Attached files

file filename
EX-32.2 - CERTIFICATION - XT Energy Group, Inc.f10q1018ex32-2_xtenergy.htm
EX-32.1 - CERTIFICATION - XT Energy Group, Inc.f10q1018ex32-1_xtenergy.htm
EX-31.2 - CERTIFICATION - XT Energy Group, Inc.f10q1018ex31-2_xtenergy.htm
EX-31.1 - CERTIFICATION - XT Energy Group, Inc.f10q1018ex31-1_xtenergy.htm
EX-10.1 - LEASE AGREEMENT, DATED AS OF OCTOBER 17, 2018, BY AND BETWEEN XI?AN JIADELI FINE - XT Energy Group, Inc.f10q1018ex10-1_xtenergy.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended October 31, 2018

 

OR

 

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

 

For the transition period from ________   to ________.

 

Commission File Number: 001-38426

 

XT Energy Group, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   98-0632932
(State or other jurisdiction
of incorporation or organization)
  (IRS Employer
Identification No.)
     

No.1, Fuqiao Village, Henggouqiao Town

Xianning, Hubei, China

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

 

+1 (929) 228-9298

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

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

 

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

 

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

  

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

 

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

 

As of December 11, 2018, there were 591,042,000 shares of the issuer’s common stock, par value $0.001 per share, outstanding.

 

 

  

 

 

  

TABLE OF CONTENTS

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS ii
   
PART I – FINANCIAL INFORMATION 1
   
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
Item 3. Quantitative and Qualitative Disclosures About Market Risk 47
Item 4. Controls and Procedures 47
     
PART II – OTHER INFORMATION 49
   
Item 1. Legal Proceedings 49
Item 1A. Risk Factors 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 49
Item 3. Defaults Upon Senior Securities 49
Item 4. Mine Safety Disclosures 49
Item 5. Other Information 49
Item 6. Exhibits 50
 
SIGNATURES 51

 

i

 

  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report 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,” “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 October 30, 2018, 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.

 

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

(Formerly Known as Xiangtian (USA) Air Power Co., Ltd.)

Unaudited Condensed Consolidated Balance Sheets

(Stated in U.S. Dollars)

 

   October 31,
2018
   July 31,
2018
 
   (Unaudited)     
ASSETS    
Current assets    
Cash  $25,882,003   $14,245,783 
Notes receivable   491,700    1,303,443 
Accounts receivable, net   2,791,284    5,142,780 
Inventories, net   5,530,021    5,141,533 
Advances to suppliers   4,713,028    1,101,472 
Costs and estimated earnings in excess of billings   2,815,830    2,883,408 
Prepaid expenses   1,150,088    1,364,501 
Other receivables   79,328    77,228 
Other receivables - related party   14,335    - 
Loan receivables   -    1,759,428 
Deposit for investment   415,723    439,857 
Total current assets   43,883,340    33,459,433 
           
Other assets          
Property, plant and equipment, net   11,958,536    11,966,233 
Intangible assets, net   8,870,063    9,260,643 
Prepaid expenses - non-current   240,936    208,498 
Deferred tax assets   17,125    - 
Goodwill   4,041,069    4,133,143 
Total other assets   25,127,729    25,568,517 
           
Total assets  $69,011,069   $59,027,950 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Short-term loan - bank  $716,764   $733,095 
Current maturities of long-term loan   2,551,678    3,069,113 
Short-term loan - third party   -    175,943 
Short-term loans - related parties   2,924,396    20,145,446 
Accounts payable   3,542,566    5,349,445 
Advance from customers   25,221,474    8,326,929 
Other payables and accrued liabilities   2,259,597    2,424,228 
Other payables - related parties and director   4,997,573    4,230,118 
Income taxes payable   1,146,808    898,424 
Current maturities of investment payable   134,522    2,505,871 
Current maturities of investment payable - related parties   355,290    507,143 
Total current liabilities   43,850,668    48,365,755 
           
Other liabilities          
Investment payable   5,474,241    6,700,774 
Investment payable - related parties   498,872    504,359 
Total other liabilities   5,973,113    7,205,133 
           
Total liabilities   49,823,781    55,570,888 
           
Commitments and contingencies          
           
Equity          
Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued and outstanding   -    - 
Common stock: $0.001 par value, 1,000,000,000 shares authorized, 591,042,000 shares issued and outstanding as of October 31 and July 31, 2018   591,042    591,042 
Additional paid-in capital   24,393,071    9,860,068 
Subscription receivable   (310,000)   (310,000)
Statutory reserves   258,030    108,487 
Accumulated deficit   (5,517,175)   (6,743,399)
Accumulated other comprehensive loss   (1,290,762)   (932,061)
Total XT Energy Group, Inc. common shareholders’ equity   18,124,206    2,574,137 
           
Noncontrolling interest   1,063,082    882,925 
           
Total equity   19,187,288    3,457,062 
           
Total liabilities and equity  $69,011,069   $59,027,950 

 

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

 

1

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co., Ltd.)

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

(Stated in U.S. Dollars)

(Unaudited)

 

   For the Three Months Ended October 31, 
   2018   2017 
         
Revenue-products  $19,599,106   $305,640 
Revenue-installation of power systems   389,332    49,554 
Total revenue   19,988,438    355,194 
           
Cost of sales-products   15,435,353    279,645 
Cost of sales-installation of power systems   357,570    37,999 
Total cost of sales   15,792,923    317,644 
           
Gross profit   4,195,515    37,550 
           
Operating expenses:          
Selling expenses   113,062    15,970 
General and administrative expenses   1,705,709    870,182 
Recovery of doubtful accounts   (164,887)   - 
Total operating expenses   1,653,884    886,152 
           
Income (loss) from operations   2,541,631    (848,602)
           
Other (expenses) income          
Other (expenses) income, net   30,755    (4,431)
Interest income   9,195    328 
Interest expense   (477,228)   - 
Total other expenses, net   (437,278)   (4,103)
           
Income (loss) before income taxes   2,104,353    (852,705)
           
Income tax expense   (526,144)   (2,835)
           
Net income (loss)   1,578,209    (855,540)
           
Less:  Net income attributable to non-controlling interest   202,442    - 
           
Net income (loss) attributable to XT Energy Group, Inc.  $1,375,767   $(855,540)
           
Net income (loss)  $1,578,209   $(855,540)
           
Foreign currency translation adjustment   (380,986)   89,875 
           
Total comprehensive income (loss)   1,197,223    (765,665)
           
Less:  Comprehensive income attributable to non-controlling interest   180,157    - 
           
Comprehensive income (loss) attributable to XT Energy Group, Inc.  $1,017,066   $(765,665)
           
Net income (loss) per common share - basic and diluted  $0.00   $(0.00)
           
Weighted average number of common shares outstanding - basic and diluted   591,042,000    591,042,000 

 

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

 

2

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co., Ltd.)

Unaudited Condensed Consolidated Statements of Cash Flows

(Stated in U.S. Dollars)

 

   For the Three Months Ended October 31, 
   2018   2017 
Cash flows from operating activities:        
Net income (loss)  $1,578,209   $(855,540)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:          
Depreciation expense   216,106    82,133 
Amortization expense   186,902    - 
Deferred tax expense   (17,369)   - 
Provision for (recovery of) allowance for doubtful accounts   (164,887)   1,576 
Amortization of debt discount   123,819    - 
Rent contributed by shareholders   -    1,500 
Changes in operating assets and liabilities          
Notes receivable   793,842    - 
Accounts receivable   2,433,645    689,234 
Inventories   (510,184)   (86,650)
Advances to suppliers   (3,687,827)   216,339 
Costs and estimated earnings in excess of billings   3,391    147,155 
Prepaid expenses   149,023    - 
Other receivables   (3,875)   (5,032)
Accounts payable   (1,711,721)   (824,213)
Advance from customers   17,323,053    (318,408)
Other payables and taxes payable   153,686    (50,168)
Net cash provided by (used in) operating activities   16,865,813    (1,002,074)
           
Cash flows from investing activities:          
Payment to former shareholders on businesses acquired   (3,701,600)   - 
Purchases of property and equipment   (478,662)   - 
Refund of deposit investment   14,539    - 
Collection of loan receivable   1,744,708    - 
Issuance of notes receivable   -    (150,766)
Net cash used in investing activities   (2,421,015)   (150,766)
           
Cash flows from financing activities:          
Borrowings from related parties and directors   779,761    - 
Capital contribution from shareholders   14,533,003    - 
Payments of short-term loan - bank   (455,453)   - 
Payments of third party loan   (174,471)   - 
Proceeds from related party loans   2,035,492    147,661 
Payments of related party loans   (19,046,392)   - 
Net cash provided by (used in) financing activities   (2,328,060)   147,661 
           
Effect of exchange rate change on cash   (480,518)   96,904 
           
Net change in cash   11,636,220    (908,275)
           
Cash - beginning of period   14,245,783    1,156,969 
           
Cash - end of period  $25,882,003   $248,694 
           
Supplemental disclosure of cash flow information:          
Interest paid  $49,848   $- 
Income tax paid  $271,296   $8,808 
           
Supplemental non-cash investing and financing information:          
Rent contributed by shareholders  $-   $1,500 
Receipt of property, plant and equipment from deposit made in prior year  $-   $1,839,603 
Transfers from advances to suppliers to inventories  $-   $305,819 

 

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

 

3

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1 – Nature of business and organization

 

XT Energy Group, Inc., formerly known as Xiangtian (USA) Air Power Co. Ltd. (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 (“Lucky 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. Effective May 29, 2012, the Company’s name was changed to “Xiangtian (USA) Air Power Co., Ltd.”.

 

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 Aerodynamic and 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 in Nevada as a result of its merger with and into our wholly owned Nevada subsidiary.

