plant and equipment, net | ||||||||
| Less: property, plant and equipment – discontinued operations | ( |
) | ||||||
| Property, plant and equipment, net – continuing operations | $ | $ | ||||||
Depreciation expenses from continuing operations
for the three months ended January 31, 2020 and 2019 were $
Depreciation expenses from continuing operations
for the six months ended January 31, 2020 and 2019 were $
Depreciation expenses from discontinued
operations for the three months ended January 31, 2020 and 2019 were $
Depreciation expenses from discontinued
operations for the six months ended January 31, 2020 and 2019 was $
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 | $ | $ | ||||||||
| Automobile exhaust cleaner construction project | ||||||||||
| Fire safety equipment installation | ||||||||||
| Total construction-in-progress – continuing operations | $ | $ | ||||||||
| * |
Note 8 – Intangible assets, net
Intangible assets, net, consist of the following:
| January 31, 2020 |
July 31, 2019 |
|||||||
| Land use rights | $ | $ | ||||||
| Technology know-hows | ||||||||
| Patents, licenses and certifications | ||||||||
| Software | ||||||||
| Less: accumulated amortization | ( |
) | ( |
) | ||||
| Intangible assets, net | ||||||||
| Less: intangible assets – discontinued operations | ( |
) | ||||||
| Intangible assets, net – continuing operations | $ | $ | ||||||
Amortization expenses from continuing operations
for the three months ended January 31, 2020 and 2019 amounted to $
Amortization expenses from discontinued
operations for the six months ended January 31, 2020 and 2019 amounted to $
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 | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Total | ||||
| Less: intangible assets – discontinued operations | ||||
| Total intangible assets, net – continuing operations | $ | |||
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 | $ | $ | $ | - | $ | |||||||||||
| Goodwill acquired through acquisitions | ||||||||||||||||
| Goodwill impairment | ( | ) | ( | ) | ||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance as of July 31, 2019 | ||||||||||||||||
| Disposal | ( | ) | ( | ) | ||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Balance as of January 31, 2020 | ||||||||||||||||
| Less: goodwill – discontinued operations | ||||||||||||||||
| Goodwill – continuing operations | $ | $ | $ | $ | ||||||||||||
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 $
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 $
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 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less: Interest | ( | ) | |||
| Present value of lease liabilities | $ | ||||
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.
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
Related party balances
| a. | Other receivables – related parties: |
| Name of Related Party | Relationship | Nature | January 31, 2020 |
July 31, 2019 |
||||||||
| Lei Su | $ | $ | ||||||||||
| Tianyu Ma | ||||||||||||
| Kai Li | * | |||||||||||
| Deng Hua Zhou | ||||||||||||
| Total | $ | $ | ||||||||||
| * |
| b. | Accounts payable – related parties: |
| Name of Related Party | Relationship | Nature | January 31, 2020 |
July 31, 2019 |
||||||||
| Xianning Baizhuang Tea Industry Co., Ltd. | $ | $ | ||||||||||
| Total | $ | $ | ||||||||||
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. | $ | $ | ||||||||||
| Lucksky Group | ||||||||||||
| Sanhe Dong Yi | ||||||||||||
| Hubei Henghao Real Estate Development Co., Ltd. | ||||||||||||
| Zhou Deng Rong | ||||||||||||
| Jian Zhou | ||||||||||||
| Zhimin Feng | ||||||||||||
| Heping Zhang | ||||||||||||
| Total | $ | $ | ||||||||||
| 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
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
$
On July 27, 2016, Xianning Xiangtian entered
into a rental agreement with Xianning Lucksky to lease
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
On July 27, 2018, Xianning Xiangtian entered
into a lease with Xianning Lucksky for a space of
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 $
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
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
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
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 | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Deferred | ||||||||||||||||
| (Income tax benefit) provision for income tax | ( | ) | ( | ) | ||||||||||||
| Less: (Income tax benefit) provision for income tax – discontinued operations | ( | ) | ( | ) | ||||||||||||
| (Income tax benefit) provision for income tax – continuing operations | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
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, | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forwards | $ | $ | ||||||
| Accounts receivable allowance | ||||||||
| Inventory allowance | ||||||||
| Deposit for investment allowance | ||||||||
| Accrued liabilities | ||||||||
| Warranty and other | ||||||||
| Deferred tax assets before valuation allowance | ||||||||
| Less: valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
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, | |||||||
| Deferred tax assets: | ||||||||
| Accounts receivable allowance | $ | $ | ||||||
| Less: valuation allowance | ( | ) | ||||||
| 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
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
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
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
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
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
| Dispute matter | Claim amount | |||
| 1) Negotiable instruments | $ | |||
| 2) Labor | ||||
| Total | $ | |||
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
For the six months ended January 31, 2020,
four customers accounted for
As of January 31, 2020, two customers accounted
for
Vendor concentration risk
For the three months ended January 31,
2020, one vendor accounted for
For the six months ended January 31, 2020,
one vendor accounted for
As of January 31, 2020, four vendors accounted
for
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 | $ | $ | $ | $ | ||||||||||||
| Xianning Xiangtian | ||||||||||||||||
| Jingshan Sanhe | ||||||||||||||||
| Xiangtian Zhongdian | ||||||||||||||||
| Hubei Jinli | ||||||||||||||||
| Xiangtian Trade | ||||||||||||||||
| Wine Co. | ||||||||||||||||
| Herbal Wine Co. | ( | ) | ( | ) | ||||||||||||
| Consolidated revenues | ||||||||||||||||
| Less: revenues – discontinued operations | ( | ) | ( | ) | ||||||||||||
| Revenues – continuing operations | $ | $ | $ | $ | ||||||||||||
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Gross profit (loss): | ||||||||||||||||
| Sanhe Xiangtian | $ | $ | $ | $ | ||||||||||||
| Xianning Xiangtian | ( | ) | ||||||||||||||
| Jingshan Sanhe | ( | ) | ( | ) | ||||||||||||
| Xiangtian Zhongdian | ( | ) | ( | ) | ||||||||||||
| Hubei Jinli | ||||||||||||||||
| Xiangtian Trade | ( | ) | ||||||||||||||
| Wine Co. | ( | ) | ( | ) | ||||||||||||
| Herbal Wine Co. | ( | ) | ( | ) | ||||||||||||
| Consolidated gross profit (loss) | ( | ) | ||||||||||||||
| Less: gross (loss) profit – discontinued operations | ( | ) | ( | ) | ||||||||||||
| Gross profit – continuing operations | $ | $ | $ | $ | ||||||||||||
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 | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Xianning Xiangtian | ( |
) | ( |
) | ( |
) | ||||||||||
| Jingshan Sanhe | ( |
) | ( |
) | ||||||||||||
| Xiangtian Zhongdian | ( |
) | ( |
) | ||||||||||||
| Hubei Jinli | ( |
) | ( |
) | ||||||||||||
| Tianjin Jiabaili | ( |
) | ( |
( |
) | ( |
||||||||||
| Xiangtian Trade | ( |
) | ( |
) | ||||||||||||
| Wine Co. | ( |
) | ( |
) | ||||||||||||
| Herbal Wine Co. | ( |
) | ( |
) | ||||||||||||
| All four holding entities | ( |
) | ( |
( |
) | ( |
||||||||||
| Consolidated (loss) income from operations | ( |
) | |
( |
) | |||||||||||
| Less: income (loss) from operations – discontinued operations | ( |
( |
||||||||||||||
| (Loss) income from operations – continuing operations | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Three Months Ended January 31, |
Six Months Ended January 31, |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income (loss) attributable to controlling interest: | ||||||||||||||||
| Sanhe Xiangtian | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Xianning Xiangtian | ( |
) | ( |
( |
) | |||||||||||
| Jingshan Sanhe | ( |
) | ( |
) | ||||||||||||
| Xiangtian Zhongdian | ( |
) | ( |
) | ||||||||||||
| Hubei Jinli | ( |
) | ( |
) | ||||||||||||
| Tianjin Jiabaili | ( |
) | ( |
( |
) | ( |
||||||||||
| Xiangtian Trade | ( |
) | ( |
) | ||||||||||||
| Wine Co. | ( |
) | ( |
) | ||||||||||||
| Herbal Wine Co. | ( |
) | ( |
) | ||||||||||||
| All four holding entities | ( |
) | ( |
( |
) | ( |
||||||||||
| Consolidated net (loss) income attributable to controlling interest | ( |
) | ( |
) | ||||||||||||
| Less: net (loss) income attributable to controlling interest - discontinued operations | ( |
( |
||||||||||||||
| Net (loss) income attributable to controlling interest - continuing operations | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Three Months Ended January 31, |
Six Months Ended January 31, |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Depreciation and amortization expenses: | ||||||||||||||||
| Sanhe Xiangtian | $ | $ | $ | $ | ||||||||||||
| Xianning Xiangtian | ||||||||||||||||
| Jingshan Sanhe | ||||||||||||||||
| Xiangtian Zhongdian | ||||||||||||||||
| Hubei Jinli | ||||||||||||||||
| Tianjin Jiabaili | ||||||||||||||||
| Xiangtian Trade | ||||||||||||||||
| Wine Co. | ||||||||||||||||
| Herbal Wine Co. | ||||||||||||||||
| Consolidated depreciation and amortization expenses | ||||||||||||||||
| Less: depreciation and amortization expenses - discontinued operations | ( |
) | ( |
( |
) | ( |
||||||||||
| Depreciation and amortization expenses - continuing operations | $ | $ | $ | $ | ||||||||||||
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 | $ | $ | ( |
$ | $ | |||||||||||
| Xianning Xiangtian | ||||||||||||||||
| Hubei Jinli | ||||||||||||||||
| Consolidated interest expense | $ | $ | $ | $ | ||||||||||||
| Three Months Ended January 31, |
Six Months Ended January 31, |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Capital expenditures: | ||||||||||||||||
| Sanhe Xiangtian | $ | $ | $ | $ | ||||||||||||
| Xianning Xiangtian | ||||||||||||||||
| Jingshan Sanhe | ||||||||||||||||
| Xiangtian Zhongdian | ||||||||||||||||
| Hubei Jinli | ||||||||||||||||
| Tianjin Jiabaili | ||||||||||||||||
| Wine Co. | ( |
) | ||||||||||||||
| Consolidated capital expenditures | ||||||||||||||||
| Less: capital expenditures - discontinued operations | ( |
( |
||||||||||||||
| Capital expenditures - continuing operations | $ | $ | $ | $ | ||||||||||||
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 | $ | $ | ||||||
| Xianning Xiangtian | ||||||||
| Jingshan Sanhe | ||||||||
| Xiangtian Zhongdian | ||||||||
| Hubei Jinli | ||||||||
| Tianjin Jiabaili | ||||||||
| Xiangtian Trade | ||||||||
| Wine Co. | ||||||||
| Herbal Wine Co. | ||||||||
| All four holding entities | ||||||||
| Consolidated assets | ||||||||
| Less: assets - discontinued operations | ( | ) | ||||||
| Total assets - continuing operations | $ | $ | ||||||
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
$(
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 | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit (loss) | ( | ) | ( | ) | ||||||||||||
| Total operating expenses | ||||||||||||||||
| (Loss) income from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Loss) income before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Loss) income from continuing operations | ( | ) | ( | ) | ( | ) | ||||||||||
| (Loss) income from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Net (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||
| Less: Net (loss) income attributable to noncontrolling interests from continuing operations | ( | ) | ( | ) | ||||||||||||
| Less: Net (loss) income attributable to noncontrolling interests from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Net (loss) income attributable to XT Energy Group, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| (Loss) earnings per common share - basic and diluted | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Discontinued operations | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted average number of common shares outstanding - basic and diluted | ||||||||||||||||
43
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 |
44
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 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 anticipated effect of the coronavirus on 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 headquarter is located in the city of Xianning, Hubei Province, and Sanhe Xiangtian, the Company’s previous headquarter, located in the city of Sanhe, Hebei Province, is restructured as our 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; |
45
| ● | 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 us to:
| ● | exercise effective control over Xianning Xiangtian; |
| ● | receive substantially all of the economic benefits of Xianning Xiangtian; and |
| ● | 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 |
As a result of the New VIE Agreements, we have become the primary beneficiary of Xianning Xiangtian, and it treats Xianning Xiangtian as its variable interest entity under U.S. GAAP. We will continue to consolidate the financial results of Xianning Xiangtian in our unaudited condensed consolidated financial statements in accordance with U.S. GAAP. The above reorganization has no effect on the Company’s unaudited condensed consolidated financial statements for the current period and thereafter.
46
Key Factors that Affect Operating Results
Our ability to build our brand and expand our sales distribution channel
We market our products through third-party distributors in China and through employees for direct sales. The distributors sell our products and receive commissions based on the value of the contracts. We utilize three classes of distributors based on the size of their territory – province, city and town. The distributors target factories and power plants, as well as local governments which may encourage local industry to utilize alternative energy sources, for our power generation products. The distributors also target wine retailers, supermarkets for our wine products and target gas stations and automobile repair shops for our synthetic fuel products. Our revenue growth will be affected by our ability to effectively execute our marketing strategies to build our brand and to expand our sales distribution channel through other sources other than through our distributors.
PRC economy
Although the PRC economy has grown in recent years, the pace of growth has slowed, and growth rates may continue to decline. According to the PRC National Bureau of Statistics of China, the annual rate of growth in the PRC declined from 7.6% in 2014, to 7.0% in 2015, 6.8% in 2016, 6.9% in 2017, 6.8% in 2018 and 6.3% in 2019. A further slowdown in overall economic growth, an economic downturn, a recession or other adverse economic development in the PRC may materially reduce the purchasing power of Chinese consumers and thus lead to a decrease in the demand for our products. Such a decrease in demand may have a materially adverse effect on our business.
Seasonality
Our financial results for quarters ended January 31 and April 30 in each year might fluctuate, depending upon the date of the Chinese New Year in the period of which it will fall into as the Chinese New Year normally would fall in between January and February. Immediately before the Chinese New Year, our operating results and revenues tend to be higher as our customers might push us to deliver our products before the Chinese New Year holiday and our operating results and revenues tend to be lower during the month after the Chinese New Year.