 

The Company is engaged in a variety of energy-related businesses through its 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 through the Company’s variable interest entities (“VIE”), Sanhe Luck Sky Electrical Engineering Co., Ltd. (“Sanhe Xiangtian”) and 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 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 the business of trading chemical raw materials for the purpose of providing a stable supply for fuel product operation. Xiangtian Trade has no operations since it was incorporated.

 

In September and October 2018, Mr. Jian Zhou, the Company’s chairman and a shareholder of Xianning Xiangtian provided Chinese Renminbi (“RMB”) 100,000,000 (approximately $14.5 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.

 

4

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Reorganization

 

On September 30, 2018, Xiangtian Shenzhen terminated its variable interest entity agreements (the “VIE Agreements”) as part of its restructuring to facilitate the shift of business focus between entities controlled by the Company. After the restructuring, the Company’s headquarters is located in the city of Xianning, Hubei Province, and Sanhe Xiangtian, the Company’s previous headquarters, located in the city of Sanhe, Hebei Province, became the Company’s sales office. The VIE Agreements include the following:

 

Framework Agreement on Business Cooperation, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian;
Exclusive Management, Consulting and Training and Technical Service Agreement, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian;
Exclusive Option Agreement, dated July 25, 2014, by and among Xiangtian Shenzhen, Sanhe Xiangtian and all the shareholders of Sanhe Xiangtian (“Shanhe Xiangtian Shareholders”);
Equity Pledge Agreement, dated July 25, 2014, by and among Xiangtian Shenzhen, Sanhe Xiangtian and the Shanhe Xiangtian Shareholders;
Know-How Sub-License Agreement, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian; and
Powers of Attorney of the Sanhe Xiangtian Shareholders dated July 25, 2014.

 

In connection with the termination of the VIE Agreements, on September 30, 2018, Sanhe Xiangtian transferred its 100% equity interest of Xianning Xiangtian to the Sanhe Xiangtian Shareholders and the Sanhe Xiangtian Shareholders transferred their 100% equity interest of Sanhe Xiangtian to Xianning Xiangtian. As a result of the foregoing equity transfers, Sanhe Xiangtian became a wholly owned subsidiary of Xianning Xiangtian.

 

On the same day, the Company, through Xiangtian Shenzhen and Xiangtian HK, entered into a new series of variable interest entity agreements (“New VIE Agreements”), pursuant to which Xianning Xiangtian became the Company’s new contractually controlled affiliate. The New VIE Agreements allow 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.

 

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 agree 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.

 

5

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 is within Xiangtian Shenzhen and Xiangtian HK’s sole discretion. In addition, each of the Xianning Xiangtian Shareholders agrees to waive their respective preemptive right when the other shareholder transfers the equity interest of Xianning Xiangtian to Xiangtian Shenzhen or its designated party. The Xianning Xiangtian Shareholders further agree, among other things, without 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 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.

 

6

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Spousal Consent Letters

 

Pursuant to the Spousal Consent Letters, each of the spouses of the Xianning Xiang 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 termination 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:

 

Name   Background   Ownership
Xiangtian HK   ●       A Hong Kong company   100% owned by XT Energy
         
Xiangtian BVI   ●       A British Virgin Islands company   100% owned by XT Energy
         
Xiangtian Shenzhen   ●       A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)   100% owned by Xiangtian HK
         
Sanhe Xiangtian  

●       A PRC limited liability company

●       Incorporated on July 8, 2013

●       Sales and installation of power generation systems and PV systems and sales of PV Panels, air compression equipment and heat pump products

  VIE of Xiangtian Shenzhen prior to September 30, 2018 and became subsidiary of Xianning Xiangtian on September 30, 2018 and thereafter
         
Xianning Xiangtian  

●       A PRC limited liability company

●       Incorporated on May 30, 2016

●       Manufacturing and sales of air compression equipment and heat pump products

  100% owned by Sanhe Xiangtian prior to September 30, 2018 and became VIE of Xiangtian Shenzhen on September 30, 2018 and thereafter
         
Xiangtian Zhongdian  

●       A PRC limited liability company

●       Incorporated on March 7, 2018

●       Manufacturing and sales of PV panels

  70% owned by Xianning Xiangtian
         
Jingshan Sanhe  

●       A PRC limited liability company

●       Incorporated on April 17, 2018

●       Researching, manufacturing and sales of high-grade synthetic fuel products

  100% owned by Xianning Xiangtian
         
Hubei Jinli  

●       A PRC limited liability company

●       Incorporated on December 27, 2004 and acquired on June 30, 2018

●       Manufacturing and sales of hydraulic parts and electronic components

  100% owned by Xianning Xiangtian
         
Tianjin Jiabaili  

●       A PRC limited liability company

●       Incorporated on April 10, 2007 and acquired on June 30, 2018

●       Manufacturing and sales of petroleum products

  100% owned by Xianning Xiangtian
         
Xiangtian Trade  

●       A PRC limited liability company

●       Incorporated on August 9, 2018

●       Trading chemicals raw materials for the purpose of providing a stable supply for synthetic fuel product operation of the Company

  100% owned by Xianning Xiangtian

 

7

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 2 – Summary of significant accounting policies

 

Liquidity

 

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 in the form of loans payable and loans from related parties have been utilized to finance the working capital requirements of the Company. As of October 31, 2018, the Company’s net working capital was approximately $33,000 and the Company had cash of approximately $25.9 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 expects to realize the balance of its current assets within the normal operating cycle of a twelve month period. If the Company is unable to realize its current assets within the normal operating cycle of a twelve month period, the Company may have to consider supplementing its available sources of funds 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 or to obtain due date extension of approximately $5.5 million current payable balance as of October 31, 2018 from its related parties.

 

Based on the above considerations, the Company’s management is of the opinion that it has sufficient funds to meet the Company’s working capital requirements and debt obligations as they become due one year from the date of this report. However, there is no assurance that management will be successful in their plans. There are a number of factors that could potentially arise that could undermine the Company’s plans, such as changes in the demand for the Company’s products or installations, PRC government policy, economic conditions, and competitive pricing in the industries that the Company operated in.

 

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, 2018 annual report on Form 10-K filed on October 30, 2018.

 

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.

 

8

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

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, allowance for accounts receivable doubtful accounts, allowance for inventory obsolescence reserve, allowance for advance to suppliers doubtful accounts, allowance for deferred tax assets, fair value of the assets and the liabilities of the entity acquired through its business combination, valuation of warranty reserves, contingent consideration liabilities, 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:

 

Framework Agreement on Business Cooperation, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian;
Exclusive Management, Consulting and Training and Technical Service Agreement, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian;
Exclusive Option Agreement, dated July 25, 2014, by and among Xiangtian Shenzhen, Sanhe Xiangtian and Shanhe Xiangtian Shareholders;
Equity Pledge Agreement, dated July 25, 2014, by and among Xiangtian Shenzhen, Sanhe Xiangtian and the Shanhe Xiangtian Shareholders;
Know-How Sub-License Agreement, dated July 25, 2014, by and between Xiangtian Shenzhen and Sanhe Xiangtian; and
Powers of Attorney of the Sanhe Xiangtian Shareholders dated July 25, 2014.

 

In connection with the termination of the VIE Agreements, on September 30, 2018, Sanhe Xiangtian transferred its 100% equity interest of Xianning Xiangtian to the Sanhe Xiangtian Shareholders and the Sanhe Xiangtian Shareholders transferred their 100% equity interest of Sanhe Xiangtian to Xianning Xiangtian. As a result of the foregoing equity transfers, Sanhe Xiangtian became a wholly owned subsidiary of Xianning Xiangtian.

 

On the same day, the Company, through Xiangtian Shenzhen and Xiangtian HK, entered into the New VIE Agreements, pursuant to which Xianning Xiangtian became the Company’s new contractually controlled affiliate.

 

The principal terms of the agreements entered into among Xianning Xiangtian and Xiangtian Shenzhen, the primary beneficiary, are described below:

 

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

 

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

 

Exclusive Option Agreement, entered among Xiangtian HK, Xiangtian Shenzhen, Zhou Deng Rong, Zhou Jian and Xianning Xiangtian, pursuant to which Zhou Deng Rong 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.

 

9

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Equity Pledge Agreement, entered among Xiangtian Shenzhen, Zhou Deng Rong, Zhou Jian, and Xianning Xiangtian, pursuant to which Zhou Deng Rong 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 Zhou Deng Rong, Zhou Jian and Lucksky Group, the owners of the aforesaid patents and technologies. For the sublicense contemplated under this agreement, Xianning Xiangtian will pay Xiangtian Shenzhen an annual royalty fee of five percent of revenue. For the quarter ended October 31, 2018, the annual 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 Powers of Attorney executed by the Xianning Xiangtian Shareholders, each of the shareholders irrevocably appoints 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.

 

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.

 

10

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

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 October 31, 2018 and July 31, 2018 and for the three months ended October 31, 2018 and 2017, respectively:

 

   October 31,
2018
   July 31,
2018
 
         
Current assets  $43,646,134   $33,240,433 
Non-current assets   25,127,729    25,568,517 
Total assets  $68,773,863   $58,808,950 
           
Current liabilities  $41,506,532   $46,576,026 
Non-current liabilities   5,973,113    7,205,133 
Total liabilities  $47,479,645   $53,781,159 

 

   For the three months ended
October 31,
2018
   For the three months ended
October 31,
2017
 
         
Revenues  $19,988,438   $355,194 
Gross Profit  $4,195,515   $37,550 
Income (loss) from operations  $3,037,062   $(687,677)
Net income (loss)  $1,869,784   $(691,802)

 

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 US dollar equivalent of $25,844,616 and $14,207,358 at October 31, 2018 and July 31, 2018, respectively, were held in accounts at financial institutions located in the PRC‚ which is not freely convertible into foreign currencies. In addition, these balances are not covered by insurance. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness The Company and its subsidiaries and VIE have not experienced any losses in such accounts and do not believe the cash is exposed to any significant risk.

 

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 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, allowances to inventories are recorded to write down the cost of inventories to their net realizable value. As of October 31, 2018 and July 31, 2018, there were no such allowances.

 

11

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Advances to Suppliers, net

 

Advances to suppliers, net, 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.

 

Costs and Estimated Earnings in Excess of Billings

 

Costs and estimated earnings in excess of billings represents revenues recognized in excess of amounts billed. 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.

 

Loans Receivables

 

Loans receivables represents interest free advances to the former shareholder of Hubei Jinli by the Company prior to the acquisition of Hubei Jinli on June 30, 2018. These advances were unsecured and due on demand. Full outstanding balance of $1,759,428 of loan receivables as of July 31, 2018 were repaid in August 2018.

 

Property, Plant and equipment, net

 

Property, plant and equipment are stated at cost net of accumulated depreciation and impairment losses. Depreciation is provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service. Estimated useful lives are as follows, taking into account the assets’ estimated residual value:

 

Classification   Estimated Useful Life   Estimated Residual Value
Plant and buildings   5-20 years   0-5%
Machinery equipment   5-10 years   0-5%
Computer and office equipment   3-10 years   0-5%
Vehicles   5-10 years   0-5%
Plant improvement   20 years   0-5%

 

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the 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 production warehouses, cafeteria, and employee dormitory. 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:

 

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

 

12

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 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 with a finite useful of 3 years in June 2018.

 

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 consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed. As of October 31 and July 31, 2018, 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. As of October 31, 2018 and July 31, 2018, no impairment of long-lived assets was recognized.

 

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.

 

13

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

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.

 

There were no assets or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of October 31, 2018.

 

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 October 31, 2018:

 

Financial liabilities  Carrying Value
as of
October 31,
2018
   Fair Value Measurements at October 31, 2018
Using Fair Value Hierarchy
 
       Level 1   Level 2   Level 3 
Contingent payment consideration liabilities (see Note 3)  $324,121   $    -   $     -   $324,121 

 

Financial liabilities  Carrying Value
as of 
July 31,
2018
   Fair Value Measurements at July 31, 2018
Using Fair Value Hierarchy
 
       Level 1   Level 2   Level 3 
Contingent payment consideration liabilities (see Note 3)  $331,505   $    -   $    -   $331,505 

 

The following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis for the three months ended October 31, 2018 and for the year ended July 31, 2018:

 

   October 31,
2018
   July 31,
2018
 
Beginning balance  $331,505   $- 
Contingent liability obligated from business combinations   -    341,411 
Exchange rate effect   (7,384)   (9,906)
Ending balance  $324,121   $331,505 

 

The Company believes the carrying amount reported in the consolidated balance sheet for cash, notes receivable, accounts receivable, inventories, advance to suppliers, costs and estimated earnings in excess of billings, prepaid expenses, other receivables, loan 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 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 October 31 and July 31, 2018, long-term investment payable balance was $5,973,113, net of discount of $876,577 and $7,205,133, net of discount of $869,173, respectively.

 

14

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 system 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 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 percentage of completion 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.

 

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 services of integrating the goods and services into a power generation system for which the customer has contracted. The Company currently do not have any modification of contract and the contract currently does not have any variable consideration.

 

15

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Sales of products

 

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 sale of products streams for the three months ended October 31, 2018 and 2017 are summarized as follows:

 

   For the three months
Ended 
October 31,
2018
   For the three months
Ended
October 31,
2017
 
Revenues          
PV panels and others  $9,101,844   $305,640 
Air compression equipment and other components   1,001,211    - 
Heat pumps   4,243,564    - 
High-grade synthetic fuel   4,096,752    - 
Hydraulic parts and electronic components   1,155,735    - 
Total revenue  $19,599,106   $305,640 

 

Warranty

 

The Company generally provides limited warranties for work performed under its contracts. The warranty periods typically extend for up to five years following substantial completion of the Company’s work on a project. 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 record for the three months ended October 31, 2018 and 2017. No right of return exists on sales of inventory. As of October 31 and July 31, 2018, accrued warranty expense amounted to $64,325 and $67,651, 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 $31,972 and $0 for the three months ended October 31, 2018 and 2017, 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 $42,722 and $26,327 for the three months ended October 31, 2018 and 2017, 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 16% starting in May 2018 or at the rate of 17% in April 2018 and prior. The Company is entitled to a refund for VAT already paid on goods purchased. The VAT balance is recorded in other payables on the consolidated balance sheets. Revenues are presented net of applicable VAT.

 

16

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 for 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 2017 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 (loss) income of ($380,986) and 89,875 for the three months ended October 31, 2018 and 2017, respectively, from foreign currency translation adjustments.

 

Foreign Currency Translation

 

The reporting currency of the Company is the United States Dollars. The functional currency of the Company is the Chinese Renminbi (“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 United States Dollars at the exchange rate on the balance sheet date, which is 6.9758 and 6.8204 as of October 31, 2018 and July 31, 2018, 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 6.8779 and 6.6227 for the three months ended October 31, 2018 and 2017, 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.

 

17

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

For the purpose of presenting these financial statements of the subsidiary in Hong Kong, the Company’s assets and liabilities are expressed in United States Dollars at the exchange rate on the balance sheet date, which is 7.8404 and 7.8490 as of October 31, 2018 and July 31, 2018, 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 7.8417, 7.8135 for the three months ended October 31, 2018 and 2017, 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 common shares 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. There were no potential dilutive securities for the three months ended October 31, 2018 and 2017.

 

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 accumulate loss. For the three months ended October 31, 2018 and 2017, the Company has contributed $149,543 and $0, 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 February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its unaudited condensed consolidated financial statements and related disclosures.

 

18

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

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. Management does not believe the adoption of this ASU would have a material effect on the Company’s 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.

 

Reclassification

 

Certain prior year amounts have been reclassified to conform to the current year presentation such as segregating the selling and general and administrative expenses for comparative purpose. These reclassifications have no effect on the reported revenues, net income (loss) or total assets.

 

Note 3 – Business combinations

 

Acquisition of Hubei Jinli

 

On June 21, 2018, Xianning Xiangtian entered into a share purchase agreement (the “Jinli Agreement”) with Sheng Zhou and Heping Zhang, former shareholders of Hubei Jinli (collectively the “Jinli Sellers”). Neither Xianning Xiangtian nor its affiliates have any material relationship with the Jinli Sellers other than with respect to the Jinli Agreement.

 

Pursuant to the Jinli Agreement, Xianning Xiangtian agreed to acquire 100% of the capital stock of Hubei Jinli collectively held by the Jinli Sellers (the “Jinli Acquisition”), for an aggregate consideration of RMB 150 million (approximately $23.18 million), consisting of the following: (a) RMB 40 million (approximately $6.18 million) in cash (the “Jinli Cash Portion”); and (b) shares of the Company’s common stock (the “Jinli Stock Portion”) which shall have a value equal to RMB 80.07 million (approximately $12.37 million). The price per share will be determined by the average daily closing price of Xiangtian’s common stock for the period from January 1, 2018 to June 30, 2018; and (c) an assumption by Xianning Sanhe of Hubei Jinli’s existing bank loan from Hubei Xianning Rural Commercial Bank in the principal amount of RMB 29.93 million (approximately $4.63 million). The existing bank loan did not count toward the purchase price as it is considered to be assumed debt as part of the Hubei Jinli’s net assets. Pursuant to the Jinli Agreement, the Jinli Cash Portion shall be paid within seven days of the Jinli Agreement, and the Jinli Acquisition shall be closed within one month after payment of the Jinli Cash Portion. On June 21, 2018, Xianning Xiangtian, entered into a supplemental agreement to the Stock Purchase Agreement (the “Supplement Agreement”) with the Jinli Sellers, pursuant to which the Jinli Sellers have the right to demand that Xianning Xiangtian pay RMB 80.07 million (approximately $12.37 million) plus interest to repurchase the Stock Portion if the Company does not list its common stock on the Nasdaq Stock Market by June 21, 2019.

 

On June 30, 2018, the parties consummated the Jinli Acquisition.

 

Pursuant to the Supplement Agreement, after the Jinli Acquisition, should Hubei Jinli’s annual net profit (the “Jinli Net Profit”) exceed RMB 10 million (approximately $1.55 million), Xianning Xiangtian shall pay the Jinli Sellers 20% of the Jinli Net Profit and if the Jinli Net Profit reaches RMB 5 million (approximately $773,000), but less than RMB 10 million (approximately $1.55 million), Xianning Xiangtian shall pay the Jinli Sellers 10% of the Jinli Net Profit. On August 25, 2018, Xianning Xiangtian and the Jinli Sellers amended this annual net profit sharing clause to define the annual net profit sharing period to be one year from June 21, 2018 to June 20, 2019.

 

19

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

On August 11, 2018, Xianning Xiangtian and the Jinli Sellers amended the payment term of the Jinli Stock Portion which shall have a value equal to RMB 80.07 million (approximately $12.37 million) to comprise three cash installments of 1) first installment of RMB 25 million (approximately $3.95 million) payable by June 20, 2019, 2) second installment of RMB 25 million (approximately $3.95 million) payable by June 20, 2020, and 3) third installment of RMB 30.07 million (approximately $4.75 million) payable by June 20, 2021.