In addition, our operating results and revenues in our heat pump product line tend to be higher during the fall and winter seasons and lower during the spring and summer seasons.
Natural disaster or health epidemics
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 our revenue is concentrated in China. Consequently, the COVID-19 outbreak may materially adversely affect our business operations, financial condition and operating results for 2020. In March 2020, the temporary closure of stores and facilities, or the ’shelter in place’ order, in China was lifted and many businesses have resumed normal operations. We believe the epidemic may have a short-term negative effect on our business. However, 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. There is no guarantee that our total revenues will grow or remain at a similar level as compared to 2019.
PRC governmental regulations
We are subject to a variety of governmental regulations related to the storage, use and disposal of hazardous materials. The major environmental regulations applicable to us include the Environmental Protection Law of the PRC, the Law of the PRC on the Prevention and Control of Water Pollution and its implementation rules, the Law of the PRC on the Prevention and Control of Air Pollution and its implementation rules, the Law of PRC on the Prevention and Control of Solid Waste Pollution and the Law of the PRC on the Prevention and Control of Noise Pollution and the PRC Law on Appraising Environment Impacts. In addition, under the Environmental Protection Law of the PRC, the Ministry of Environmental Protection sets national pollutant emission standards. However, provincial governments may set stricter local standards, which are required to be registered at the State Administration for Environmental Protection. Enterprises are required to comply with the stricter of the two standards. Unfavorable changes could affect the delivery timing of our services and products that we provide and could materially and adversely affect the results of operations.
47
In addition, we are subject to a variety of licenses and permits, laws and regulations in the People’s Republic of China related to our operations.
| ● | Safety Production License, according to Regulation on Work Safety Permits (2014), the state applies a work safety licensing system to enterprises engaged in mining, construction, and the production of dangerous chemicals, fireworks and crackers, and civil explosives. |
| ● | Hazardous Chemicals Business License, according to Measures for the Administration of Dangerous Chemicals Business License (2012), the state implements a licensing system for the operation of hazardous chemicals. Enterprises which operate dangerous chemical shall obtain a hazardous chemicals business license. It is prohibited to operate hazardous chemicals without obtaining such business license. |
| ● | Industrial Product Production License, according to Regulation of the People’s Republic of China on the Production License of Industrial Products (2005), the State implements a production license system for enterprises that produce the industrial products that affect production safety and public safety such as hazardous chemicals. It is prohibited to produce such products listed without obtaining such license. |
| ● | Good Manufacturing Practice (“GMP”) Certificate. A pharmaceutical manufacturer must meet the Good Manufacturing Practice standards for each of its production facilities in China in respect of each form of pharmaceutical product it produces. GMP standards include staff qualifications, production premises and facilities, equipment, raw materials, environmental hygiene, production management, quality control and customer complaint administration. If a manufacturer meets the GMP standards, the CFDA will issue to the manufacturer a GMP certificate with a five-year validity period. |
| ● | Secrecy Qualification, according to Circular 8 issued by the National Defense Science and Technology Bureau of PRC, entities engaged in the research and production of classified weapons and equipment are required to implement a confidentiality qualification examination and certification system and obtain the corresponding Secrecy Qualification. |
| ● | Pursuant to the Product Quality Law of China promulgated by the National People’s Congress Standing Committee in 1993 and amended in 2018, a seller must establish and practice a check-for-acceptance system for replenishment of such seller’s inventory, and examine the quality certificates and other marks and must also adopt measures to keep the products for sale in good quality. Pursuant to the Product Quality Law of China, where a defective product causes physical injury to a person or damage to such person’s property, the victim may claim for damages against the manufacturer or the seller of the product. If the seller pays the damages and it is the manufacturer that should bear the liability, the seller has a right of recourse against the manufacturer. Similarly, if the manufacturer pays damages and it is the seller that should bear the liability, the manufacturer has a right of recourse against the seller. Violations of the Product Quality Law of China could result in various penalties, including the imposition of fines, suspension of business operations, revocation of business licenses and criminal liabilities. |
| ● | Pursuant to the Tort Liability Law of China, which was promulgated by the National People’s Congress Standing Committee on December 30, 2009 and became effective on July 1, 2010, producers are liable for damages caused by defects in their products and sellers are liable for damages attributable to their fault. If the defects are caused by the fault of third parties such as the transporter or storekeeper, producers and sellers have the right to claim for compensation from these third parties after paying the damages. The producers and sellers are obligated to take remedial measures such as issuing warnings or recalling the products in a timely manner if defects are found in products that are in circulation. If a party knowingly manufactured and sold defective products that cause death or severe personal injuries, the injured person has the right to claim punitive damages. |
48
Results of Operations
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statement of the Company for the three and six months ended January 31, 2020 and 2019 and related notes thereto.
The Three Months Ended January 31, 2020 Compared to the Three Months Ended January 31, 2019
For the Three Months Ended January 31, | For the Three Months Ended January 31, | Change | Change (%) | |||||||||||||
| Revenue | $ | 2,971,667 | $ | 21,412,050 | $ | (18,440,383 | ) | (86.1 | )% | |||||||
| Cost of revenue | 2,245,313 | 16,035,930 | (13,790,617 | ) | (86.0 | )% | ||||||||||
| Gross profit | 726,354 | 5,376,120 | (4,649,766 | ) | (86.5 | )% | ||||||||||
| Operating expenses | 8,578,283 | 2,846,330 | 5,731,953 | 201.4 | % | |||||||||||
| (Loss) income from operations | (7,851,929 | ) | 2,529,790 | (10,381,719 | ) | (410.4 | )% | |||||||||
| Other expenses, net | (119,356 | ) | (111,458 | ) | (7,898 | ) | 7.1 | % | ||||||||
| (Loss) income before income taxes | (7,971,285 | ) | 2,418,332 | (10,389,617 | ) | (429.6 | )% | |||||||||
| Income tax benefit (expense) | 262,678 | (959,092 | ) | 1,221,770 | (127.4 | )% | ||||||||||
| (Loss) income from continuing operations | (7,708,607 | ) | 1,459,240 | (9,167,847 | ) | (628.3 | )% | |||||||||
| (Loss) income from discontinued operations, net of applicable income taxes | (343,713 | ) | 270,804 | (614,517 | ) | (226.9 | )% | |||||||||
| Loss on sale of discontinued operations, net of applicable income taxes | (454,067 | ) | - | (454,067 | ) | (100.0 | )% | |||||||||
| Net (loss) income | (8,506,387 | ) | 1,730,044 | (10,236,431 | ) | (591.7 | )% | |||||||||
| Less: Net (loss) income attributable to non-controlling interest from continuing operations | (972,049 | ) | 85,464 | (1,057,513 | ) | (1,237.4 | )% | |||||||||
| Less: Net (loss) income attributable to non-controlling interests from discontinued operations | (34,372 | ) | 27,081 | (61,453 | ) | (226.9 | )% | |||||||||
| Net (loss) income attributable to common stockholders | $ | (7,499,966 | ) | $ | 1,617,499 | $ | (9,117,465 | ) | (563.7 | )% | ||||||
| Net (loss) income per share attributable to common stockholders | ||||||||||||||||
| Basic and diluted (loss) earnings per share – Continuing operations | $ | (0.01 | ) | $ | 0.00 | $ | (0.01 | ) | (100.0 | )% | ||||||
| Basic and diluted (loss) earnings per share – Discontinued operations | $ | (0.00 | ) | $ | 0.00 | $ | 0.00 | - | % | |||||||
Continuing Operations
Revenue
Our revenue was derived from the sales of PV panels and others, heat pump products, high-grade synthetic fuel products, hydraulic parts and electronic components for the three months ended January 31, 2020.
49
Total revenues decreased by $18,440,383 or 86.1%, to $2,971,667 for the three months ended January 31, 2020 as compared to $21,412,050 for the same period in 2019. The overall decrease was primarily attributable to the decrease of revenue generated from sales of PV panels and other products, heat pumps, and high-grade synthetic fuel products. See the table below for a detailed analysis of the decrease in our revenue.
Our revenue from our revenue categories is summarized as follows:
For the Three Months Ended January 31, | For the Three Months Ended January 31, | Change | Change (%) | |||||||||||||
| Revenue | ||||||||||||||||
| PV panels and others | 143,496 | 11,311,832 | (11,168,336 | ) | (98.7 | )% | ||||||||||
| Air compression equipment and other components | - | 389,477 | (389,477 | ) | (100.0 | )% | ||||||||||
| Heat pumps | 1,016,082 | 3,338,872 | (2,322,790 | ) | (69.6 | )% | ||||||||||
| High-grade synthetic fuel | 73,798 | 4,183,310 | (4,109,512 | ) | (98.2 | )% | ||||||||||
| Hydraulic parts and electronic components | 1,738,291 | 2,188,559 | (450,268 | ) | (20.6 | )% | ||||||||||
| Total revenue | $ | 2,971,667 | $ | 21,412,050 | $ | (18,440,383 | ) | (86.1 | )% | |||||||
Sales of PV panels and others decreased by $11,168,336 or 98.7% from $11,311,832 for the three months ended January 31, 2019 to $143,496 for the same period in 2020. The decrease in sales of PV panels and others was primarily due to significant decrease in sales from Xiangtian Zhongdian. We are currently operating under certain disagreements with our non-controlling shareholder in Xiangtian Zhongdian, which lead to Xiangtian Zhongdian to put the PV panels sales orders on hold. As a result, our sales of PV panels decreased during the three months ended January 31, 2020 as compared to the same period in 2019. Currently, our disagreements with the non-controlling shareholder in Xiangtian Zhongdian still has not been resolved. Management is in the negotiation process with the non-controlling shareholder of Xiangtian Zhongdian about acquiring the remaining 30% ownership interest. Our PV panel operations are expected to resume back to the normal level once this issue is resolved. However, sales from PV panels are expected to decrease as compared to the prior period due to the non-controlling shareholder in Xiangtian Zhongdian having retained their marketing team and will be leaving Xiangtian Zhongdian. We will start developing our own PV panels market with our internal marketing sources.
Sales of air compression equipment and other components decreased by $389,477 or 100.0% and the sales of heat pumps decreased by $2,322,790 or 69.6% for the three months ended January 31, 2020 as compared to the same period in 2019. The decrease was attributable to significant decrease in sales orders as we lost some large air compression equipment and heat pump customers during the three months ended January 31, 2020 as compared to the same period in 2019 which resulted in lesser sales orders in the current period. Our sales from air compression equipment and heat pumps are expected to be decreased as compared to the prior period going forward as we recently did not put a lot of research and development activities to keep up with the latest technology of the air compression and heat pumps products. We anticipate a decrease in future sales of heat pumps and air compression, and as a result our competitors will, in all likelihood gain a greater market share in this industry.
Sales of high-grade synthetic fuel decreased by $4,109,512 or 98.2% for the three months ended January 31, 2020 as compared to the same period in 2019 mainly due to significant decrease in sales from Jingshan Sanhe. Jingshan Sanhe has expanded its production facilities for the anticipation of the sales orders that we have received of our high-grade synthetic fuel products. During the three months ended January 31, 2020, we were pending final completion and inspection approval of our production facilities expansion in April 2020, which prevented Jingshan Sanhe’s ability to manufacture our high-grade synthetic fuel products during the period. As a result, we took longer time to complete and test our production facilities in order for us to produce a high quality of our products. With the COVID-19 production plant closure in February and March 2020 in the Hubei province, our sales of high-grade synthetic fuel is expected to resume back to the normal level upon resuming our production which we will resume operations in June 2020. On April 14, 2020, the Board discussed a plan to pursue the potential sale of all its ownership interest in Jingshan Sanhe due to the coronavirus outbreak might affect the Company’s future business operations and desired to scale back our variety of businesses. Therefore the result of operations will be presented as discontinued operations for Jingshan Sanhe 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.
Sales of hydraulic parts and electronic components decreased by $450,268 or 20.6% for the three months ended January 31, 2020 as compared to the same period in 2019 due to less governmental contracts. October 1, 2019 is the 70th National Day of PRC, of which the Chinese government had more products demands in the three months ended January 31, 2019 for the anticipating of the 70th National Day of PRC ceremony as compared to the same period of 2020 because the Chinese military force weapons includes our hydraulic parts and electronic components as their raw materials. We are expecting our revenue generated by hydraulic parts and electronic components business from Jinli will decrease because we believe the demand of our products from the Chinese military may decrease as the uncertainty surrounding the coronavirus outbreak, which the Chinese government might need to provide more funding to other industry needs the funding the most. On April 14, 2020, the Board discussed a plan to pursue the potential sale of all its ownership interest in Jinli due to the anticipation that the coronavirus outbreak might affect the Company’s future business operations and desired to scale back our variety of businesses. Therefore the result of operations will be presented as discontinued operations for 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.
50
Cost of Revenue
Total cost of revenue decreased by $13,790,617, or 86.0%, to $2,245,313 for the three months ended January 31, 2020 as compared to $16,035,930 for the same period in 2019. The decrease in cost of revenue is in line with the decrease in revenue except the cost of revenue of Hydraulic parts and electronic components.
Our cost of revenue from our revenue categories is summarized as follows:
For the Three Months Ended January 31, | For the Three Months Ended January 31, | Change | Change (%) | |||||||||||||
| Cost of revenue | ||||||||||||||||
| PV panels and others | 344,909 | 10,157,514 | (9,812,605 | ) | (96.6 | )% | ||||||||||
| Air compression equipment and other components | - | 186,182 | (186,182 | ) | (100.0 | )% | ||||||||||
| Heat pumps | 879,396 | 2,815,295 | (1,935,899 | ) | (68.8 | )% | ||||||||||
| High-grade synthetic fuel | 121,460 | 2,185,989 | (2,064,529 | ) | (94.4 | )% | ||||||||||
| Hydraulic parts and electronic components | 899,548 | 690,950 | 208,598 | 30.2 | % | |||||||||||
| Total cost of revenue | $ | 2,245,313 | $ | 16,035,930 | $ | (13,790,617 | ) | (86.0 | )% | |||||||
Cost of revenue of hydraulic parts and electronic components increased by $208,598 or 30.2% for the three months ended January 31, 2020 as compared to the same period in 2019 mainly due to the increase of the cost per unit of our hydraulic parts as we need to hire an outsourcing vendor to work on the specific needs of the hydraulic parts.