 

The Company’s acquisition of Hubei Jinli was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Hubei Jinli 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 consideration transferred to acquire Hubei Jinli at the date of acquisition:

 

Cash  $6,040,015 
Present value of cash installments   10,996,129 
Contingent purchase prices payment   137,561 
Total consideration at fair value  $17,173,705 

 

The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price allocation at the date of the acquisition of Hubei Jinli based on a valuation performed by an independent valuation firm engaged by the Company:

 

   Fair Value 
Cash  $33,402 
Accounts receivable, net   2,561,863 
Inventories, net   455,247 
Advances to suppliers   143,129 
Other receivables   8,622 
Loan receivables   2,434,381 
Plant and equipment   6,550,446 
Intangible assets   7,899,887 
Deferred tax assets   9,295 
Goodwill   3,906,599 
Total assets   24,002,871 
      
Short-term loan - bank   (2,114,005)
Current maturities of long-term loan   (3,160,828)
Accounts payable   (357,188)
Advance from customers   (4,099)
Other payables and accrued liabilities   (844,926)
Other payables - related party   (30,200)
Income taxes payable   (317,920)
Total liabilities   (6,829,166)
Net assets acquired  $17,173,705 

 

20

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

The above fair value valuation is a preliminary assessment. The Company will continue to evaluate the fair value and to be finalized within one year from the acquisition date on June 30, 2018.

 

Approximately $3.9 million of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of Xianning Xiangtian and Hubei Jinli. None of the goodwill is expected to be deductible for income tax purposes.

 

There are no changes to the fair value measurement of contingent liability since acquisition as there is no material change to Hubei Jinli’s operations for the three months ended October 31, 2018.

 

The following unaudited pro forma combined results of operations presents the Company’s financial results as if the acquisition of Hubei Jinli had been completed on August 1, 2017. 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, 2017. 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 
   October 31,
2017
 
Revenue  $1,078,936 
Cost of revenue   563,317 
Gross profit   515,619 
Total operating expenses   1,130,635 
Loss from operations   (615,016)
Other expense, net   (4,103)
Loss before income taxes   (619,119)
Income tax expense   (2,835)
Net loss attributable to XT Energy Group, Inc.  $(621,954)
Weighted average number of common shares outstanding - basic and diluted   591,042,000 
Net loss per common share - basic and diluted  $(0.00)

 

Acquisition of Tianjin Jiabaili

 

On June 21, 2018, Xianning Xiangtian entered into a share purchase agreement (the “Jiabaili Agreement”) with Wenhe Han and Guifen Wang, former shareholders of Tianjin Jiabaili (collectively the “Jiabaili Sellers”). Neither Xianning Xiangtian nor its affiliates have any material relationship with the Jiabaili Sellers other than with respect to the Jiabaili Agreement.

 

Pursuant to the Jiabaili Agreement, Xianning Xiangtian agreed to acquire 90% of the capital stock of Tianjin Jiabaili collectively held by the Jiabaili Sellers (the “Jiabaili Acquisition”), for an aggregate consideration of RMB 6,120,000 (approximately $0.9 million), consisting of the following: (a) RMB 3,672,000 (approximately $0.5 million) in cash (the “Jiabaili Cash Portion”); and (b) shares of the Company’s common stock (the “Jiabaili Stock Portion”) which shall have a value equal to RMB 2,448,000 (approximately $0.4 million).

 

On June 30, 2018, the parties consummated the Jiabaili Acquisition.

 

21

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

On August 12, 2018, Xianning Xiangtian and the Jiabaili Sellers amended the ownership transfer from 90% to 100% and the full payment term of acquisition price of RMB 6,800,000 (approximately $1.0 million) amended to be all cash payment. In addition, Xianning Xiangtian will indefinitely provide 10% of profit sharing of Tianjin Jiabaili to the Jiabaili Sellers.

 

The Company’s acquisition of Tianjin Jiabaili was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Tianjin Jiabaili 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 consideration transferred to acquire Tianjin Jiabaili at the date of acquisition:

 

Cash  $1,026,803 
Contingent purchase prices payment   203,850 
Total consideration at fair value  $1,230,653 

 

The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price allocation at the date of the acquisition of Tianjin Jiabaili based on a valuation performed by an independent valuation firm engaged by the Company:

 

   Fair Value 
Cash  $2,731 
Other current assets   2,065 
Intangible assets   875,802 
Goodwill   350,055 
Total assets   1,230,653 
Total liabilities   - 
Net assets acquired  $1,230,653 

 

Approximately $0.4 million of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of Xianning Xiangtian and Tianjin Jiabaili. None of the goodwill is expected to be deductible for income tax purposes.

 

For three months ended October 31, 2017, the impact of the acquisition of Tianjin Jiabaili to the consolidated statements of operations and other comprehensive loss was not material.

 

Contingent liabilities

 

Contingent liabilities represent estimated contingent profit sharing payments that the Company agreed to as a purchase price consideration in relation to the acquisition of Hubei Jinli and Tianjin Jiabaili to the former shareholders’ of Hubei Jinli and Tianjin Jiabaili.

 

Profit sharing payments to former shareholders’ of Hubei Jinli

 

If Jinli Net Profit exceed RMB 10 million (approximately $1.55 million), Xianning Xiangtian shall pay the former shareholders of Hubei Jinli 20% of the Jinli Net Profit and if the Jinli Net Profit reaches RMB 5 million (approximately $773,000), but less than RMB 10 million (approximately $1.55 million), Xianning Xiangtian shall pay the former shareholders of Hubei Jinli 10% of the Jinli Net Profit and the annual net profit sharing period is one year from June 21, 2018 to June 20, 2019. As of October 31, 2018, estimated contingent liabilities payables to the former shareholders of Hubei Jinli was $130,594 and classified in the caption “other payables and accrued liabilities” in the accompanying unaudited condensed consolidated balance sheets.

 

22

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Profit sharing payments to former shareholders’ of Tianjin Jiabaili

 

Xianning Xiangtian shall pay the former shareholders of Tianjin Jiabaili 10% of the Tianjin Jiabaili’s annual net profit indefinitely from the date of acquisition on June 30, 2018. As of October 31, 2018, estimated contingent liabilities payables to the former shareholders of Tianjin Jiabaili was $193,527 and classified in the caption “other payables and accrued liabilities” in the accompanying unaudited condensed consolidated balance sheets.

 

Investment payable

 

Investment payable consists of the following:

 

Name of Payee  Relationship  Nature  October 31,
2018
   July 31,
2018
 
               
Sheng Zhou  Former shareholder of Hubei Jinli  Payment for acquisition of Hubei Jinli  $5,474,241   $9,069,058 
Guifen Wang  Former shareholder of Hubei Jinli  Payment for acquisition of Tianjin Jiabaili   134,522    137,587 
Total         5,608,763    9,206,645 
Short-term         (134,522)   (2,505,871)
Long-term        $5,474,241   $6,700,774 

 

The maturities schedule is as follows as of October 31, 2018:

 

Repayment date  Amount 
Due on demand  $134,522 
June 2019   101,257 
June 2020   2,179,328 
June 2021   4,008,874 
Debt discount   (815,218)
Total  $5,608,763 


Investment payable – related parties

 

Investment payable – related parties consist of the following:

 

Name of Related Party  Relationship  Nature  October 31,
2018
   July 31,
2018
 
               
Wenhe Han  Vice general manager of Tianjin Jiabaili  Payment for acquisition of Tianjin Jiabaili  $112,044   $261,216 
Heping Zhang  General manager of Hubei Jinli  Payment for acquisition of Hubei Jinli   742,118    750,286 
Total         854,162    1,011,502 
Short-term         (355,290)   (507,143)
Long-term        $498,872   $504,359 

 

23

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

The maturities schedule is as follows as of October 31, 2018:

 

Repayment date  Amount 
Due on demand  $112,044 
June 2019   250,867 
June 2020   250,867 
June 2021   301,743 
Debt discount   (61,359)
Total  $854,162 

 

Debt discount

 

Debt discount, net of accumulated amortization, totaled $876,577 and $1,021,413 as of October 31, 2018 and July 31, 2018, respectively, are recognized as a reduction of investment payable. Amortization expense related to the Debt discount, included in interest expense, was $123,819 and $0 for the three months ended October 31, 2018 and 2017, respectively.

 

Note 4 – Accounts receivable, net

 

Accounts receivable, net consist of the following:

 

   October 31,
2018
   July 31,
2018
 
         
Accounts receivable  $3,972,252   $6,516,935 
Less:  allowance for doubtful accounts   (1,180,968)   (1,374,155)
Accounts receivable, net  $2,791,284   $5,142,780 

 

During the three months ended October 31, 2018, the Company recognized $164,887 of recovery of allowance for doubtful accounts with foreign currency translation effect of $28,300. During the three months ended October 31, 2017, the Company recorded a provision of $1,576 related to certain outstanding accounts receivables which the Company deemed were no longer collectible.

 

Note 5 – Inventories, net

 

Inventories, net, consist of the following:

 

   October 31,
2018
   July 31,
2018
 
         
Raw materials and parts  $1,329,830   $1,725,258 
Work in progress   125,046    124,507 
Finished goods   4,075,145    3,291,768 
Total   5,530,021    5,141,533 
Less: allowance for inventory reserve   -    - 
Inventory, net  $5,530,021   $5,141,533 

 

Note 6 – Costs and estimated earnings in excess of billings

 

Costs in excess of billings relate to certain contracts and consist of the following:

 

   October 31,
2018
   July 31,
2018
 
Costs and estimated earnings incurred on uncompleted contracts  $5,300,349   $5,025,892 
Billings to date   (2,484,519)   (2,142,484)
Costs and estimated earnings in excess of billings  $2,815,830   $2,883,408 

 

24

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 7 – Deposit for investment

 

On March 16, 2018, the Company entered into a letter of intent to establish a 60% majority-owned subsidiary for a proposed supermarket project. Pursuant to the letter of intent, the Company paid a deposit to an unrelated party that will be the 40% noncontrolling interest in the proposed project. The deposit was $439,857 (RMB 3,000,000) and is expected to be used as working capital once the subsidiary is formed. On July 20, 2018, the Company rescinded the letter of intent and the unrelated party is required to fund the deposit to the Company by October 20, 2018. The Company collected $14,539 (RMB 100,000) as of October 31, 2018. The Company has received additional approximately $0.1 million (RMB 710,000) in November 2018. In November 2018, the Company entered an extension agreement with the unrelated party to extend the remaining balance of approximately $0.3 million (RMB 2,190,000) to April 2019.

 

Note 8 – Property, plant and equipment, net

 

Property, plant and equipment consist of the following:

 

   October 31,
2018
   July 31,
2018
 
         
Plant and buildings  $6,543,857   $6,662,554 
Machinery equipment   6,720,310    6,711,556 
Computer and office equipment   282,052    251,965 
Vehicle   165,030    121,211 
Plant improvement   713,509    729,766 
Construction in progress   452,527    256,503 
Subtotal   14,877,285    14,733,555 
Less: accumulated depreciation   (2,918,749)   (2,767,322)
Property, plant and equipment, net  $11,958,536   $11,966,233 

 

Depreciation expenses for the three months ended October 31, 2018 and 2017 was $216,106 and $82,133, respectively. For the three months ended October 31, 2018 and 2017, depreciation included in cost of sales was $116,889 and $3,131, respectively. For the three months ended October 31, 2018 and 2017, depreciation included in selling, general and administrative expenses was $99,217 and $79,002, respectively.

 

Construction-in-progress consist of the following as of October 31, 2018:

 

Construction-in-progress description  Value   Estimated completion date  Estimated additional cost to complete 
Synthetic fuel raw materials production line  $223,605   November 2018*  $- 
Factory plantation   114,682   December 2018   28,671 
Fire safety equipment installation   103,117   March 2019   14,335 
Other miscellaneous items   11,123   December 2018   - 
Total construction-in-progress  $452,527      $43,006 

 

* The construction-in-progress is completed and pending for final inspection.

 

25

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 9 – Intangible assets, net

 

Intangible assets consist of the following:

 

   October 31,
2018
   July 31,
2018
 
         
Land use rights  $4,479,773   $4,581,842 
Technology know-hows   1,788,325    1,829,072 
Patents, licenses and certifications   2,869,904    2,935,293 
Less: accumulated amortization   (267,939)   (85,564)
Intangible assets, net  $8,870,063   $9,260,643 

 

Amortization expenses for the three months ended October 31, 2018 and 2017 amounted to $186,902 and $0, respectively.

 

Based on the finite-lived intangible assets as of October 31, 2018, the expected amortization expenses are estimated as follows:

 

Twelve months ending October 31,  Estimated
amortization expense
 
     
2019  $733,915 
2020   733,915 
2021   733,054 
2022   732,194 
2023   578,223 
Thereafter   5,358,762 
Total  $8,870,063 

 

Note 10 – Debt

 

Short-term loan - bank

 

Outstanding balances of short-term loan - bank consisted of the following:

 

 

Bank Name  Maturities   Interest rate   Collateral/ Guarantee  October 31,
2018
   July 31,
2018
 
                        
Wuhan Rural Commercial Bank   May 2019    7.00%  Guarantee by Sheng Zhou and Heping Zheng, former shareholders of Hubei Jinli, and three other companies related to Sheng Zhou  $716,764   $733,095 

  

26

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Current maturities of long-term loan

 

Outstanding balances of current maturities of long-term loan consisted of the following:

 

Bank Name  Maturities   Interest rate   Collateral/ Guarantee  October 31,
2018
   July 31,
2018
 
                        
Xianning Rural Commercial Bank*   April 2019    5.83%  Land use rights, plant and equipment, inventories  $2,551,678   $3,069,113 

 

*The current maturities of long-term loan were acquired through the acquisition of Hubei Jinli on June 30, 2018 (see Note 3).

 

Short-term loan – third party

 

Outstanding balances of short-term loan – third party consisted of the following:

 

Lender Name  Maturities   Interest rate   Collateral/ Guarantee  October 31,
2018
   July 31,
2018
 
                        
Xianning Zhongying New Energy Service Co. Ltd.   Repaid in October 2018    4.75%  None  $-   $175,943 

  

Short-term loans – related parties

 

Name of Related Party   Relationship   Maturities     Interest rate     Collateral/ Guarantee   October 31,
2018
    July 31,
2018
 
                                 
Zhou Deng Hua   Chief Executive Officer of the Company   April 2019 & July 2019       None     None   $ 1,433,527     $ 5,864,759  
Jian Zhou   Chairman of the Company   May 2019       None     None     401,388       703,771  
Hubei Henghao Real Estate Development Co., Ltd.   Bin Zhou, son of Zhou Deng Hua, is the executive director and general manager   Repaid in October 2018       12.00 %   None     -       13,195,707  
Hubei Henghao Real Estate Development Co., Ltd   Bin Zhou, son of Zhou Deng Hua, is the executive director and general manager   January 2019       4.75 %   None     372,717       381,209  
Hubei Henghao Real Estate Development Co., Ltd   Bin Zhou, son of Zhou Deng Hua, is the executive director and general manager   September 2019       6.00 %   None     716,764       -  
Total                         $ 2,924,396     $ 20,145,446  

 

Interest expense for the year ended October 31, 2018 amounted to $353,409, including $295,327 related parties interest expenses. There was no interest expense for the same period 2017.

 

Note 11 – Related party balances and transactions

 

Sales to related parties

 

Sanhe Liguang Kelitai Equipment Ltd (“Sanhe Kelitai”)

 

In August 2016, Sanhe Xiangtian began three construction projects for installation of PV panels with Sanhe Kelitai. Sanhe Kelitai is majority (95%) owned by Zhou Jian, the Company’s Chairman of the Board. During the three months ended October 31, 2017, revenue of $8,748 and costs of sales of $7,550 were recognized related to these projects. There was no revenue for the same period 2018.

 

27

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Leases with related parties

 

Sanhe Xiangtian leases its principal office, factory and dormitory from LuckSky Group in Sanhe City, Hebei Province, PRC. LuckSky Group is owned by Zhou Deng Rong, the Company’s former Chief Executive Officer. The space in the office, factory and dormitory being leased are 1296, 5160 and 1200 square meters, respectively. The office and factory space are leased for a rent of $105,053 (RMB 697,248) per year and the dormitory is leased for a rent of $19,527 (RMB 129,600) per year. The leases expire in April 30, 2024 and are subject to renewal with a prior two-month written notice. For the three months ended October 31, 2018 and 2017, rent expense for the lease with Lucksky was $30,054 and $31,212, respectively. At October 31, 2018 and July 31, 2018, the amount due under the leases was $533,389 and $515,234, respectively.

 

During year ended July 31, 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 expiring on June 14, 2019 for a rent of approximately $7,000 (RMB 48,000) per year. For the three months ended October 31, 2018, rent expense for this lease with Sanhe Dong Yi was $1,745.

 

Related party balances

 

a.Short-term loans – related parties (See Note 10)

 

b.Other receivable – related parties and directors:

  

Name of Related Party  Relationship  Nature  October 31,
2018
   July 31,
2018
 
                 
Tianyu Ma  General Manager of Tianjin Jiabaili  Employee advances  $14,335   $- 

  

c.Other payables – related parties and directors:

 

Name of Related Party   Relationship   Nature   October 31,
2018
    July 31,
2018
 
                     
Luck Sky International Investment Holdings Ltd.   Owned by Zhou Deng Rong, former Chief Executive Officer and director   Advances for payment of U.S. Professional Fee   $ 318,776     $ -  
Lucksky Group   Owned by Zhou Deng Rong, former Chief Executive Officer and director   Lease payable     533,389       515,234  
Sanhe Dong Yi   Owned by Zhou Deng Rong, former Chief Executive Officer and director   Lease payable     -       21,113  
Hubei Hengyi Real Estate Development Co., Ltd.   Bin Zhou, son of Zhou Deng Hua, is the executive director and generate manager   Interest payable     496,422       211,441  
Zhou Deng Rong   Former Chief Executive Officer and director   Advances for payment of U.S. Professional Fee     2,748,260       2,748,260  
Zhou Deng Hua   Chief Executive Officer   Advances for operational purpose     283,122       289,572  
Jian Zhou   Chairman   Advances for operational purpose     610,448       436,444  
Zhimin Feng   Legal representative of Jingshan Sanhe   Advances for operational purpose     2,855       1,191  
Wei Gu   General manager of Xiangtian Zhongdian   Advances for operational purpose     4,301       6,863  
Total           $ 4,997,573     $ 4,230,118  

 

d.Investment payables – related parties (See Note 3)

 

28

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 12 – Significant customer, former related party

 

Prior to April 10, 2014, Zhou Deng Rong, the Company’s former Chief Executive Officer and director, owned 70% equity interest, and Zhou Jian, the Company’s Chairman, owned the remaining 30% equity interest of Xianning Lucksky Aerodynamic Electricity (“Xianning Lucksky”). Through April 10, 2014, Xianning Lucksky’s primary asset was a land use right for approximately 70 acres of land located in Xianning, Hubei Province, PRC. On April 8, 2014, Zhou Deng Rong sold his 70% equity interest in Xianning Lucksky to an individual, and Zhou Jian sold his 30% equity interest in Xianning Lucksky to another individual. The two individuals are unrelated to Zhou Deng Rong or Jian Zhou, or any member of management of the Company, or any of its consolidated subsidiaries or VIE. As such, as of April 8, 2014, the Company, or any of its shareholders, had no relationship to Xianning Lucksky.

 

As of October 31, 2018, the Company entered into a series of sales contracts with Xianning Lucksky and other contracts on two buildings owned by Xianning Lucksky. These contracts represented approximately $1,011,000 and $0 of the Company’s revenue during the three months ended October 31, 2018 and 2017, respectively.