Gross Profit
Our gross profit from our major revenue categories is summarized as follows:
For the Three Months Ended January 31, | For the Three Months Ended January 31, | Change | Change (%) | |||||||||||||
| PV panels and others | ||||||||||||||||
| Gross (loss) profit margin | $ | (201,413 | ) | $ | 1,154,318 | $ | (1,355,731 | ) | (117.4 | )% | ||||||
| Gross profit percentage | (140.4 | )% | 10.2 | % | (150.6 | )% | ||||||||||
| Air compression equipment and other components | ||||||||||||||||
| Gross profit margin | $ | - | $ | 203,295 | $ | (203,295 | ) | (100.0 | )% | |||||||
| Gross profit percentage | - | % | 52.2 | % | (52.2 | )% | ||||||||||
| Heat pumps | ||||||||||||||||
| Gross profit margin | $ | 136,686 | $ | 523,577 | $ | (386,891 | ) | (73.9 | )% | |||||||
| Gross profit percentage | 13.5 | % | 15.7 | % | (2.2 | )% | ||||||||||
| High-grade synthetic fuel | ||||||||||||||||
| Gross (loss) profit margin | $ | (47,662 | ) | $ | 1,997,321 | $ | (2,044,983 | ) | (102.4 | )% | ||||||
| Gross profit percentage | (64.6 | )% | 47.7 | % | (112.3 | )% | ||||||||||
| Hydraulic parts and electronic components | ||||||||||||||||
| Gross profit margin | $ | 838,743 | $ | 1,497,609 | $ | (658,866 | ) | (44.0 | )% | |||||||
| Gross profit percentage | 48.3 | % | 68.4 | % | (20.1 | )% | ||||||||||
| Total | ||||||||||||||||
| Gross profit margin | $ | 726,354 | $ | 5,376,120 | $ | (4,649,766 | ) | (86.5 | )% | |||||||
| Gross profit percentage | 24.4 | % | 25.1 | % | (0.7 | )% | ||||||||||
51
Our gross profit decreased by $4,649,766, or 86.5%, to $726,354 during the three months ended January 31, 2020 from $5,376,120 for the same period in 2019. The decrease in gross profit was primarily due to the significant decrease in revenues from sales of PV panels and other products, high-grade synthetic fuel products and hydraulic parts and electronic components.
For the three months ended January 31, 2020 and 2019, our overall gross profit percentage was 24.4% and 25.1%, respectively. The decrease of 0.7% was primarily due to the increase in cost of revenue as we provided allowance for aging inventories and the increase of cost of revenue of our hydraulic parts and electronic components products.
Gross (loss) profit percentage for PV panels and others revenue was (140.4%) and 10.2% for the three months ended January 31, 2020 and 2019, respectively. The decrease of gross profit percentage was due to the increase in cost of revenue as we provided allowance for aging inventories due to slow moving of our inventories and lack of sales as discussed above.
Gross profit percentage for air compression equipment and other components revenue was 52.2% for the three months ended January 31, 2019. We did not sell any air compression equipment and other components during the three months ended January 31, 2020.
Gross profit percentage for heat pumps revenue was 13.5% and 15.7% for the three months ended January 31, 2020 and 2019, respectively. The slight decrease is mainly due to the decrease of selling prices. There more competitions in the market while we recently did not put a lot of research and development activities to keep up with the latest technology of our heat pumps product to stay competitive, for which we need to lower our selling price to stay in competitiveness. .
Gross (loss) profit percentage for high-grade synthetic fuel revenue was (64.6%) and 47.7% for the three months ended January 31, 2020 and 2019, respectively. The decrease in gross profit percentage was primarily due to higher cost in manufacturing our newly developed engine cleaner, Xiangtian No. 5, during the testing phase in the three months ended January 31, 2020 while we were pending final completion and inspection approval of our production facilities expansion in January 2020, for which we sold our Xiangtian No. 5 samples. In the three months ended January 31, 2019, we sold our Green Energy No. 1 products under normal capacity situation.
Gross profit percentage for hydraulic parts and electronic components revenue was 48.3% and 68.4% for the three months ended January 31, 2020 and 2019, respectively. The decrease in gross profit percentage was due to increase of cost of revenue as the increase of the unit price of our hydraulic parts as we need to hire an outsourcing vendor to work on the specific needs of the hydraulic parts during the three months ended January 31, 2020.
52
Operating Expenses
Total operating expenses increased by $5,731,953 or 201.4% from $2,846,330 during the three months ended January 31, 2019 to $8,578,283 during the same period in 2020. The increase in operating expenses was mainly attributable to (i) the increase in general and administrative expenses of $532,144, (ii) the increase in research and development expenses of $345,612 and (iii) the increase in impairment of advances to suppliers of 538,809 and (vi) the increase in impairment loss of long-lived assets of $4,999,504. This increase was offset by (i) the decrease in selling expenses of $35,178 and (ii) the increase in recovery for doubtful accounts of $493,194 as we have collected some aged receivables.
The decrease in selling expenses of approximately $35,000 was mainly attributable to the decrease in marketing expenses of approximately $321,000 to our sales representatives as we determined adding sales representatives is not an effective way to promote our products and started to minimizing our marketing expenses. The decrease was offset by the increase in shipping expenses of approximately $280,000 as we need to take care the shipping cost of our hydraulic parts from outsourcing vendor to our customers.
The increase in general and administrative expenses of approximately $532,000 was mainly attributable to (i) the increase in salaries, social insurance expenses, and benefits expenses of approximately $245,000 mainly due to the allocation of the production line personnel salary and their related social insurance and benefit into general and administrative expense as we have limited or no production in Xiangtian Zhongdian and Jingshan Sanhe, and (ii) the increase in rent, utilities and property management expenses of approximately $413,000 mainly due to the allocation of our leased factories and equipment and related cost into general and administrative expense as we have limited or no production in Xiangtian Zhongdian and Jingshan Sanhe, and (iii) the increase in other general and administrative expenses including office expenses, meals and entertainment, training and other service expenses of approximately $247,000 as we were more focusing on training our employees while having limited or no production in Xiangtian Zhongdian and Jingshan Sanhe. This increase was offset by approximately $307,000 decrease in professional fees including legal fees, audit fees and consulting fees, as we incurred significant professional fees in relation to the acquisition of Rongentang as well as incurring more up-listing cost during the three months ended January 31, 2019 and we did not incur such professional fees in the same period in 2020 as we currently put our up-listing plan on hold. The increase was also offset by approximately $91,000 decrease in insurance expenses.
The increase of R&D expenses of approximately $346,000 was mainly due to our research and development costs incurred on improving our hydraulic parts and electronic components products as well as researching and developing new high-grade synthetic fuel products.
The increase of impairment of advances to suppliers of approximately $539,000 was mainly due to Xiangtian Zhongdian lacked of productions, we provided impairments on advances to suppliers.
The increase of impairment loss of long-lived assets of approximately $5,000,000 was mainly due to Sanhe Xiangtian and Xiangtian Zhongdian lacked of productions, we provided impairments on production equipment and relevant patents.
Other Income (Expenses), Net
Total other expenses increased by $7,898 or 7.1% from $111,458 during the three months ended January 31, 2019 to $119,356 during the same period in 2020. The increase in total other expenses was mainly attributable to the increase in other expense as we made approximately $285,000 donation to the Red Cross Society of Hubei province and Xianning City for helping current COVID-19 patients and the increase in other income of approximately $176,000, as we received more government grants for technological transformation. This increase in other expense was offset by approximately $196,000 decrease in interest expense as we did not obtained any new related party loan during the three months ended January 31, 2020.
53
Income Tax Benefit (Expense)
Our current income tax benefit (expense) was $262,678 and $(959,092) for the three months ended January 31, 2020 and 2019, respectively. The increase of income tax benefit is due to the fact that we utilized the income tax benefit from our VIEs and controlled entities which we incurred losses in current period while incurring income tax expenses in prior periods for the three months ended January 31, 2020. We have also provided 100% allowance on net operating losses for our VIEs and controlled entities which incurred losses in the three months ended January 31, 2020. In the three months ended January 31, 2019, our income tax expense was incurred by our profitable VIEs and controlled entities in both periods and we have provided 100% allowance on net operating losses for our VIEs and controlled entities which incurred losses.
(Loss) Income from Continuing Operations
Our net loss from continuing operations increased by $9,167,847, or 628.3%, to net loss of $7,708,607 for the three months ended January 31, 2020, from a net income of $1,459,240 for the same period in 2019. Such change was the result of the combination of the changes discussed above.
Discontinued Operations
Net Loss from Discontinued Operations
Our net loss from discontinued operations increased by $614,517, or 226.9%, to net loss of $343,713 for the three months ended January 31, 2020, from a net income of $270,804 for the three months ended January 31, 2019. The increase in loss from discontinued operations was predominantly due to the expenses generated by Herbal Wine Co. and Wine Co. which considered as discontinued operations and loss on sale of discontinued operations as we entered into an equity transfer agreement with Kairui Tong and Hao Huang (the “Buyers”) on January 6, 2020, 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. We were generating income from the Wine Co. and Herbal Wine Co. in the same period in 2019. See Note 4 – Discontinued operations.
Net loss on sale of discontinued operations
Our net loss on sale of discontinued operations increased by $454,067, or 100.0%, to net loss of $454,067 for the three months ended January 31, 2020, from a net income of $0 for the three months ended January 31, 2019. The increase in loss on sale of discontinued operations was due to the sale of Wine Co. and Herbal Wine Co.
Net (Loss) Income
Our net loss increased by $10,236,431, or 591.7%, to net loss of $8,506,387 for the three months ended January 31, 2020 from a net income of $1,730,044 for the three months ended January 31, 2019. Such change was the result of the combination of the changes discussed above.
54
The Six Months Ended January 31, 2020 Compared to the Six Months Ended January 31, 2019
For the Six Months Ended January 31, | For the Six Months Ended January 31, | Change | Change (%) | |||||||||||||
| Revenue | $ | 6,138,503 | $ | 41,400,488 | $ | (35,261,985 | ) | (85.2 | )% | |||||||
| Cost of revenue | 6,019,093 | 31,828,853 | (25,809,760 | ) | (81.1 | )% | ||||||||||
| Gross profit | 119,410 | 9,571,635 | (9,452,225 | ) | (98.8 | )% | ||||||||||
| Operating expenses | 11,894,238 | 4,500,214 | 7,394,024 | 164.3 | % | |||||||||||
| (Loss) income from operations | (11,774,828 | ) | 5,071,421 | (16,846,249 | ) | (332.2 | )% | |||||||||
| Other expenses, net | (103,737 | ) | (548,736 | ) | 444,999 | (81.1 | )% | |||||||||
| (Loss) income before income taxes | (11,878,565 | ) | 4,522,685 | (16,401,250 | ) | (362.6 | )% | |||||||||
| Income tax benefit (expense) | 216,482 | (1,485,236 | ) | 1,701,718 | (114.6 | )% | ||||||||||
| (Loss) income from continuing operations | (11,662,083 | ) | 3,037,449 | (14,699,532 | ) | (483.9 | )% | |||||||||
| (Loss) income from discontinued operations, net of applicable income taxes | (518,475 | ) | 270,804 | (789,279 | ) | (291.5 | )% | |||||||||
| Loss on sale of discontinued operations, net of applicable income taxes | (454,067 | ) | - | (454,067 | ) | (100.0 | )% | |||||||||
| Net (loss) income | (12,634,625 | ) | 3,308,253 | (15,942,878 | ) | (481.9 | )% | |||||||||
| Less: Net (loss) income attributable to non-controlling interest from continuing operations | (1,215,078 | ) | 287,906 | (1,502,984 | ) | (522.0 | )% | |||||||||
| Less: Net (loss) income attributable to non-controlling interests from discontinued operations | (51,848 | ) | 27,081 | (78,929 | ) | (291.5 | )% | |||||||||
| Net (loss) income attributable to common stockholders | $ | (11,367,699 | ) | $ | 2,993,266 | $ | (14,360,965 | ) | (479.8 | )% | ||||||
| Net (loss) income per share attributable to common stockholders | ||||||||||||||||
| Basic and diluted (loss) earnings per share – Continuing operations | $ | (0.02 | ) | $ | 0.00 | $ | (0.02 | ) | (100.0 | )% | ||||||
| Basic and diluted (loss) earnings per share – Discontinued operations | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | - | % | ||||||
Continuing Operations
Revenue
Our revenue was derived from the sales of PV panels and others, heat pump products, high-grade synthetic fuel products and hydraulic parts and electronic components for the six months ended January 31, 2020.
Total revenues decreased by $35,261,985 or 85.2%, to $ 6,138,503 for the six months ended January 31, 2020 as compared to $41,400,488 for the same period in 2019. The overall decrease was primarily attributable to the decrease of revenue generated from sales of PV panels and other products, air compression equipment and other components, heat pumps, and high-grade synthetic fuel products. See the table below for a detailed analysis of the decrease in our revenue.
Our revenue from our revenue categories is summarized as follows:
For the Six Months Ended January 31, | For the Six Months Ended January 31, | Change | Change (%) | |||||||||||||
| Revenue | ||||||||||||||||
| Installation of power generation systems | $ | - | $ | 389,482 | $ | (389,482 | ) | (100.0 | )% | |||||||
| PV panels and others | 1,848,293 | 20,413,526 | (18,565,233 | ) | (90.9 | )% | ||||||||||
| Air compression equipment and other components | - | 1,390,688 | (1,390,688 | ) | (100.0 | )% | ||||||||||
| Heat pumps | 1,074,068 | 7,582,436 | (6,508,368 | ) | (85.8 | )% | ||||||||||
| High-grade synthetic fuel | 113,774 | 8,280,062 | (8,166,288 | ) | (98.6 | )% | ||||||||||
| Hydraulic parts and electronic components | 3,102,368 | 3,344,294 | (241,926 | ) | (7.2 | )% | ||||||||||
| Total revenue | $ | 6,138,503 | $ | 41,400,488 | $ | (35,261,985 | ) | (85.2 | )% | |||||||
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Installation of power generation systems revenue decreased by $389,482 or 100.0% from $389,482 for the six months ended January 31, 2019 to $0 for the same period in 2020 because we did not have any new installation projects performed during the six months ended January 31, 2020 as we have not been focusing on our power generation systems business. We are no longer focusing on the installation of power generation systems but to sell the PV panels separately. As a result, we do not expect our installation of power generation systems will be generating any significant revenues.
Sales of PV panels and others decreased by $18,565,233 or 90.9% from $20,413,526 for the six months ended January 31, 2019 to $1,848,293 for the same period in 2020. The decrease in sales of PV panels and others was primarily due to significant decrease in sales from Xiangtian Zhongdian. We are currently operating under certain disagreements with our non-controlling shareholder in Xiangtian Zhongdian, which lead to Xiangtian Zhongdian to put the PV panels sales orders on hold. As a result, our sales of PV panels decreased during the six months ended January 31, 2020 as compared to the same period in 2019. Currently, our disagreements with the non-controlling shareholder in Xiangtian Zhongdian still has not been resolved. Management is in the process of negotiating with the non-controlling shareholder in Xiangtian Zhongdian about acquiring the remaining 30% ownership interest. Our PV panels operations is expected to resume back to the normal level once this issue is resolved. However, our sales from PV panels is expected to decrease as compared to the prior period due to the non-controlling shareholder in Xiangtian Zhongdian having retained their marketing team and will be leaving Xiangtian Zhongdian. We will start developing our own PV panels market with our internal marketing sources.
Sales of air compression equipment and other components decreased by $1,390,688 or 100.0% and the sales of heat pumps decreased by $6,508,368 or 85.8% for the six months ended January 31, 2020 as compared to the same period in 2019. The decrease was attributable to significant decrease in sales orders as we lost some large air compression equipment and heat pump customers during the six months ended January 31, 2020 as compared to the same period in 2019 which resulted in lesser sales orders in the current period. Our sales from air compression equipment and heat pumps are expected to be decreased as compared to the prior period going forward as we recently did not put a lot of research and development activities to keep up with the latest technology of the air compression and heat pumps products. We anticipate a decrease in future sales of heat pumps and air compression, and as a result our competitors will, in all likelihood gain a greater market share in this industry.
Sales of high-grade synthetic fuel decreased by $8,166,288 or 98.6% for the six months ended January 31, 2020 as compared to the same period in 2019 mainly due to significant decrease in sales from Jingshan Sanhe. Jingshan Sanhe has expanded its production facilities for the anticipation of the sales orders that we have received of our high-grade synthetic fuel products. During the six months ended January 31, 2020, we were pending final completion and inspection approval of our production facilities expansion in April 2020, which prevented Jingshan Sanhe’s ability to manufacture our high-grade synthetic fuel products during the period. As a result, we took longer time to complete and test our production facilities in order for us to produce a high quality of our products. With the COVID-19 production plant closure in February and March 2020 in the Hubei province, our sales of high-grade synthetic fuel is expected to resume back to the normal level upon resuming our production which we will resume operations in June 2020. On April 14, 2020, the Board discussed a plan to pursue the potential sale of all its ownership interest in Jingshan Sanhe due to the coronavirus outbreak might affect the Company’s future business operations and desired to scale back our variety of businesses. Therefore the result of operations will be presented as discontinued operations for Jingshan Sanhe 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.
Sales of hydraulic parts and electronic components decreased by $241,926 or 7.2% for the six months ended January 31, 2020 as compared to the same period in 2019 due to less governmental contracts. We are expecting our revenue generated by hydraulic parts and electronic components business from Jinli will decrease because we believe the demand of our products from the Chinese military may decrease as the uncertainty surrounding the COVID-19 outbreak. On April 14, 2020, the Board discussed a plan to pursue the potential sale of all its ownership interest in Jinli due to the coronavirus outbreak might affect the Company’s future business operations and desired to scale back our variety of businesses. Therefore the result of operations will be presented as discontinued operations for 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.
56
Cost of Revenue
Total cost of revenue decreased by $25,809,760, or 81.1%, to $6,019,093 for the six months ended January 31, 2020 as compared to $31,828,853 for the same period in 2019. The decrease in cost of revenue is in line with the decrease in revenue except the cost of revenue of Hydraulic parts and electronic components.
Our cost of revenue from our revenue categories is summarized as follows:
For the Six Months Ended January 31, | For the Six Months Ended January 31, | Change | Change (%) | |||||||||||||
| Cost of revenue | ||||||||||||||||
| Installation of power generation systems | $ | - | $ | 357,708 | $ | (357,708 | ) | (100.0 | )% | |||||||
| PV panels and others | 2,495,067 | 18,350,972 | (15,855,905 | ) | (86.4 | )% | ||||||||||
| Air compression equipment and other components | - | 905,208 | (905,208 | ) | (100.0 | )% | ||||||||||
| Heat pumps | 1,887,628 | 6,202,740 | (4,315,112 | ) | (69.6 | )% | ||||||||||
| High-grade synthetic fuel | 156,930 | 4,704,035 | (4,547,105 | ) | (96.7 | )% | ||||||||||
| Hydraulic parts and electronic components | 1,479,468 | 1,308,190 | 171,278 | 13.1 | % | |||||||||||
| Total cost of revenue | $ | 6,019,093 | $ | 31,828,853 | $ | (25,809,760 | ) | (81.1 | )% | |||||||
Cost of revenue of hydraulic parts and electronic components increased by $171,278 or 13.1% for the six months ended January 31, 2020 as compared to the same period in 2019 mainly due to the increase of the unit price of our hydraulic parts as we need to hire an outsourcing vendor to work on the specific needs of the hydraulic parts.
Gross Profit
Our gross profit from our major revenue categories is summarized as follows:
For the Six Months Ended January 31, | For the Six Months Ended January 31, | Change | Change (%) | |||||||||||||
| Installation of power generation systems | ||||||||||||||||
| Gross profit margin | $ | - | $ | 31,774 | $ | (31,774 | ) | (100.0 | )% | |||||||
| Gross profit percentage | - | % | 8.2 | % | (8.2 | )% | ||||||||||
| PV panels and others | ||||||||||||||||
| Gross (loss) profit margin | $ | (646,774 | ) | $ | 2,062,554 | $ | (2,709,328 | ) | (131.4 | )% | ||||||
| Gross profit percentage | (35.0 | )% | 10.1 | % | (45.1 | )% | ||||||||||
| Air compression equipment and other components | ||||||||||||||||
| Gross profit margin | $ | - | $ | 485,480 | $ | (485,480 | ) | (100.0 | )% | |||||||
| Gross profit percentage | - | % | 34.9 | % | (34.9 | )% | ||||||||||
| Heat pumps | ||||||||||||||||
| Gross (loss) profit margin | $ | (813,560 | ) | $ | 1,379,696 | $ | (2,193,256 | ) | (159.0 | )% | ||||||
| Gross profit percentage | (75.7 | )% | 18.2 | % | (93.9 | )% | ||||||||||
| High-grade synthetic fuel | ||||||||||||||||
| Gross (loss) profit margin | $ | (43,156 | ) | $ | 3,576,027 | $ | (3,619,183 | ) | (101.2 | )% | ||||||
| Gross profit percentage | (37.9 | )% | 43.2 | % | (81.1 | )% | ||||||||||
| Hydraulic parts and electronic components | ||||||||||||||||
| Gross profit margin | $ | 1,622,900 | $ | 2,036,104 | $ | (413,204 | ) | (20.3 | )% | |||||||
| Gross profit percentage | 52.3 | % | 60.9 | % | (8.6 | )% | ||||||||||
| Total | ||||||||||||||||
| Gross profit margin | $ | 119,410 | $ | 9,571,635 | $ | (9,452,225 | ) | (98.8 | )% | |||||||
| Gross profit percentage | 1.9 | % | 23.1 | % | (21.2 | )% | ||||||||||
57
Our gross profit decreased by $9,452,225, or 98.8%, to $119,410 during the six months ended January 31, 2020 from $9,571,635 for the same period in 2019. The decrease in gross profit was primarily due to the significant decrease in revenues from sales of PV panels and other products, heat pumps, and high-grade synthetic fuel products.
For the six months ended January 31, 2020 and 2019, our overall gross profit percentage was 1.9% and 23.1%, respectively. The decrease of 21.2% was primarily due to the increase in cost of revenue as we provided allowance for aging inventories.
Gross profit percentage for our installation of power generation systems revenue was 8.2% for the six months ended January 31, 2019. We did not have any installation project performed during the six months ended January 31, 2020.
Gross (loss) profit percentage for PV panels and others revenue was (35.0%) and 10.1% for the six months ended January 31, 2020 and 2019, respectively. The decrease of gross profit percentage was due to the increase in cost of revenue as we provided allowance for aging inventories due to slow moving of our inventories and lack of sales as discussed above.
Gross profit percentage for air compression equipment and other components revenue was 34.9% for the six months ended January 31, 2019. We did not sell any air compression equipment and other components during the six months ended January 31, 2020.
Gross (loss) profit percentage for heat pumps revenue was (75.7%) and 18.2% for the six months ended January 31, 2020 and 2019, respectively. The significant decrease is mainly due to the increase in cost of revenue as we provided allowance for aging inventories.
Gross (loss) profit percentage for high-grade synthetic fuel revenue was (37.9%) and 43.2% for the six months ended January 31, 2020 and 2019, respectively. The decrease in gross profit percentage was primarily due to higher cost in manufacturing our newly developed engine cleaner, Xiangtian No. 5, during the testing phase in the six months ended January 31, 2020 while we were pending final completion and inspection approval of our production facilities expansion in January 2020, for which we sold our Xiangtian No. 5 samples. In the six months ended January 31, 2019, we sold our Green Energy No. 1 products under normal capacity situation.
Gross profit percentage for hydraulic parts and electronic components revenue was 52.3% and 60.9% for the six months ended January 31, 2020 and 2019, respectively. The decrease in gross profit percentage was due to the increase of cost of revenue is due to the increase of the unit price of our hydraulic parts as we need to hire an outsourcing vendor to work on the specific needs of the hydraulic parts, which decreased our gross profit percentage.
Operating Expenses
Total operating expenses increased by $7,394,024 or 164.3% from $4,500,214 during the six months ended January 31, 2019 to $11,894,238 during the same period in 2020. The increase in operating expenses was mainly attributable to (i) the increase in selling expenses of $75,052, (ii) the increase in general and administrative expenses of $704,891, and (iii) the increase in research and development expenses of $439,688, (iv) the increase in provision for doubtful accounts of $791,824 as we have more aged receivables, (v) the increase in impairment of advances to suppliers of 538,809 and (vi) the increase in impairment loss of long-lived assets of $4,999,504.
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The increase in selling expenses of approximately $75,000 was mainly attributable to the increase in shipping expenses of approximately $324,000 as we need to take care the shipping cost of our hydraulic parts from outsourcing vendor to our customers. The increase was offset by the decrease in marketing expenses of approximately $260,000 to our sales representatives as we determined adding sales representatives is not an effective way to promote our products and started to minimizing our marketing expenses.
The increase in general and administrative expenses of approximately $705,000 was mainly attributable to (i) the increase in salaries, social insurance expenses, and benefits expenses of approximately $494,000 mainly due to the allocation of the production line personnel salary and their related social insurance and benefit into general and administrative expense as we have limited or no production in Xiangtian Zhongdian and Jingshan Sanhe, and (ii) the increase in rent, utilities and property management expenses of approximately $670,000 mainly due to the allocation of our leased factories and equipment and related cost into general and administrative expense as we have limited or no production in Xiangtian Zhongdian and Jingshan Sanhe, and (iii) the increase in other general and administrative expenses including office expenses, meals and entertainment, training and supply expenses of approximately $175,000 as we were more focusing on training our employees while having limited or no production in Xiangtian Zhongdian and Jingshan Sanhe. This increase was offset by approximately $533,000 decrease in professional fees including legal fees, audit fees and consulting fees, as we incurred significant professional fees in relation to the acquisition of Hubei Jinli and Rongetang as well as incurring more up-listing cost during the six months ended January 31, 2019 and we did not incur such professional fees in the same period in 2020 as we currently put our up-listing plan on hold. The increase was also offset by approximately $94,000 decrease in insurance expenses.
The increase of R&D expenses of approximately $440,000 was mainly due to our research and development costs incurred on improving our hydraulic parts and electronic components products as well as researching and developing new high-grade synthetic fuel products.
The increase of impairment of advances to suppliers of approximately $539,000 was mainly due to Xiangtian Zhongdian lacked of productions, we provided impairments on advances to suppliers.
The increase of impairment loss of long-lived assets of approximately $5,000,000 was mainly due to Sanhe and Xiangtian Zhongdian lacked of productions, we provided impairments on production equipment and relevant patents.
Other (Expenses) Income, Net
Total other expenses decreased by $444,999 or 81.1% from total other expenses of $548,736 during the six months ended January 31, 2019 to $103,737 during the same period in 2020. The decrease in total other expenses was mainly attributable to the approximately $668,000 decrease in interest expense as we did not obtained any new related party loan during the six months ended January 31, 2020. This decrease was offset by the increase in other expense as we made approximately $285,000 donation to the Red Cross Society of Hubei province and Xianning City for helping current COVID-19 patients and the increase in other income of approximately $176,000, as we received more government grants for technological transformation.