 

On July 27, 2016, Xianning Xiangtian entered into a rental agreement with Xianning Lucksky to lease 4,628 square meters space in a factory in Xianning, Hubei Province, PRC. The space is leased for a rent of $83,132 (RMB 555,360) per year. The lease expires on July 31, 2018, and the Company terminated the lease early in February 2018 when the Company through Xiangtian Zhongdian signed another lease agreement which expires on February 5, 2019 with a rent of approximately $25,000 (RMB 168,922) per year. During the three months ended October 31, 2018 and 2017, rent expense related to these leases was $6,250 and $20,783, respectively.

 

On July 27, 2018, Xianning Xiangtian entered into a lease with Xianning Lucksky. The space in the factory in Xianning in Hubei province being leased is 3,128 square meters. 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 prior one-month written notice. Rent expense for this lease amounted to $3,464 for the three months ended October 31, 2018.

 

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. At October 31, 2018 and July 31, 2018, the outstanding amount due to the local labor bureau was $177,525 and $174,971, respectively, and is included in Other Payables and Accrued Liabilities on the accompanying balance sheets.

 

29

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 14 – Income taxes

 

Income tax

 

United States

 

On December 22, 2017, the “Tax Cuts and Jobs Act” (the “Act”) was enacted. Under the provisions of the Act, the U.S. corporate tax rate decreased from 34% to 21%. As the Company has a July 31 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28.6% for the Company’s fiscal year ending July 31, 2018, and 21% for subsequent fiscal years. Accordingly, the Company has remeasured the Company’s deferred tax assets on net operating loss carryforwards (“NOLs”) in the U.S at the lower enacted cooperated tax rate of 21%. However, this remeasurement has no effect on the Company’s income tax expenses as the Company has provided a 100% valuation allowance on its deferred tax assets previously.

 

Additionally, the Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation. The change in rate has caused us to remeasure all U.S. deferred income tax assets and liabilities for temporary differences and NOLs and recorded one time income tax payable to be paid in 8 years. However, this one-time transition tax has no effect on the Company’s income tax expenses as the Company has no undistributed foreign earnings prior to December 31, 2017 which the Company has foreign cumulative losses at December 31, 2017.

 

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 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 expense consisted of the following for the three months ended October 31, 2018 and 2017: 

 

   2018   2017 
Current  $543,513   $2,835 
Deferred   (17,369)   - 
Provision for income tax  $526,144   $2,835 

 

30

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Significant components of the Company’s deferred tax assets as of October 31 and July 31, 2018 are approximately as follows:

 

   October 31,
2018
   July 31,
2018
 
Deferred tax assets:          
Net operating loss carry forwards  $879,015   $911,400 
Accounts receivable allowance   295,242    343,500 
Accrued liabilities   71,307    50,600 
Warranty and other   16,082    16,400 
Deferred tax assets before valuation allowance   1,261,646    1,321,900 
Less: valuation allowance   (1,244,521)   (1,321,900)
Net deferred tax assets  $17,125   $- 

 

As of October 31, 2018, the Company had U.S. federal NOLs of approximately $3,650,600 that expire beginning in 2029 to 2038 with deferred tax assets of approximately $766,600. As of October 31, 2018, the Company had approximately $430,100 of NOLs related to its PRC subsidiaries and VIEs that expire in years 2019 through 2023 with deferred tax assets of approximately $107,500. 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 July 31, 2018. During the three months ended October 31, 2018, the Company’s PRC entities has started to generating income, as a result, additional temporary difference generated from these entities during the three months ended October 31, 2018 are recognized as deferred tax assets without fully reserved for allowance.

 

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 filed its July 31, 2016 and 2017 corporation income tax return in November 2018. No interest or penalty on unpaid tax in relation to the late filings was recorded during the three months ended October 31, 2018 and 2017, respectively. As of October 31 and July 31, 2018, other than discussed above, 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.

 

31

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 15 – Commitments and contingencies

 

Operating leases

 

The total future minimum lease payments under the non-cancellable operating leases as of October 31, 2018 are payable as follows:

 

Twelve months ending October 31,   Minimum lease payment  
2019   $ 1,176,723  
2020     1,211,542  
2021     1,262,342  
2022     568,515  
2023     316,071  
Thereafter     60,448  
Total minimum payments required   $ 4,595,641  

  

Rental expense of the Company for the three months ended October 31, 2018 and 2017 were $158,018 and $19,710, respectively.

 

Purchase commitment

 

The total future minimum purchase commitment under the non-cancellable purchase contracts as of October 31, 2018 are payable as follows:

 

Twelve months ending October 31,  Minimum purchase commitment 
2019  $179,012 
Thereafter   - 
Total minimum payments required  $179,012 

 

Contingencies

 

On September 23, 2013, the Company issued 60,000,000 shares of restricted common stock at $0.001 per share to Mr. Roy Thomas Phillips, who was then a consultant to the Company and later served as the acting Chief Financial Officer of the Company beginning July 29, 2014, and two other non-related parties obtained a total of 7,000,000 shares of restricted common stock. The shares were issued in contemplation of a secondary offering. The Company takes the position that these shares should be cancelled since no secondary offering was consummated. The Company is taking steps to have these shares canceled. The Company valued the 67,000,000 shares of common stock issued at $67,000 as there was no market for the Company’s common stock and it has limited or no trading; and there is thought to be minimal value in the Company at the time of issuance, therefore the par value is thought to match the assumed market price of the Company’s common stock which is at $0.001 per share. The Company might incur additional expenses to have these shares canceled. On July 24, 2015, 7,000,000 shares issued to two other non-related parties were cancelled. For the three months ended October 31, 2018 and 2017, the dilutive effect of not canceling the 60,000,000 shares is incorporated in the unaudited condensed consolidated financial statements as the Company recorded such shares as issued and outstanding. For the three months ended October 31, 2018 and 2017, not canceling the 60,000,000 shares has an anti-dilutive effect. If the shares are not voluntarily returned for cancellation, the Company will need to commence litigation in Nevada to obtain a judgment to cancel the shares for lack of consideration. At this time, the Company is unable to estimate the cost such litigation if it takes place.

 

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.

 

32

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 16 – Stockholders’ equity

 

In June 2017, the Board of Directors of the Company adopted the 2017 Stock Incentive Plan (the “Plan”) under which 30 million shares of common stock are available for issuances.

 

As of October 31, 2018, the Company had not granted any awards under the Plan.

 

During the three months ended October 31, 2018, the Company’s Chairman and major shareholder contributed $14,533,003 of additional paid in capital in Xianning Xiangtian.

 

Note 17 – Concentrations

 

Customer concentration risk

 

For the three months ended October 31, 2018, four customers accounted for 43.3%, 18.1%, 14.0% and 11.1% of the Company’s total revenues, respectively. For the three months ended October 31, 2017, one customer accounted for 95.0% of the Company’s total revenues.

 

As of October 31, 2018, two customers accounted for 24.0% and 14.0% of the total balance of accounts receivable, respectively. As of July 31, 2018, three customers accounted for 32.0%, 15.0% and 12.3% of the total balance of accounts receivable, respectively.

 

Vendor concentration risk

 

For the three months ended October 31, 2018, two vendors accounted for 42.5% and 25.8% of the Company’s total purchases, respectively. For the three months ended October 31, 2017, four vendors accounted for 35.8%, 31.5%, 16.5% and 10.5% of the Company’s total purchases, respectively.

 

As of October 31, 2018, four vendors accounted for 44.1%, 13.6%, 11.4% and 10.1% of the total balance of accounts payable, respectively. As of July 31, 2018, four vendors accounted for 29.8%, 15.7%, 14.0% and 11.7% of the total balance of accounts payable, respectively.

 

Note 18 – Segment reporting

 

Starting in April 2018, the Company begins to evaluate performance and to determine resource allocations based on a number of factors, the primary measure being income from operations of the Company’s six reportable divisions in the PRC: Sanhe Xiangtian, Xianning Xiangtian, Xiangtian Zhongdian, Jingshan Sanhe, Hubei Jinli, and Tianjin Jiabaili. Tianjin Jiabaili does not has any operations as of October 31, 2018. Prior period numbers are broken down for purposes of comparison.

 

These reportable divisions are consistent with the way the Company manages its business, 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 consolidated financial statement level.