Income Tax Benefit (Expense)
Our current income tax benefit (expense) was $216,482 and $(1,485,236) for the six months ended January 31, 2020 and 2019, respectively. The increase of income tax benefit is due to the fact that we utilized the income tax benefit from our VIEs and controlled entities which we incurred losses in current period while incurring income tax expenses in prior periods for the six months ended January 31, 2020. We have also provided 100% allowance on net operating losses for our VIEs and controlled entities which incurred losses in the six months ended January 31, 2020. In the six months ended January 31, 2019, our income tax expense was incurred by our profitable VIEs and controlled entities in both periods and we have provided 100% allowance on net operating losses for our VIEs and controlled entities which incurred losses.
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(Loss) Income from Continuing Operations
Our net loss from continuing operations increased by $14,699,532, or 483.9%, to net loss of $11,662,083 for the six months ended January 31, 2020, from a net income of $3,037,449 for the same period in 2019. Such change was the result of the combination of the changes discussed above.
Discontinued Operations
Net Loss from Discontinued Operations
Our net loss from discontinued operations increased by $789,279, or 291.5%, to net loss of $518,475 for the six months ended January 31, 2020, from a net income of $270,804 for the six months ended January 31, 2019. The increase in loss from discontinued operations was predominantly due to the expenses generated by Herbal Wine Co. and Wine Co. which considered as discontinued operations and loss on sale of discontinued operations as we entered into an equity transfer agreement with Kairui Tong and Hao Huang (the “Buyers”) on January 6, 2020, 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. We were generating income from the Wine Co. and Herbal Wine Co. in the same period in 2019. See Note 4 – Discontinued operations.
Net loss on sale of discontinued operations
Our net loss on sale of discontinued operations increased by $454,067, or 100.0%, to net loss of $454,067 for the six months ended January 31, 2020, from a net income of $0 for the six months ended January 31, 2019. The increase in loss on sale of discontinued operations was due to the sales of Wine Co. and Herbal Wine Co..
Net (Loss) Income
Our net loss increased by $15,942,878, or 481.9%, to net loss of $12,634,625 for the six months ended January 31, 2020 from a net income of $3,308,253 for the six months ended January 31, 2019. Such change was the result of the combination of the changes discussed above.
Liquidity and Capital Resources
Capital Resources
In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. Debt financing from related parties has been utilized to finance the working capital requirements of the Company and acquisitions of businesses. As of January 31, 2020, the Company’s working deficit was approximately $3.9 million and the Company had cash of approximately $2.9 million. Excluding other payable to related parties and director of approximately $7.5 million, the Company’s working capital was approximately $3.6 million. Although we believe that we can realize our current assets in the normal course of business, our ability to repay our current obligations will depend on the future realization of our current assets and the future operating revenues generated from our operations.
Our management has considered whether there is a going concern issue due to our recurring losses from operations. Management has determined there is substantial doubt about our ability to continue as a going concern. If we are unable to generate significant revenue, we may be required to cease or curtail our operations. Management is trying to alleviate the going concern risk through the following sources:
| ● | we 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. |
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.
The following summarizes the key components of our cash flows for the six months ended January 31, 2020 and 2019.
| For the Six Months Ended January 31, | ||||||||
| 2020 | 2019 | |||||||
| 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 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 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 | ||||||
| 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 | ) | ||
As of January 31, 2020 and July 31, 2019, we had a cash and restricted cash balance of $2,903,098 and $3,536,481, respectively, from continuing operations.
Operating Activities
Net cash used in operating activities from continuing operations was approximately $0.4 million for the six months ended January 31, 2020, which was mainly due to net loss from continuing operations of approximately $11.7 million, the increase in inventories of approximately $1.0 million, the increase in advance from customers of approximately $1.0 million, the increase in prepaid expenses of approximately $0.3 million, the payments of operating lease liabilities of approximately $0.5 million and the decrease in other payables and accrued liabilities of approximately $0.1 million. The net cash used in operating activities was partially offset by non-cash effects of depreciation and amortization expense of approximately $0.9 million, amortization of right-of-use assets of approximately $0.5 million, bad debt allowance of approximately $0.7 million, impairment of inventories of approximately $1.7 million, impairment of advances to suppliers of approximately $0.5 million, impairment loss of long-lived assets of approximately $5.0 million, the decrease in notes receivable of approximately $0.8 million, the decrease in accounts receivable as we collected approximately $1.6 million, the decrease in advances to suppliers of approximately $2.0 million, the decrease in other receivables as we collected approximately $0.3 million, and the increase in accounts payable of approximately $0.3 million.
Net cash provided by operating activities from continuing operations for the six months ended January 31, 2019 was mainly comprised of net income from continuing operations of approximately $3.0 million, the decrease in notes receivable as we collected bank notes of approximately $1.0 million, the decrease of contract assets of approximately $2.8 million, the increase of advance from customers of approximately $12.4 million as we have received significant sales orders for our high-grade synthetic fuel products which require customer deposits, the increase in other payables and accrued liabilities of approximately $0.4 million and the increase in income taxes payable of approximately $0.4 million. The net cash provided by operating activities from continuing operations was partially offset by the increase in inventories of approximately $1.4 million, the increase of advance to suppliers of approximately $2.5 million, and the decrease in accounts payable as we paid off approximately $1.8 million to our vendors as the payments became due.
Investing Activities
Net cash used in investing activities from continuing operations was approximately $2.4 million for the six months ended January 31, 2020, which was mainly comprised of the partial investment payments of approximately $0.4 million that we made in relation to the acquisition of Hubei Jinli, the purchase of property and equipment of approximately $1.7 million for our business expansion and loan to a related party of approximately $0.6 million with an annual interest rate of 4.75% offset by the refund of short-term investment of approximately $0.4 million.
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Net cash used in investing activities from continuing operations for the six months ended January 31, 2019 was mainly comprised of the partial investment payments of approximately $8.8 million that we made in relation to the acquisition of Hubei Jinli and Tianjin Jiabaili, the purchase of property and equipment of approximately $1.4 million for our business expansion partially offset by the collection of loan receivable of approximately $1.7 million.
Financing Activities
Net cash provided by financing activities from continuing operations was approximately $1.1 million for the six months ended January 31, 2020, which was due to borrowings from related parties of approximately $1.1 million.
Net cash used in financing activities from continuing operations for the six months ended January 31, 2019 was comprised of capital contribution from one shareholder of approximately $6.7 million, borrowings from related parties of approximately $1.5 million, and proceeds from related party loans of approximately $2.0 million partially offset by the payments of short-term bank loan, third party loan, and related party loan of approximately $0.5 million, $0.2 million and $22.0 million, respectively.
Commitments and Contingencies
In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450-20, “Loss Contingencies”, we will record accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.
Contractual Obligations
As of January 31, 2020, the future minimum payments under certain of our contractual obligations were as follows:
| Payments Due In | ||||||||||||||||||||
| Contractual obligations | Total | Less than 1 year | 1 – 3 years | 3 – 5 years | Thereafter | |||||||||||||||
| Operating leases liabilities | $ | 1,795,707 | $ | 926,297 | $ | 868,103 | $ | 872 | $ | 435 | ||||||||||
| Long-term debt obligations | 249,724 | 249,724 | - | - | - | |||||||||||||||
| Due to related parties and third party | 7,511,270 | 7,511,270 | - | - | - | |||||||||||||||
| Total | $ | 9,556,701 | $ | 8,687,291 | $ | 868,103 | $ | 872 | $ | 435 | ||||||||||
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.
Critical Accounting Policies and Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. While our significant accounting policies are more fully described in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this report, we believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our unaudited condensed consolidated financial statements.
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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.
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.
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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.
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.
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Warranty
We generally provide limited warranties for work performed under our contracts. At the time a sale is recognized, we record 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 us. Generally, the estimated claim rates of warranty are based on actual warranty experience or our best estimate.
Recent Accounting Pronouncements
See Note 2 of our notes to unaudited condensed consolidated financial statements for a discussion of recently issued accounting standards.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Credit Risk
Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. We manage credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. We identify credit risk collectively based on industry, geography and customer type. In measuring the credit risk of our sales to our customers, we mainly reflect the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development.
Liquidity Risk
We are also exposed to liquidity risk which is the risk that it is unable to provide sufficient capital resources and liquidity to meet our commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, we will turn to other financial institutions and related parties to obtain short-term funding to avoid the liquidity shortage.
Foreign Exchange Risk
While our reporting currency is the US dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for some cash and cash equivalents and accounts receivables. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between US dollar and RMB. If the RMB depreciates against the US dollar, the value of our RMB revenues, earnings and assets as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
Inflation
Inflationary factors such as increases in the costs of our products and overhead costs may adversely affect our operating results. Inflation in China has recently increased substantially. Based on publicly available sources, the inflation rate in China was reported at 2.28% for 2019, 2.48% for 2018 and 1.56% percent for 2017.
These factors have led to the adoption by the Chinese government, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. Price inflation can affect our ability to maintain current levels of gross margin and selling and distribution, general and administrative expenses as a percentage of net revenues if we are unable to pass along raw material price increases to customers. Accordingly, inflation in China may weaken our competitiveness domestically.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, as defined by §229.10(f)(1), the Company is not required to provide the information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of January 31, 2020.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer identified material weaknesses in our internal control over financial reporting, which is an integral component of our disclosure controls and procedures and concluded that our disclosure controls and procedures as of January 31, 2020 were not effective.
Management’s assessment identified the following material weaknesses in our internal control over financial reporting:
| ● | Ineffective control environment. We did not maintain an effective control environment, which is the foundation necessary for effective internal control over financial reporting. Specifically, we (i) had an insufficient number of personnel appropriately qualified to perform control design, execution and monitoring activities; (ii) had an insufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience; (iii) did not establish the authorization approval matrix; and (iv) did not implement a budget system, which makes management and other personnel unable to carry out their internal control responsibilities including the lack of budget-to-actual analyses, balance sheet variation analysis, pro forma financial statements, and the usage of key spreadsheets for monitoring. |
| ● | Ineffective controls over our financial statement close and reporting process. We did not maintain effective controls over our financial statement close and reporting process. Specifically, we did not have effective controls over the completeness, existence and accuracy of related party disclosures. |
| ● | Inadequate controls over production plan. Our manufacturing department did not maintain effective controls over the accuracy of raw materials. The amount of raw materials mentioned in the production plan is inconsistent with the actual amount of raw materials delivered (Jingshan Sanhe). |
| ● | Inadequate controls over information technology. We had inadequate controls over information technology. Specifically, (i) the system permissions on approval process of account opening and ERP system were not one-to-one matched; and (ii) a formal test environment wasn’t established. |
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Remediation Plans
Our management have taken and are implementing the following measures to address the material weaknesses in internal control over financing reporting, include:
| (i) | We are setting up a key monitoring mechanism including independent directors, an audit compliance committee, a risk management committee and a strategic planning committee to oversee and monitor our risk management, business strategies and financial reporting procedure. |
| a. | We plan to formulate delegation of authorities and job description to clarify authorities and responsibilities of each position. |
| b. | We are in the process of formalizing policies and controls, such as financial management regulations, budget management system, narrative and risk control management, to enable management and other personnel to understand their internal control responsibilities including budget-to-actual analyses, balance sheet variation analysis, pro forma financial statements, and the usage of key spreadsheets for monitoring. |
| (ii) | We are in the process of designing employees’ key performance indicators to monitor and assess employees’ performance. |
| (iii) | We have engaged Ernst & Young (China) Advisory Limited to assist us with our compliance under Section 404 of the Sarbanes-Oxley Act of 2002. From January 2019 to November 2019, they worked with us to help us establish and maintain an effective control environment, enhance our process and internal control related to sales, account receivables and inventory and establish comprehensive accounting policies and procedures. |
| (iv) | We have prepared a list of interest expenses and established a documented process to accrue interest. |
| (v) | We are in the process of updating the production policy, especially focusing on production plan and usages of raw materials. |
| (vi) | We have set up a key strategies mechanism including an investment decision committee to oversee business acquisitions and investments. We have established a formal policy and procedures on business acquisitions and investments. |
| (vii) | We have kept the price comparison records of purchasing battery slices. |
| (viii) | We have engaged tax consultants to prepare and file our US tax returns since January 2019. |
| (ix) | We have established formal policy regarding user management and system backup strategy in the information system safety management regulations to regulate approval process of account opening, periodic account review on financial system, access rule of administrator account, operation log review on financial system and password policy. |
| (x) | We plan to establish a formal test environment and test before system changes come online. |
Our management believes that the measures described above and others to be implemented will remediate the material weaknesses identified and will strengthen our internal control over financial reporting. Management is committed to continuous improvement of our internal control processes and will continue to diligently review our financial reporting controls and procedures. The remediation efforts set out above are largely dependent upon our generating more revenue to cover the costs of implementing the changes required.
Changes in Internal Control over Financial Reporting
Except as discussed above, there were no changes in the Company’s internal control over financial reporting during the three months period ended January 31, 2020 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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.
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.
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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. 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 | ||
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.
Item 1A. Risk Factors.
Please refer to our note on forward-looking statements on page 2 of this Quarterly Report on Form 10-Q, which is incorporated into this item by reference.
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in our 2020 Annual Report. The risks described in such 2020 Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, operating results and stock price.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
| Number | Description | |
| 31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1** | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2** | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| XT Energy Group, Inc. | ||
| Dated: May 29, 2020 | By: | /s/ Zhou Deng Hua |
| Name: Zhou Deng Hua | ||
| Title: Chief Executive Officer (Principal Executive Officer) |
||
| Dated: May 29, 2020 | By: | /s/ Jianzheng Cao |
| Name: Jianzheng Cao | ||
| Title: Chief Financial Officer (Principal Financial and Accounting Officer) |
71
EXHIBIT 31.1
CERTIFICATION
I, Zhou Deng Hua, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of XT Energy Group, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors: |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: May 29, 2020 | By: | /s/ Zhou Deng Hua |
| Name: Zhou Deng Hua | ||
|
Title: Chief Executive Officer (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION
I, Jianzheng Cao, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of XT Energy Group, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors: |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: May 29, 2020 | By: | /s/ Jianzheng Cao |
| Name: Jianzheng Cao | ||
| Title: Chief Financial Officer (Principal Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO
18 U.S.C. 1350
(SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002)
I, Zhou Deng Hua, Chief Executive Officer of XT Energy Group, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, that, to the best of my knowledge:
| 1. | the Quarterly Report on Form 10-Q of the Company for the period ended January 31, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Dated: May 29, 2020 | By: | /s/ Zhou Deng Hua |
| Name: Zhou Deng Hua | ||
|
Title: Chief Executive Officer (Principal Executive Officer) |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION
PURSUANT TO
18 U.S.C. 1350
(SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002)
I, Jianzheng Cao, Chief Financial Officer of XT Energy Group, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, that, to the best of my knowledge:
| 1. | the Quarterly Report on Form 10-Q of the Company for the period ended January 31, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Dated: May 29, 2020 | By: | /s/ Jianzheng Cao |
| Name: Jianzheng Cao | ||
| Title: Chief Financial Officer (Principal Financial and Accounting Officer) |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Business Combination (Tables) |
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| Schedule of Business Acquisitions, by Acquisition [Table Text Block] |
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| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Text Block] | 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.
Significant components of the income tax (benefit) expense consisted of the following for the three and six months ended January 31:
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:
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.
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:
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. |
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| Subsequent Events [Text Block] | 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 $19.5 million, respectively.
The following unaudited pro forma results of operations presents the Company’s financial results as if the disposal of Jingshan Sanhe and Hubei Jinli had been completed on August 1, 2019. The unaudited pro forma results do not reflect operating efficiencies or potential cost savings which may result from the consolidation of operations. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations that the Company would have recognized had we completed the transaction on August 1, 2019. Future results may vary significantly from the results in this pro forma information because of future events and transactions, as well as other factors.
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Summary of Significant Accounting Policies (Details) |
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Jan. 31, 2020
USD ($)
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Jan. 31, 2020
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Jan. 31, 2019
USD ($)
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Jan. 31, 2020
CNY (¥)
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Aug. 01, 2019
USD ($)
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Jul. 31, 2019
USD ($)
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| Summary of Significant Accounting Policies (Details) [Line Items] | ||||||||
| Working capital deficit | $ 3,900,000 | $ 3,900,000 | ||||||
| Cash | 2,900,000 | 2,900,000 | ||||||
| Other payables to related parties | 7,500,000 | 7,500,000 | ||||||
| Excluding other payable to related parties working capital deficit | 3,600,000 | 3,600,000 | ||||||
| Variable interest agreements, description | 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. | |||||||
| Cash denominated in Renminbi (RMB) with US dollar | 2,458,140 | 2,458,140 | $ 3,250,535 | |||||
| Balances are not covered by insurance as the deposit | 1,810,643 | 1,810,643 | 2,333,681 | |||||
| Insured each depositor per bank for a maximum | 71,000 | $ 71,000 | ¥ 500,000 | |||||
| Cash balance, description | 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). | |||||||
| Impairment of advances to suppliers | 538,809 | $ 538,809 | ||||||
| Allowance for doubtful accounts | 1,363 | $ 0 | $ 292,814 | $ 0 | ||||
| Land use rights, description | 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, description | 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. | |||||||
| Patents, licenses and certifications, description | 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.
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| Software license, description | 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. | |||||||
| Impairment of equipment | 4,353,609 | $ 4,353,609 | ||||||
| Intangible assets impairment | 645,895 | 0 | 645,895 | 0 | ||||
| Long-term investment payable balance | 279,764 | |||||||
| Net of discount | 25,999 | 25,999 | ||||||
| Operating lease, right of use asset | 2,266,981 | $ 2,266,981 | ||||||
| Description of incremental borrowing rate | 4.75% and 4.90% based on duration of lease terms. | |||||||
| Installation of power generation systems | 389,482 | |||||||
| Accrued warranty expense | 65,149 | 65,149 | $ 65,182 | |||||
| Advertising costs | 74,980 | 9,039 | 100,488 | 41,011 | ||||
| Employee benefit expenses | 82,890 | 92,377 | 197,925 | 135,099 | ||||
| Research and development expense | 421,738 | 76,126 | $ 518,861 | 79,173 | ||||
| Value added taxes, description | 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%. | |||||||
| Income tax examination, description | The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. | |||||||
| Other comprehensive loss from foreign currency translation adjustments | $ 699,170 | $ 1,046,405 | $ (249,169) | 665,419 | ||||
| Statutory surplus reserve fund percentage description | 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. | |||||||
| Statutory reserves | $ 0 | $ 372,824 | ||||||
| Subsidiaries in PRC [Member] | ||||||||
| Summary of Significant Accounting Policies (Details) [Line Items] | ||||||||
| Foreign currency exchange rate | 6.8876 | 6.8876 | 6.8876 | 6.8841 | ||||
| Weighted average exchange rate | 6.9886 | 6.8732 | 7.0221 | 6.8753 | ||||
| Subsidiaries In Hong Kong [Member] | ||||||||
| Summary of Significant Accounting Policies (Details) [Line Items] | ||||||||
| Foreign currency exchange rate | 7.7672 | 7.7672 | 7.7672 | 7.8275 | ||||
| Weighted average exchange rate | 7.8014 | 7.8304 | 7.8212 | 7.8361 | ||||
| Accounting Standards Update 2016-02 [Member] | ||||||||
| Summary of Significant Accounting Policies (Details) [Line Items] | ||||||||
| Operating lease, right of use asset | $ 2,800,000 | |||||||
| Operating lease liabilities | $ 2,200,000 | |||||||
| Xiangtian Shenzhen [Member] | ||||||||
| Summary of Significant Accounting Policies (Details) [Line Items] | ||||||||
| Percentage of amount received in net income | 100.00% | |||||||
Segment Reporting (Tables) |
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| Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Segment Reporting Information, by Segment [Table Text Block] |
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| Schedule of total assets of each division [Table Text Block] |
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Nature of Business and Organization |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block] | 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.
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:
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:
The New VIE Agreements include the following:
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.
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.
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:
|
Inventories, Net (Details) - Schedule of inventories, net - USD ($) |
Jan. 31, 2020 |
Jul. 31, 2019 |
|---|---|---|
| Schedule of inventories, net [Abstract] | ||
| 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 |
Intangible Assets, Net (Details) - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jan. 31, 2020 |
Jan. 31, 2019 |
Jan. 31, 2020 |
Jan. 31, 2019 |
|
| Continuing Operations [Member] | ||||
| Intangible Assets, Net (Details) [Line Items] | ||||
| Amortization expenses | $ 139,556 | $ 209,000 | $ 277,326 | $ 373,948 |
| Discontinued Operations [Member] | ||||
| Intangible Assets, Net (Details) [Line Items] | ||||
| Amortization expenses | $ 21,242 | $ 21,954 | $ 52,737 | $ 21,954 |
Discontinued Operations (Details) - Schedule of income and loses from discontinued operations - Parent [Member] - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jan. 31, 2020 |
Jan. 31, 2019 |
Jan. 31, 2020 |
Jan. 31, 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 |
Business Combination (Details) ¥ in Millions |
1 Months Ended | 3 Months Ended | 6 Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Jan. 06, 2020
USD ($)
|
Jan. 06, 2020
CNY (¥)
|
Dec. 14, 2018 |
Mar. 31, 2019
USD ($)
|
Mar. 31, 2019
CNY (¥)
|
Jan. 31, 2020
USD ($)
|
Jan. 31, 2019
USD ($)
|
Jan. 31, 2020
USD ($)
|
Jan. 31, 2019
USD ($)
|
Jul. 31, 2019
USD ($)
|
Dec. 31, 2018 |
Dec. 21, 2018 |
|
| Business Combination (Details) [Line Items] | ||||||||||||
| Percentage of capital stock acquire | 90.00% | 90.00% | ||||||||||
| Shareholders consideration, description | 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. | |||||||||||
| Goodwill arising from the acquisition | $ 1,900,000 | |||||||||||
| Debt discount, net of accumulated amortization | $ 0 | 0 | $ 36,571 | |||||||||
| Amortization expense related to the debt discount | $ 29,900 | $ 125,356 | $ 35,853 | $ 249,175 | ||||||||
| Rongentang [Member] | ||||||||||||
| Business Combination (Details) [Line Items] | ||||||||||||
| Aggregate consideration | $ 1,100,000 | ¥ 7.5 | ||||||||||
| Ownership and payment term, description | 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. | |||||||||||
| Wine Co. [Member] | ||||||||||||
| Business Combination (Details) [Line Items] | ||||||||||||
| Equity method investment, ownership percentage | 90.00% | 90.00% | ||||||||||
| Equity Method Investment, Amount Sold | $ 9,600,000 | ¥ 67.5 | ||||||||||
| Kairui Tong [Member] | ||||||||||||
| Business Combination (Details) [Line Items] | ||||||||||||
| Equity method investment, ownership percentage | 54.00% | 54.00% | ||||||||||
| Hao Huang [Member] | ||||||||||||
| Business Combination (Details) [Line Items] | ||||||||||||
| Equity method investment, ownership percentage | 36.00% | 36.00% | ||||||||||
Business Combination (Details) - Schedule of investment payables related parties - USD ($) |
6 Months Ended | |
|---|---|---|
Jan. 31, 2020 |
Jul. 31, 2019 |
|
| Investment Payable Related Parties [Member] | ||
| Business Combination (Details) - Schedule of investment payables related parties [Line Items] | ||
| Total | $ 113,479 | $ 484,412 |
| Short-term | (113,479) | (204,648) |
| Long-term | 279,764 | |
| Wenhe Han [Member] | ||
| Business Combination (Details) - Schedule of investment payables related parties [Line Items] | ||
| Relationship | Vice general manager of Tianjin Jiabaili | |
| Nature | Payment for acquisition of Tianjin Jiabaili | |
| Total | $ 113,479 | 113,537 |
| Heping Zhang [Member] | ||
| Business Combination (Details) - Schedule of investment payables related parties [Line Items] | ||
| Relationship | General manager of Hubei Jinli | |
| Nature | Payment for acquisition of Hubei Jinli | |
| Total | $ 370,875 |
Income Taxes (Details) - Schedule of significant components of the discontinuing operations of deferred tax assets - Discontinued Operations [Member] - USD ($) |
Jan. 31, 2020 |
Jul. 31, 2019 |
|---|---|---|
| Deferred tax assets: | ||
| Accounts receivable allowance | $ 8,100 | |
| Less: valuation allowance | (8,100) | |
| Net deferred tax assets |
Leases (Details) - Schedule of maturity of lease obligations |
Jan. 31, 2020
USD ($)
|
|---|---|
| Schedule of maturity of lease obligations [Abstract] | |
| 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 |
Inventories, Net |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jan. 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Text Block] | Note 6 – Inventories, net
Inventories, net, consist of the following:
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. |
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Leases |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jan. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ASU 2016-02 Transition [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lessee, Operating Lease, Disclosure [Table Text Block] | 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:
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Intangible Assets, Net (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jan. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Finite-Lived Intangible Assets [Table Text Block] |
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| Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block] |
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Discontinued Operations (Tables) |
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| Discontinued Operations [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of assets and liabilities from discontinued operations [Table Text Block] |
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| Schedule of income and loses from discontinued operations [Table Text Block] |
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Income Taxes (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Components of Income Tax Expense (Benefit) [Table Text Block] |
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| Schedule of deferred tax assets continuing operations [Table Text Block] |
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| Schedule of deferred tax assets discontinuing operations [Table Text Block] |
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Business Combination (Details) - Schedule of maturities investment payable repayment date - Investment Payable [Member] - USD ($) |
Jan. 31, 2020 |
Jul. 31, 2019 |
|---|---|---|
| Business Combination (Details) - Schedule of maturities investment payable repayment date [Line Items] | ||
| Due on demand (see Note 15 – Commitments and Contingencies) | $ 136,245 | |
| Total | $ 136,245 | $ 136,314 |
Discontinued Operations (Details) - Schedule of assets and liabilities from discontinued operations - Parent [Member] - USD ($) |
Jan. 06, 2020 |
Jul. 31, 2019 |
|---|---|---|
| CURRENT ASSETS: | ||
| Cash | $ 389,569 | $ 1,929,899 |
| Accounts receivable, net | 318,895 | 471,889 |
| Inventories | 2,048,320 | 1,785,176 |
| Advances to suppliers | 21,674 | 181,101 |
| Other current assets | 594,880 | 73,707 |
| Total current assets | 3,373,338 | 4,441,772 |
| OTHER ASSETS: | ||
| Property, plant and equipment, net | 4,421,786 | 4,588,449 |
| Intangible assets, net | 2,858,308 | 2,950,343 |
| Goodwill | 1,972,004 | 1,998,387 |
| Total other assets | 9,252,098 | 9,537,179 |
| Total assets | 12,625,436 | 13,978,951 |
| CURRENT LIABILITIES: | ||
| Accounts payable | 9,718 | 25,266 |
| Advance from customers | 1,108,430 | 1,124,608 |
| Other payables and accrued liabilities | 24,025 | 42,778 |
| Income taxes payable | 224,584 | 306,360 |
| Total current liabilities | 1,366,757 | 1,499,012 |
| Total liabilities | 1,366,757 | $ 1,499,012 |
| 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 |
Significant Customer, Former Related Party (Details) |
1 Months Ended | 3 Months Ended | 6 Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Jul. 27, 2018
m²
|
Jun. 30, 2018
USD ($)
|
Jun. 30, 2018
CNY (¥)
|
Feb. 01, 2018
m²
|
Jul. 27, 2016
USD ($)
m²
|
Jul. 27, 2016
CNY (¥)
m²
|
Jan. 31, 2020
USD ($)
|
Jan. 31, 2019
USD ($)
|
Jan. 31, 2020
USD ($)
|
Jan. 31, 2019
USD ($)
|
Apr. 10, 2014
m²
|
Apr. 08, 2014 |
|
| Significant Customer, Former Related Party (Details) [Line Items] | ||||||||||||
| Rent expense related to the leases | $ 7,000 | ¥ 48,000 | $ 352,000 | $ 303,587 | $ 679,000 | $ 461,605 | ||||||
| Luck Sky Hong Kong Aerodynamic Electricity Limited [Member] | Zhou Deng Rong [Member] | ||||||||||||
| Significant Customer, Former Related Party (Details) [Line Items] | ||||||||||||
| Owners, percentage | 70.00% | 70.00% | ||||||||||
| Area of Land (in Square Meters) | m² | 70 | |||||||||||
| Luck Sky Hong Kong Aerodynamic Electricity Limited [Member] | Zhou Jian [Member] | ||||||||||||
| Significant Customer, Former Related Party (Details) [Line Items] | ||||||||||||
| Owners, percentage | 30.00% | 30.00% | ||||||||||
| Xianning Lucksky [Member] | ||||||||||||
| Significant Customer, Former Related Party (Details) [Line Items] | ||||||||||||
| Revenue from continuing operations | $ | 9,000 | 813,315 | 11,000 | 1,824,694 | ||||||||
| Xianning Xiangtian [Member] | ||||||||||||
| Significant Customer, Former Related Party (Details) [Line Items] | ||||||||||||
| Factory leased space (in Square Meters) | m² | 4,628 | 4,628 | ||||||||||
| Amount leased for rent | $ 83,132 | ¥ 555,360 | ||||||||||
| Lease expiration, description | 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. | 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 the leases | $ | 6,357 | 6,250 | 12,028 | 12,500 | ||||||||
| Xianning Lucksky [Member] | ||||||||||||
| Significant Customer, Former Related Party (Details) [Line Items] | ||||||||||||
| Factory leased space (in Square Meters) | m² | 4,628 | |||||||||||
| Lease expiration, description | 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 related to the leases | $ | 6,042 | 6,250 | 12,028 | 12,500 | ||||||||