 

The following represents results of division operations for the three months ended October 31, 2018 and 2017:

 

   2018   2017 
Revenues:          
Sanhe Xiangtian  $1,920,878   $354,890 
Xianning Xiangtian   4,233,629    304 
Jingshan Sanhe   3,576,328    - 
Xiangtian Zhongdian   9,101,868    - 
Hubei Jinli   1,155,735    - 
Consolidated revenues  $19,988,438   $355,194 

 

33

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

   2018   2017 
Gross profit:          
Sanhe Xiangtian  $707,409   $37,364 
Xianning Xiangtian   853,785    186 
Jingshan Sanhe   1,187,491    - 
Xiangtian Zhongdian   908,334    - 
Hubei Jinli   538,496    - 
Consolidated gross profit  $4,195,515   $37,550 

 

   2018   2017 
Income (loss) from operations:          
Sanhe Xiangtian  $669,762   $(425,298)
Xianning Xiangtian   622,068    (262,379)
Jingshan Sanhe   1,012,957    - 
Xiangtian Zhongdian   801,752    - 
Hubei Jinli   107,436    - 
Tianjin Jiabaili   (176,912)   - 
All four holding entities   (495,432)   (160,925)
Consolidated income (loss) from operations  $2,541,631   $(848,602)

 

   2018   2017 
Net income (loss) attributable to controlling interest:          
Sanhe Xiangtian  $547,514   $(429,455)
Xianning Xiangtian   209,416    (262,347)
Jingshan Sanhe   757,356    - 
Xiangtian Zhongdian   472,364    - 
Hubei Jinli   63,268    - 
Tianjin Jiabaili   (180,132)   - 
All four holding entities   (494,019)   (163,738)
Consolidated net income (loss) attributable to controlling interest  $1,375,767   $(855,540)

 

   2018   2017 
Depreciation and amortization expenses:          
Sanhe Xiangtian  $43,063   $64,860 
Xianning Xiangtian   57    17,273 
Jingshan Sanhe   8,705    - 
Xiangtian Zhongdian   74,890    - 
Hubei Jinli   221,785    - 
Tianjin Jiabaili   54,508    - 
Consolidated depreciation and amortization expenses  $403,008   $82,133 

 

34

 

 

XT Energy Group, Inc. and Subsidiaries

(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Notes to Unaudited Condensed Consolidated Financial Statements

 

   2018   2017 
Interest expense:          
Sanhe Xiangtian  $6,041   $295 
Xianning Xiangtian   413,105    32 
Hubei Jinli   58,082    - 
Consolidated interest expense  $477,228   $327 

 

   2018   2017 
Capital expenditures:          
Sanhe Xiangtian  $47,031   $- 
Xianning Xiangtian   1,265    - 
Jingshan Sanhe   265,323    - 
Xiangtian Zhongdian   8,040    - 
Hubei Jinli   144,643    - 
Tianjin Jiabaili   12,360    - 
Consolidated capital expenditures  $478,662   $- 

 

Total assets of each division as of October 31, 2018 and July 31, 2018 consist of the following:

 

   October 31,
2018
   July 31,
2018
 
Total assets:          
Sanhe Xiangtian  $11,046,964   $11,355,619 
Xianning Xiangtian   7,135,951    4,689,100 
Jingshan Sanhe   13,196,263    3,513,449 
Xiangtian Zhongdian   13,153,436    12,620,210 
Hubei Jinli   19,820,836    22,489,702 
Tianjin Jiabaili   4,420,414    4,111,706 
All four holding entities   237,205    248,164 
Consolidated assets  $69,011,069   $59,027,950 

 

Note 19 – Subsequent event

 

On November 20, 2018, Xianning Xiangtian signed a letter of intent with Aksu Duolang Investment Limited Liability Company to purchase 70% ownership of Kuche Xincheng Chemical Co. Ltd. (Kuche Xincheng). Xianning Xiangtian has the full right of refusal of proceeding the acquisition after the completion of the due diligence process. As of the date of this report, the due diligence process of Kuche Xincheng has not begun. 

 

35

 

 

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

   

Overview

 

XT Energy Group, Inc., formerly known as Xiangtian(USA) Air Power Co. Ltd. (the “Company” or “XT Energy” or “we”, “us”, “our” and similar terminology) 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 (“Lucky Sky”), an entity owned and controlled by Zhou Deng Rong, 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. Effective May 29, 2012, the Company’s name was changed to “Xiangtian (USA) Air Power Co., Ltd.”.

 

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”), Luch Sky Aerodynamic and Luck Sky (Shenzhen) Aerodynamic Electricity Limited (“Xiangtian Shenzhen”) became the Company’s indirect subsidiary through Xiangtian HK.

 

Effective October 31, 2016, we were reincorporated in Nevada as a result of our merger with and into our wholly owned Nevada subsidiary.

 

The Company is engaged in a variety of energy-related businesses through its 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 through the Company’s variable interest entities (“VIE”), Sanhe Luck Sky Electrical Engineering Co., Ltd. (“Sanhe Xiangtian”) and 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 is engaged in the business of trading chemical raw materials for the purpose of providing a stable supply for fuel product operation. Xiangtian Trade has no operations since it was incorporated.

 

In September and October 2018, Mr. Jian Zhou, the Company’s chairman and a shareholder of Xianning Xiangtian provided RMB 100,000,000 (approximately $14.5 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 its newly formed wholly-owned subsidiary formed for the purpose of affecting the name change.

 

36

 

 

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;
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.

 

As a result of the New VIE Agreements, the Company has become the primary beneficiary of Xianning Xiangtian, and it treats Xianning Xiangtian as its variable interest entity under U.S. GAAP. The Company 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 to the Company’s unaudited condensed consolidated financial statements for the current period and thereafter.

 

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 24 provinces 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 alternate energy sources. 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 and 6.8% in 2018. 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.

 

37

 

 

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.

 

Results of Operations

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statement for the three months ended October 31, 2018 and 2017 and related notes thereto.

 

The Three Months Ended October 31, 2018 Compared to the Three Months Ended October 31, 2017

 

  

For the Three Months

Ended
October 31,
2018

  

For the Three Months

Ended
October 31,
2017

   Change   Change (%) 
                 
Revenue  $19,988,438   $355,194   $19,633,244    5,527.5%
Cost of revenue   15,792,923    317,644    15,475,279    4,871.9%
Gross profit   4,195,515    37,550    4,157,965    11,073.1%
Operating expenses   1,653,884    886,152    767,732    86.6%
Income (loss) from operations   2,541,631    (848,602)   3,390,233    399.5%
Other expenses, net   (437,278)   (4,103)   433,175    10,557.5%
Income (loss) before income taxes   2,104,353    (852,705)   2,957,058    346.8%
Income tax expense   (526,144)   (2,835)   523,309    18,458.9%
Net income (loss)   1,578,209    (855,540)   2,433,749    284.5%
Less: Net income attributable to non-controlling interest   202,442    -    202,442    100.0%
Net income (loss) attributable to common stockholders   1,375,767    (855,540)   2,231,307    260.8%
Net income (loss) per share attributable to common stockholders                    
Basic and diluted  $0.00   $(0.00)  $0.0    - 

 

Revenue

 

Our revenue consist of installment of power generation systems and the sales of PV panels and others, air compression equipment and other components, heat pump products, high-grade synthetic fuel products, and hydraulic parts and electronic components for the three months ended October 31, 2018.

 

Total revenues increased by $19,633,244, or 5,527.5%, to $19,988,438 for the three months ended October 31, 2018 as compared to $355,194 for the three months ended October 31, 2017. The overall increase was primarily attributable to the increase of revenue generated from installing power generation systems, sales of PV panels and other products, air compression equipment and other components, heat pumps, high-grade synthetic fuel, hydraulic parts and electronic components.

 

38

 

 

Our revenue from our revenue categories are summarized as follows:

 

   For the Three Months Ended
October 31,
2018
   For the Three Months Ended
October 31,
2017
   Change   Change (%) 
                 
Revenue                    
Installation of power generation systems  $389,332   $49,554   $339,778    685.7%
PV panels and others   9,101,844    305,640    8,796,204    2,878.0%
Air compression equipment and other components   1,001,211    -    1,001,211    100.0%
Heat pumps   4,243,564    -    4,243,564    100.0%
High-grade synthetic fuel   4,096,752    -    4,096,752    100.0%
Hydraulic parts and electronic components   1,155,735    -    1,155,735    100.0%
Total revenue  $19,988,438   $355,194   $19,633,244    5,527.5%

 

Installation of power generation systems revenue increased by $339,778 or 685.7% from $49,554 for the three months ended October 31, 2017 to $389,332 for the three months ended October 31, 2018 due to the increase in installation project size. We only had one major installation project during the three months ended October 31, 2018 as compared to a few significantly smaller projects during the three months ended October 31, 2017. We will keep searching for large installation projects to increase our revenue but we may not continue to experience this rate of increase in the future. Sales of PV panels and others increased by $8,796,204 or 2,878.0% from $305,640 for the three months ended October 31, 2017 to $9,101,844 for the same period in 2018. The increase in sales of PV panels and others was entirely attributable to our 70% owned subsidiary, Xiangtian Zhongdian, established in March 2018, which is in the business of manufacturing and sales of PV panels. Sales of air compression equipment and other components increased by $1,001,211 or 100.0% and the sales of heat pumps increased by $4,243,564 or 100.0% for the three months ended October 31, 2018 as compared to the same period in 2017. Air compression equipment and other components and heat pumps are parts of the installation of power generation systems, which were not sold separately during the three months ended October 31, 2017 while we sold them as separate components as a result of our marketing efforts during the three months ended October 31, 2018, which resulted in the increase of sales revenues.

 

Sales of high-grade synthetic fuel increased by $4,096,752 or 100.0% for the three months ended October 31, 2018 as compared to the same period in 2017 due to our establishment of Jingshan Sanhe in April 2018 which  is engaged in the business of researching, manufacturing and sales of high-grade synthetic fuel products. We expect our sales of high-grade synthetic fuel will continue to increase significantly as we expand our product offering to include synthetic fuel for diesel vehicles, which already passed the testing inspection.

 

Sales of hydraulic parts and electronic components increased by $1,155,735 or 100.0% for the three months ended October 31, 2018 as compared to the same period in 2017 due to our acquisition of Hubei Jinli in June 2018 which is engaged in the business of manufacturing and sales of hydraulic parts and electronic components.

 

Cost of Revenue

 

Total cost of revenue increased by $15,475,279, or 4,871.9%, to $15,792,923 for the three months ended October 31, 2018 as compared to $317,644 for the same period in 2017. The increase in cost of revenue was in line with the increase of revenue.