| Xianning Lucksky One [Member] | ||||||||||||
| Significant Customer, Former Related Party (Details) [Line Items] | ||||||||||||
| Factory leased space (in Square Meters) | m² | 3,128 | |||||||||||
| Lease expiration, description | 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 related to the leases | $ | $ 4,083 | $ 4,250 | $ 8,129 | $ 8,500 | ||||||||
Commitments and Contingencies (Details) |
1 Months Ended | 6 Months Ended | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Jun. 11, 2019
USD ($)
|
Jun. 11, 2019
CNY (¥)
|
Jun. 05, 2019
USD ($)
|
Jun. 05, 2019
CNY (¥)
|
Dec. 23, 2019
USD ($)
|
Dec. 23, 2019
CNY (¥)
|
Jul. 23, 2019 |
Apr. 23, 2019
USD ($)
|
Apr. 23, 2019
CNY (¥)
|
Apr. 15, 2019
USD ($)
|
Apr. 15, 2019
CNY (¥)
|
Mar. 19, 2019
USD ($)
|
Mar. 19, 2019
CNY (¥)
|
Nov. 29, 2018
USD ($)
|
Nov. 29, 2018
CNY (¥)
|
Jan. 24, 2018
USD ($)
|
Jan. 24, 2018
CNY (¥)
|
Jan. 31, 2020
USD ($)
|
Jan. 31, 2020
CNY (¥)
|
|
| Commitments and Contingencies (Details) [Line Items] | |||||||||||||||||||
| Labor dispute, description | 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. | ||||||||||||||||||
| Sanhe Xiangtian [Member] | |||||||||||||||||||
| Commitments and Contingencies (Details) [Line Items] | |||||||||||||||||||
| Claimed damages amount | $ 610,284 | ¥ 4,089,150 | $ 149,245 | ¥ 1,000,000 | |||||||||||||||
| Pay for damages value | $ 2,300,000 | ¥ 15,826,000 | |||||||||||||||||
| Other associated fees | $ 3,000 | ¥ 23,000 | |||||||||||||||||
| Project and claimed unpaid work | $ 610,284 | ¥ 4,089,150 | |||||||||||||||||
| Liquidated damages | $ 302,242 | ¥ 2,025,139 | |||||||||||||||||
| Liquidated damages and legal fees | $ 126,657 | ¥ 848,655 | |||||||||||||||||
| Plaintiffs [Member] | |||||||||||||||||||
| Commitments and Contingencies (Details) [Line Items] | |||||||||||||||||||
| Claimed damages amount | $ 300,000 | ¥ 2,000,000 | |||||||||||||||||
| Liquidated damages | $ 600,000 | ¥ 3,720,000 | |||||||||||||||||
| Payment on unpaid equity transfer balance | $ 300,000 | ¥ 1,720,000 | |||||||||||||||||
| Xianning Xiangtian [Member] | |||||||||||||||||||
| Commitments and Contingencies (Details) [Line Items] | |||||||||||||||||||
| Claimed damages amount | $ 300,000 | ¥ 2,000,000 | |||||||||||||||||
| Payment on unpaid equity transfer balance | $ 800,000 | ¥ 5,080,000 | |||||||||||||||||
| Percentage of annual interest | 6.00% | 6.00% | |||||||||||||||||
| Wenhan Han And Guifen Wangs [Member] | |||||||||||||||||||
| Commitments and Contingencies (Details) [Line Items] | |||||||||||||||||||
| Personal assets | $ 1,000,000.0 | ¥ 7,080,000 | |||||||||||||||||
| Xiangtian Zhongdian [Member] | |||||||||||||||||||
| Commitments and Contingencies (Details) [Line Items] | |||||||||||||||||||
| Number of lawsuits | 14 | ||||||||||||||||||
| Instruments dispute | $ 600,000 | ¥ 4,000,000.0 | |||||||||||||||||
Related Party Balances and Transactions (Details) |
1 Months Ended | 3 Months Ended | 6 Months Ended | |||
|---|---|---|---|---|---|---|
|
Jun. 30, 2018
USD ($)
|
Jun. 30, 2018
CNY (¥)
|
Jan. 31, 2020
USD ($)
|
Jan. 31, 2019
USD ($)
|
Jan. 31, 2020
USD ($)
|
Jan. 31, 2019
USD ($)
|
|
| Related Party Balances and Transactions (Details) [Line Items] | ||||||
| Lease, description | 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. | |||||
| Rent expense related to the leases | $ 7,000 | ¥ 48,000 | $ 352,000 | $ 303,587 | $ 679,000 | $ 461,605 |
| Sanhe Dong Yi [Member] | ||||||
| Related Party Balances and Transactions (Details) [Line Items] | ||||||
| Lease expiration date | Jun. 14, 2019 | Jun. 14, 2019 | ||||
| Rent expense related to the leases | $ 1,709 | $ 1,746 | $ 3,418 | $ 3,491 | ||
| Kai Li [Member] | ||||||
| Related Party Balances and Transactions (Details) [Line Items] | ||||||
| Lease, description | The loan is due on January 13, 2021 with an annual interest rate of 4.75%. | |||||
Accounts Receivable, Net |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Receivables [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans, Notes, Trade and Other Receivables Disclosure [Text Block] | Note 5 – Accounts receivable, net
Accounts receivable, net, consist of the following:
Movement of allowance for doubtful accounts is as follows:
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Goodwill |
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| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Text Block] | Note 9 – Goodwill
The changes in the carrying amount of goodwill by reportable segment are as follows:
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Commitments and Contingencies (Tables) |
6 Months Ended | ||||||||||||||||||||
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Jan. 31, 2020 | |||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||
| Schedule of accrue costs for potential litigation losses [Table Text Block] |
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Goodwill (Tables) |
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| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Intangible Assets and Goodwill [Table Text Block] |
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Accounts Receivable, Net (Tables) |
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| Receivables [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block] |
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| Schedule of doubtful accounts [Table Text Block] |
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Employee Benefits Government Plan |
6 Months Ended |
|---|---|
Jan. 31, 2020 | |
| Retirement Benefits [Abstract] | |
| Pension and Other Postretirement Benefits Disclosure [Text Block] | 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. |
Segment Reporting |
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| Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting Disclosure [Text Block] | 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:
Total assets of each division as of January 31, 2020 and July 31, 2019 consisted of the following:
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Summary of Significant Accounting Policies (Tables) |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Condensed Financial Statements [Table Text Block] |
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| Schedule of estimated useful lives of property, plant and equipment [Table Text Block] |
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| Schedule Of Intangible Assets On Straight Line Basis Over Estimated Use full Lives [Table Text Block] |
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| Fair Value, Liabilities Measured on Recurring Basis [Table Text Block] |
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| Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block] |
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| Schedule Of Disaggregate Sale Of Products Streams [Table Text Block] |
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Summary of Significant Accounting Policies (Details) - Schedule of reconciliation of assets and liabilities measured at fair value on a recurring basis - USD ($) |
6 Months Ended | 12 Months Ended |
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Jan. 31, 2020 |
Jul. 31, 2019 |
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| Schedule of reconciliation of assets and liabilities measured at fair value on a recurring basis [Abstract] | ||
| 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 |
Summary of Significant Accounting Policies |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Significant Accounting Policies [Text Block] | 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:
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.
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:
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:
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.
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:
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).
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.
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:
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:
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.
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:
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:
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:
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 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.
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.
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 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:
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.
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.
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.
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.
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. |
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Summary of Significant Accounting Policies (Details) - Schedule of financial statement amounts and balances of the VIE were included in the accompanying unaudited condensed consolidated financial statements - Variable Interest Entities [Member] - USD ($) |
3 Months Ended | 6 Months Ended | |||
|---|---|---|---|---|---|
Jan. 31, 2020 |
Jan. 31, 2019 |
Jan. 31, 2020 |
Jan. 31, 2019 |
Jul. 31, 2019 |
|
| Condensed Financial Statements, Captions [Line Items] | |||||
| Current assets | $ 25,407,774 | $ 25,407,774 | $ 22,287,078 | ||
| Current assets of discontinued operations | 4,441,772 | ||||
| Non-current assets | 24,887,708 | 24,887,708 | 26,783,807 | ||
| Non-current assets of discontinued operations | 9,537,179 | ||||
| Total assets | 50,295,482 | 50,295,482 | 63,049,836 | ||
| Current liabilities | 25,202,984 | 25,202,984 | 23,617,149 | ||
| Current liabilities of discontinued operations | 1,499,012 | ||||
| Non-current liabilities | 866,382 | 866,382 | 279,764 | ||
| Total liabilities | 26,069,366 | 26,069,366 | $ 25,395,925 | ||
| 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 | |
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity - USD ($) |
Preferred Stock [Member] |
Common Stock [Member] |
Additional Paid-in Capital [Member] |
Subscription Receivable [Member] |
Accumulated Deficit Statutory Reserves [Member] |
Accumulated Deficit Unrestricted [Member] |
AOCI Attributable to Parent [Member] |
Noncontrolling Interest [Member] |
Total |
|---|---|---|---|---|---|---|---|---|---|
| BALANCE at Jul. 31, 2018 | $ 591,042 | $ 9,860,068 | $ (310,000) | $ 108,487 | $ (6,743,399) | $ (932,061) | $ 882,925 | $ 3,457,062 | |
| BALANCE (in Shares) at Jul. 31, 2018 | 591,042,000 | ||||||||
| 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 (loss) attributable to XT Energy Group, Inc. | 1,375,767 | 1,375,767 | |||||||
| Net income (loss) attributable to noncontrolling interest | 202,442 | 202,442 | |||||||
| BALANCE at Oct. 31, 2018 | $ 591,042 | 24,393,071 | (310,000) | 258,030 | (5,517,175) | (1,290,762) | 1,063,082 | 19,187,288 | |
| BALANCE (in Shares) at Oct. 31, 2018 | 591,042,000 | ||||||||
| BALANCE at Jul. 31, 2018 | $ 591,042 | 9,860,068 | (310,000) | 108,487 | (6,743,399) | (932,061) | 882,925 | 3,457,062 | |
| BALANCE (in Shares) at Jul. 31, 2018 | 591,042,000 | ||||||||
| Foreign currency translation adjustment | 665,419 | ||||||||
| Net income (loss) attributable to XT Energy Group, Inc. | 2,993,266 | ||||||||
| BALANCE at Jan. 31, 2019 | $ 591,042 | 25,325,104 | (310,000) | 481,311 | (4,122,957) | (327,099) | 2,120,562 | 23,757,963 | |
| BALANCE (in Shares) at Jan. 31, 2019 | 591,042,000 | ||||||||
| BALANCE at Oct. 31, 2018 | $ 591,042 | 24,393,071 | (310,000) | 258,030 | (5,517,175) | (1,290,762) | 1,063,082 | 19,187,288 | |
| BALANCE (in Shares) at Oct. 31, 2018 | 591,042,000 | ||||||||
| 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 (loss) attributable to XT Energy Group, Inc. | 1,617,499 | 1,617,499 | |||||||
| Noncontrolling interest from acquisition | 862,193 | 862,193 | |||||||
| Net income (loss) attributable to noncontrolling interest | 112,545 | 112,545 | |||||||
| BALANCE at Jan. 31, 2019 | $ 591,042 | 25,325,104 | (310,000) | 481,311 | (4,122,957) | (327,099) | 2,120,562 | 23,757,963 | |
| BALANCE (in Shares) at Jan. 31, 2019 | 591,042,000 | ||||||||
| BALANCE at Jul. 31, 2019 | $ 531,042 | 40,680,195 | (250,000) | 572,642 | (8,292,847) | (1,425,617) | 2,316,045 | 34,131,460 | |
| BALANCE (in Shares) at Jul. 31, 2019 | 531,042,000 | ||||||||
| Statutory reserves | 20,413 | (20,413) | |||||||
| Foreign currency translation adjustment | (893,143) | (55,196) | (948,339) | ||||||
| Net income (loss) attributable to XT Energy Group, Inc. | (3,867,733) | (3,867,733) | |||||||
| Net income (loss) attributable to noncontrolling interest | (260,505) | (260,505) | |||||||
| BALANCE at Oct. 31, 2019 | $ 531,042 | 40,680,195 | (250,000) | 593,055 | (12,180,993) | (2,318,760) | 2,000,344 | 29,054,883 | |
| BALANCE (in Shares) at Oct. 31, 2019 | 531,042,000 | ||||||||
| BALANCE at Jul. 31, 2019 | $ 531,042 | 40,680,195 | (250,000) | 572,642 | (8,292,847) | (1,425,617) | 2,316,045 | 34,131,460 | |
| BALANCE (in Shares) at Jul. 31, 2019 | 531,042,000 | ||||||||
| Foreign currency translation adjustment | (249,169) | ||||||||
| Net income (loss) attributable to XT Energy Group, Inc. | (11,367,699) | ||||||||
| BALANCE at Jan. 31, 2020 | $ 531,042 | 40,680,195 | (250,000) | 572,642 | (19,660,546) | (1,654,227) | (121,348) | 20,097,758 | |
| BALANCE (in Shares) at Jan. 31, 2020 | 531,042,000 | ||||||||
| BALANCE at Oct. 31, 2019 | $ 531,042 | 40,680,195 | (250,000) | 593,055 | (12,180,993) | (2,318,760) | 2,000,344 | 29,054,883 | |
| BALANCE (in Shares) at Oct. 31, 2019 | 531,042,000 | ||||||||
| Statutory reserves | (20,413) | 20,413 | |||||||
| Foreign currency translation adjustment | 664,533 | 34,637 | 699,170 | ||||||
| Net income (loss) attributable to XT Energy Group, Inc. | (7,499,966) | (7,499,966) | |||||||
| Net income (loss) attributable to noncontrolling interest | (1,006,421) | (1,006,421) | |||||||
| Deconsolidation of discontinued operations | (1,149,908) | (1,149,908) | |||||||
| BALANCE at Jan. 31, 2020 | $ 531,042 | $ 40,680,195 | $ (250,000) | $ 572,642 | $ (19,660,546) | $ (1,654,227) | $ (121,348) | $ 20,097,758 | |
| BALANCE (in Shares) at Jan. 31, 2020 | 531,042,000 |
Subsequent Events (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Subsequent Events [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Quarterly Financial Information [Table Text Block] |
|
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Inventories, Net (Details) - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jan. 31, 2020 |
Jan. 31, 2019 |
Jan. 31, 2020 |
Jan. 31, 2019 |
|
| Inventory Disclosure [Abstract] | ||||
| Impairment of inventory | $ 231,890 | $ 0 | $ 1,666,439 | $ 0 |
Related Party Balances and Transactions (Details) - Schedule of related party accounts payable - USD ($) |
6 Months Ended | |
|---|---|---|
Jan. 31, 2020 |
Jul. 31, 2019 |
|
| Related Party Balances and Transactions (Details) - Schedule of related party accounts payable [Line Items] | ||
| Related party balances | $ 9,554 | |
| Xianning Baizhuang Tea Industry Co., Ltd. [Member] | ||
| Related Party Balances and Transactions (Details) - Schedule of related party accounts payable [Line Items] | ||
| Relationship | Bin Zhou is the CEO of the company | |
| Nature | Purchase of materials | |
| Related party balances | $ 9,554 |
Concentrations (Details) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jan. 31, 2020 |
Jan. 31, 2019 |
Jan. 31, 2020 |
Jan. 31, 2019 |
|
| Revenue [Member] | Customer One [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 34.00% | 47.40% | 16.50% | 45.40% |
| Revenue [Member] | Customer Two [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 32.00% | 17.10% | 15.50% | 17.60% |
| Revenue [Member] | Customer Three [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 28.10% | 13.60% | ||
| Revenue [Member] | Customer Four [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 13.30% | |||
| Accounts Receivable [Member] | Customer One [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 26.10% | 20.80% | ||
| Accounts Receivable [Member] | Customer Two [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 22.20% | 17.70% | ||
| Accounts Receivable [Member] | Customer Three [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 17.30% | |||
| Accounts Receivable [Member] | Customer Four [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 12.90% | |||
| Purchases [Member] | Vendor One [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 60.20% | 35.40% | 19.00% | 38.40% |
| Purchases [Member] | Vendor Two [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 11.90% | 17.80% | ||
| Accounts Payable [Member] | Vendor One [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 45.40% | 49.80% | ||
| Accounts Payable [Member] | Vendor Two [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 12.50% | 13.70% | ||
| Accounts Payable [Member] | Vendor Three [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 11.50% | 11.40% | ||
| Accounts Payable [Member] | Vendor Four [Member] | ||||
| Concentrations (Details) [Line Items] | ||||
| Concentration risk, percentage | 10.40% | |||
Income Taxes (Details) - Schedule of significant components of the continuing operations of deferred tax assets - Continuing Operations [Member] - USD ($) |
Jan. 31, 2020 |
Jul. 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 |
Leases (Details) |
1 Months Ended | 3 Months Ended | 6 Months Ended | |||
|---|---|---|---|---|---|---|
|
Jun. 30, 2018
USD ($)
|
Jun. 30, 2018
CNY (¥)
|
Jan. 31, 2020
USD ($)
|
Jan. 31, 2019
USD ($)
|
Jan. 31, 2020
USD ($)
|
Jan. 31, 2019
USD ($)
|
|
| Leases (Details) [Line Items] | ||||||
| Operating lease right of use assets | $ 2,800,000 | $ 2,800,000 | ||||
| Present value of the future minimum rental payments | 2,200,000 | $ 2,200,000 | ||||
| Weighted average remaining lease term | 2 years 9 months 25 days | |||||
| Rent expenses | $ 7,000 | ¥ 48,000 | $ 352,000 | $ 303,587 | $ 679,000 | $ 461,605 |
| Minimum [Member] | ||||||
| Leases (Details) [Line Items] | ||||||
| Borrowing rate | 4.75% | 4.75% | ||||
| Maximum [Member] | ||||||
| Leases (Details) [Line Items] | ||||||
| Borrowing rate | 4.90% | 4.90% | ||||
Subsequent Events (Details) - Schedule of results of operations by quarter - Pro Forma [Member] - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jan. 31, 2020 |
Jan. 31, 2019 |
Jan. 31, 2020 |
Jan. 31, 2019 |
|
| Subsequent Events (Details) - Schedule of results of operations by quarter [Line Items] | ||||
| 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 (in Dollars per share) | $ (0.01) | $ 0.00 | $ (0.02) | $ 0.00 |
| Discontinued operations (in Dollars per share) | $ 0.00 | $ 0.00 | $ 0.00 | $ 0.00 |
| Weighted average number of common shares outstanding - basic and diluted (in Shares) | 531,042,000 | 591,042,000 | 531,042,000 | 591,042,000 |
Income Taxes (Details) |
6 Months Ended |
|---|---|
Jan. 31, 2020 | |
| Income Taxes (Details) [Line Items] | |
| Net operating loss carryforwards, description | 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. |
| United States [Member] | |
| Income Taxes (Details) [Line Items] | |
| Corporate tax rate | 21.00% |
| Hong Kong [Member] | |
| Income Taxes (Details) [Line Items] | |
| Corporate tax rate | 16.50% |
| Net operating loss carryforwards, description | 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. |
| PRC [Member] | |
| Income Taxes (Details) [Line Items] | |
| Corporate tax rate | 25.00% |
| Net operating loss carryforwards, description | 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 $1,621,000. |
Business Combination (Details) - Schedule of fair value of identifiable assets acquired and liabilities assumed at the acquisition date - Wine Co. and Herbal Wine Co [Member] |
Jul. 31, 2019
USD ($)
|
|---|---|
| Business Acquisition [Line Items] | |
| 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 | 90.00% |
| Total net assets acquired | $ 9,699,669 |
Business Combination (Details) - Schedule of maturity related party repayment date - Investment Payable Related Parties [Member] - USD ($) |
Jan. 31, 2020 |
Jul. 31, 2019 |
|---|---|---|
| Business Combination (Details) - Schedule of maturity related party repayment date [Line Items] | ||
| Due on demand | $ 113,479 | |
| Total | $ 113,479 | $ 484,412 |
Related Party Balances and Transactions (Tables) |
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Property, Plant and Equipment, Net (Tables) |
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| Related Party Transactions Disclosure [Text Block] | 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
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Business Combination |
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| Business Combinations [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Combination Disclosure [Text Block] | 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.
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:
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.
Investment payable
Investment payable consists of the following:
The maturities schedule is as follows as of January 31, 2020:
Investment payable – related parties
Investment payable – related parties consist of the following:
The maturities schedule is as follows as of January 31, 2020:
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. |
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| Property, Plant and Equipment Disclosure [Text Block] | Note 7 – Property, plant and equipment, net
Property, plant and equipment consist of the following:
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.
Construction-in-progress consist of the following as of January 31, 2020:
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| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||
| Commitments and Contingencies Disclosure [Text Block] | 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.
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.
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. |
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| Going concern | 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:
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| Basis of presentation | 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.
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| Principles of consolidation | 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.
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| Use of estimates and assumptions | 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.
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| Variable interest entities | 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:
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:
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.
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:
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| Business Combinations | 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.
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| Cash | 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).
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| Restricted Cash | 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.
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| Short-term Investment | 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.
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| Notes Receivable | 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.
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| Accounts Receivable, net | 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.
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| Inventories, net | 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.
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| Advances to Suppliers | 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.
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| Contract Assets | 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.
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| Prepaid Expenses | Prepaid Expenses
Prepaid expenses represent advance payments made to vendors for services such as rent, internet, consulting, maintenance and certification.
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| Other Receivables, net | 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.
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| Other Receivables – Related Parties | Other Receivables – Related Parties
Other receivables – related parties present advances to the management of the Company for business development and travel advances.
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| Property, Plant and Equipment, net | 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:
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.
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| Intangible Assets, net | 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:
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.
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| Goodwill | 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.
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| Impairment for Long-Lived Assets | 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.
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| Subscription Receivable | Subscription Receivable
Subscription receivable represents unpaid capital contribution from its shareholders.
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| Fair Value Measurement | 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:
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:
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:
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 and $279,764, net of discount of $25,999, respectively.
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| Leases | 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.
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.
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| Discontinued operations | 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.
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| Revenue Recognition | 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.
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 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:
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.
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| Warranty | 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.
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| Advertising Costs | 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.
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| Employee Benefit | 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.
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| Research and development (“R&D”) | 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.
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| Value Added Taxes | 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.
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| Income Taxes | 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.
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| Comprehensive Income (Loss) | 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.
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| Foreign Currency Translation | 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.
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| Earnings (Loss) Per Share | 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.
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| Statutory Reserves | 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.
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| Contingencies | 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.
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| Recently issued accounting pronouncements | 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.
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. |
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Intangible Assets, Net (Details) - Schedule of intangible assets - USD ($) |
Jan. 31, 2020 |
Jul. 31, 2019 |
|---|---|---|
| Finite-Lived Intangible Assets [Line Items] | ||
| 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 |
| Less: accumulated amortization | (754,280) | (715,376) |
| Land Use Rights [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Intangible assets, net | 4,537,139 | 7,227,670 |
| Technology know-hows [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Intangible assets, net | 1,841,359 | 1,812,147 |
| Patents, Licenses and Certifications [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Intangible assets, net | 1,248,621 | 2,408,430 |
| Software [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Intangible assets, net | $ 2,065 | $ 7,451 |
Accounts Receivable, Net (Details) - Schedule of accounts receivable - USD ($) |
Jan. 31, 2020 |
Jul. 31, 2019 |
|---|---|---|
| Schedule of accounts receivable [Abstract] | ||
| 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 |
Property, Plant and Equipment, Net (Details) - Property, Plant and Equipment [Member] - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jan. 31, 2020 |
Jan. 31, 2019 |
Jan. 31, 2020 |
Jan. 31, 2019 |
|
| Continuing Operations [Member] | ||||
| Property, Plant and Equipment, Net (Details) [Line Items] | ||||
| Depreciation expenses | $ 302,313 | $ 285,201 | $ 584,523 | $ 501,307 |
| Cost, Depreciation | 114,422 | 175,729 | 265,343 | 292,618 |
| Selling, General and Administrative Expense | 187,891 | 109,472 | 319,180 | 208,689 |
| Discontinued Operations [Member] | ||||
| Property, Plant and Equipment, Net (Details) [Line Items] | ||||
| Depreciation expenses | 44,760 | 39,820 | 110,194 | 39,820 |
| Cost, Depreciation | 44,760 | 34,935 | 90,931 | 34,935 |
| Selling, General and Administrative Expense | $ 0 | $ 4,885 | $ 19,263 | $ 4,885 |
Summary of Significant Accounting Policies (Details) - Schedule of estimated useful lives of intangible assets, net |
6 Months Ended |
|---|---|
Jan. 31, 2020 | |
| Land Use Rights [Member] | |
| Summary of Significant Accounting Policies (Details) - Schedule of estimated useful lives of intangible assets, net [Line Items] | |
| Estimated Useful Life | 50 years |
| Technology-Based Intangible Assets [Member] | |
| Summary of Significant Accounting Policies (Details) - Schedule of estimated useful lives of intangible assets, net [Line Items] | |
| Estimated Useful Life | 10 years |
| Software [Member] | |
| Summary of Significant Accounting Policies (Details) - Schedule of estimated useful lives of intangible assets, net [Line Items] | |
| Estimated Useful Life | 3 years |
| Minimum [Member] | Patents, Licenses and Certifications [Member] | |
| Summary of Significant Accounting Policies (Details) - Schedule of estimated useful lives of intangible assets, net [Line Items] | |
| Estimated Useful Life | 3 years |
| Maximum [Member] | Patents, Licenses and Certifications [Member] | |
| Summary of Significant Accounting Policies (Details) - Schedule of estimated useful lives of intangible assets, net [Line Items] | |
| Estimated Useful Life | 10 years |
Unaudited Condensed Consolidated Balance Sheets (Parentheticals) - $ / shares |
Jan. 31, 2020 |
Jul. 31, 2019 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Preferred stock par value (in Dollars per share) | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized | 100,000,000 | 100,000,000 |
| Preferred stock, shares issued | ||
| Preferred stock, shares outstanding | ||
| Common stock, par value (in Dollars per share) | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 1,000,000,000 | 1,000,000,000 |
| Common stock, shares issued | 531,042,000 | 531,042,000 |
| Common stock, shares outstanding | 531,042,000 | 531,042,000 |
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