 

39

 

 

Our cost of revenue from our revenue categories are summarized as follows:

 

   For the Three Months Ended
October 31,
2018
   For the Three Months Ended
October 31,
2017
   Change   Change (%) 
                 
Cost of revenue                    
Installation of power generation systems  $357,570   $37,999   $319,571    841.0%
PV panels and others   8,193,596    279,645    7,913,951    2,830.0%
Air compression equipment and other components   719,026    -    719,026    100.0%
Heat pumps   3,387,445    -    3,387,445    100.0%
High-grade synthetic fuel   2,518,046    -    2,518,046    100.0%
Hydraulic parts and electronic components   617,240    -    617,240    100.0%
Total cost of revenue  $15,792,923   $317,644   $15,475,279    4,871.9%

 

Gross Profit

 

Our gross profit from our major revenue categories are summarized as follows:

 

   For the Three Months Ended
October 31,
2018
   For the Three Months Ended
October 31,
2017
   Change   Change (%) 
                 
Installation of power generation systems                    
Gross profit  $31,762   $11,555   $20,207    174.9%
Gross margin   8.2%   23.3%   (15.1)%     
                     
PV panels and others                    
Gross profit  $908,248   $25,995   $882,253    3,393.9%
Gross margin   10.0%   8.5%   1.5%     
                     
Air compression equipment and other components                    
Gross profit  $282,185   $-   $282,185    100.0%
Gross margin   28.2%   -%   28.2%     
                     
Heat pumps                    
Gross profit  $856,119   $-   $856,119    100.0%
Gross margin   20.2%   -%   20.2%     
                     
High-grade synthetic fuel                    
Gross profit  $1,578,706   $-   $1,578,706    100.0%
Gross margin   38.5%   -%   38.5%     
                     
Hydraulic parts and electronic components                    
Gross profit  $538,495   $-   $538,495    100.0%
Gross margin   46.6%   -%   46.6%     
                     
Total                    
Gross profit  $4,195,515   $37,550   $4,157,965    11,073.1%
Gross margin   21.0%   10.6%   10.4%     

 

40

 

 

Our gross profit increased by $4,157,965, or 11,073.1%, to $4,195,515 during the three months ended October 31, 2018 from $37,550 for the same period in 2017. The increase in gross profit was primarily due to the significant increase in revenues contributed by Xiangtian Zhongdian, established in March 2018, Jingshan Sanhe, established in April 2018, and Hubei Jinli, acquired in June 2018.

 

For the three months ended October 31, 2018 and 2017, our overall gross profit percentage was 21.0% and 10.6%, respectively. The increase in gross profit percentage was primarily due to the increase in sales of our high-grade synthetic fuel products, hydraulic parts and electronic components, which generally have a higher gross profit percentage.

 

Gross profit percentage for our installation of power generation systems revenue was 8.2% and 23.3% for the three months ended October 31, 2018 and 2017, respectively. The decrease in gross profit percentage is due to the increase in installation of power generation systems revenue offset by a higher percentage increase in cost as we allocated more resources to complete the installation project and spent more on overhead during the three months ended October 31, 2018.

 

Gross profit percentage for PV panels and others revenue was 10.0% and 8.5% for the three months ended October 31, 2018 and 2017, respectively. The increase of gross profit percentage was relatively consistent for both periods.

 

Operating Expenses

 

Total operating expenses increased by $767,732 or 86.6% from $886,152 during the three months ended October 31, 2017 to $1,653,884 during the same period in 2018. The increase in operating expenses was mainly attributable to the increase in selling expenses of $97,092 and the increase in general and administrative expenses of $835,527 offset by the recovery of doubtful accounts of $164,887 for the three months ended October 31, 2018 as compared to the same period in 2017.

 

The increase in selling expenses of approximately $97,000 was mainly attributable to the increase in salaries of approximately $50,000 due to the increased number of sales representatives, the increase in travel expenses of approximately $18,000, and the increase in other miscellaneous selling expenses, such as meals and entertainment, insurance, and benefits of approximately $18,000. The above increases were mainly attributable to the added operations from Xiangtian Zhongdian, established in March 2018, Jingshan Sanhe, established in April 2018, and Hubei Jinli, acquired in June 2018.

 

The increase in general and administrative (“G&A”) expenses of approximately $836,000 was mainly attributable to the increase in depreciation and amortization expense of approximately $114,000, the increase in salary, social insurance expenses, benefits, and travel expenses of approximately $337,000, and the increase in professional fees such as legal, audit and consulting of approximately $115,000. The above increases were mainly attributable to the added operations from Xiangtian Zhongdian, established in March 2018, Jingshan Sanhe, established in April 2018, Hubei Jinli, acquired in June 2018 and Tianjin Jiabaili acquired in June 2018.

 

Research and Development (“R&D”)

 

For the three months ended October 31, 2018 and 2017, we have incurred R&D expense of $3,047 and $0, respectively. We have not incurred any significant expenses for research and development from inception through October 31, 2018. Company employees only conduct basic research and do not work on a specific plan or project to which expenses can be allocated.

 

41

 

 

Other income (expenses), net

 

Total other expenses increased by $433,175 or 10,557.5% from $4,103 during the three months ended October 31, 2017 to $437,278 during the three months ended October 31, 2018. The increase in total other expenses was mainly attributable to related parties loan and third parties loan that we obtained in 2018 to pay for the initial acquisition payments in relation to the acquisition of Hubei Jinli and Tianjin Jiabaili in June 2018. In addition, Hubei Jinli has existing bank loans prior to our acquisition. As a result, we have incurred approximately $353,000 interest expenses for the three months ended October 31, 2018 as compared to $0 for the same period in 2017. Furthermore, the acquisition of Hubei Jinli also includes three installment payments to be due on each of the June 20 of 2019, 2020 and 2021, which resulted in amortization of debt discount of our investment payable of approximately $124,000 for the three months ended October 31, 2018 as compared to $0 for the same period in 2017.

 

Income tax expense

 

Our income tax expense was $526,144 (which consists of current income tax of $543,513 and deferred income tax benefit of $17,369) and $2,835 for the three months ended October 31, 2018 and 2017, respectively. Our income tax expense was incurred by our profitable subsidiaries/variable interest entities in both periods and we have provided 100% allowance on net operating losses for our subsidiaries/variable interest entities for which it has incurred losses. The income tax benefit of $17,369 was generated from one of our subsidiaries which just started to generate profit and we did not provide 100% allowance for the temporary difference on valuation allowance on doubtful accounts.

 

Net income (loss)

 

Our net income increased by $2,433,749, or 284.5%, to $1,578,209 for the three months ended October 31, 2018, from net loss of $855,540 for the same period in 2017. 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 its working capital requirements, operating expenses and capital expenditure obligations. Debt financing in the form of loans payable and loans from related parties have been utilized to finance the working capital requirements of us. As of October 31, 2018, our working capital was approximately $33,000 and we had cash of approximately $25.9 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.

 

We expect to realize the balance of our current assets within the normal operating cycle of a twelve month period. If we are unable to realize our current assets within the normal operating cycle of a twelve month period, we may have to consider supplementing its available sources of funds 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 our related parties or to obtain due date extension of approximately $5.5 million current payable balance as of October 31, 2018 from our related parties.

 

Based on the above considerations, our management is of the opinion that we have sufficient funds to meet our working capital requirements and debt obligations as they become due for at least one year from the date of this report. However, there is no assurance that management will be successful in our plans. There are a number of factors that could potentially arise that could undermine our plans, such as changes in the demand for our products or installations, PRC government policy, economic conditions, and competitive pricing in the industries that we operated in.

 

42

 

 

The following summarizes the key components of our cash flows for the three months ended October 31, 2018 and 2017.

 

   For the Three Months Ended October 31, 
   2018   2017 
Net cash (used in) provided by operating activities  $16,865,813   $(1,002,074)
Net cash used in investing activities   (2,421,015)   (150,766)
Net cash (used in) provided by financing activities   (2,328,060)   147,661 
Effect of exchange rate change on cash   (480,518)   96,904 
Net change in cash  $11,636,220   $(908,275)

 

As of October 31 and July 31, 2018, we had a cash balance of $25,882,003 and $14,245,783, respectively.

 

Operating activities

 

Net cash provided by operating activities was approximately $16.9 million for the three months ended October 31, 2018 as compared to net cash used in operating activities of approximately $1.0 million for the same period in 2017.

 

Net cash provided by operating activities for the three months ended October 31, 2018 was mainly due to net income of approximately $1.6 million, the decrease in notes receivable as we collected bank notes of approximately $0.8 million, the decrease in accounts receivable as we collected approximately $2.4 million, and the increase of advance from customers of approximately $17.3 million as we have received significant sales orders for our high-grade synthetic fuel products which require customer deposits. The net cash provided by operating activities was offset by the increase in advance to suppliers of approximately $3.7 million as we prepaid for more purchase in the anticipation of sales productions and the decrease in accounts payable as we paid off approximately $1.7 million to our vendors as the payments becomes due.

 

Net cash used in operating activities for the three months ended October 31, 2017 was mainly due to net loss of approximately $0.9 million, the decrease in accounts payable of approximately $0.8 million and the decrease in advance from customers of approximately $0.3 million offset by the decrease of accounts receivable of approximately $0.7 million and the decrease of advance to suppliers of approximately $0.2 million.

  

Investing activities

 

Net cash used in investing activities was approximately $2.4 million for the three months ended October 31, 2018 as compared to net cash used in investing activities of approximately $0.2 million for the same period in 2017.

 

Net cash used in investing activities for the three months ended October 31, 2018 was mainly due to the partial investment payments of approximately $3.7 million that we made in relation to the acquisition of Hubei Jinli and Tianjin Jiabaili, the purchase of property and equipment of approximately $0.5 million for our business expansion offset by the collection of loan receivable of approximately $1.8 million.

 

Net cash used in investing activities for the three months ended October 31, 2017 was due to the issuance of notes receivable of approximately $0.2 million.

 

Financing activities

 

Net cash used in financing activities was approximately $2.3 million for the three months ended October 31, 2018 as compare to net cash provided by financing activities of approximately $0.1 million for the same period in 2017.

 

Net cash used in financing activities for the three months ended October 31, 2018 was due to the payments of short-term bank loan, third party