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 April 30, 20192020

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: 001-38426000-54520

XT Energy Group, Inc.

(Exact name of registrant as specified in its charter)

Nevada98-0632932

(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)

+86 (400) 103-7733 (86715) 8719899

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Title of each classTrading Symbol(s)Name of each exchange on which registered
NoneNoneNone

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☒
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 June 17, 2019,July 9, 2020, there were 531,042,000  shares of the issuer’s common stock, par value $0.001 per share, outstanding.

 

 

 

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSii
PART I – FINANCIAL INFORMATION1
Item 1.Financial Statements1
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations4450
Item 3.Quantitative and Qualitative Disclosures About Market Risk6069
Item 4.Controls and Procedures6169
PART II – OTHER INFORMATION6471
Item 1.Legal Proceedings6471
Item 1A.Risk Factors6472
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds6773
Item 3.Defaults Upon Senior Securities6773
Item 4.Mine Safety Disclosures6773
Item 5.Other Information6773
Item 6.Exhibits6773
SIGNATURES6874

i

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

A number of important factors could cause our actual results to differ materially from those expressed in any forward-looking statements made in this report. Forward-looking statements are often identified by words like: “believe,” “could,” “expect,” “estimate,” “anticipate,” “intend,” “project” and similar expressions or words which, by their nature, refer to future events. In some cases, you can also identify forward-looking statements by terminology such as “may,” “will,” “should,” “plans,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” contained in our annual report on Form 10-K filed withfor the Securities and Exchange Commission on October 30, 2018,year ended July 31, 2019, which may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include, without limitation:

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

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

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

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

ii

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

XT Energy Group, Inc. and Subsidiaries

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

Unaudited Condensed Consolidated Balance Sheets

(Stated in U.S. Dollars)

 April 30,
2019		  July 31,
2018		 
 (Unaudited)     April 30,
2020		  July 31,
2019		 
ASSETSASSETS        
Current assetsCurrent assets        
Cash $14,589,699  $14,245,783  $1,517,952  $2,279,173 
Restricted cash  78,399   - 
Short-term investment  445,448   -   -   435,787 
Notes receivable  706,296   1,303,443   235,224   1,376,785 
Accounts receivable, net  5,726,943   5,142,780   145,674   1,391,403 
Accounts receivable - related party  17,196   - 
Inventories, net  8,207,067   5,141,533   679,357   5,813,871 
Advances to suppliers  3,524,613   1,101,472   1,769,242   3,744,863 
Costs and estimated earnings in excess of billings  -   2,883,408 
Prepaid expenses  1,760,959   1,364,501   625,911   791,813 
Other receivables  386,749   77,228 
Other receivables - related party  29,070   - 
Loan receivables  -   1,759,428 
Deposit for investment  325,177   439,857 
Other receivables, net  16,644   335,636 
Other receivables from sale of discontinued operations  9,564,835   - 
Other receivables - related parties  656,630   6,537 
Current assets of discontinued operations  6,689,439   11,861,434 
Total current assets  35,780,420   33,459,433   21,918,104   28,037,302 
                
Other assets                
Deposit for property, plant and equipment  224,906   - 
Property, plant and equipment, net  18,468,295   11,966,233   133,310   4,755,524 
Right-of-use assets  61,754   - 
Right-of-use assets - related party  17,989   - 
Intangible assets, net  12,021,743   9,260,643   756   703,390 
Prepaid expenses - non-current  355,274   208,498   77,748   158,014 
Goodwill  5,918,634   4,133,143 
Other assets of discontinued operations  23,553,550   30,722,558 
Total other assets  36,988,852   25,568,517   23,845,107   36,339,486 
                
Total assets $72,769,272  $59,027,950   45,763,211  $64,376,788 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities                
Note payable $78,399  $- 
Short-term loan - bank  742,413   733,095 
Current maturities of long-term loan  -   3,069,113 
Short-term loan - third party  -   175,943 
Short-term loans - related parties  -   20,145,446 
Accounts payable  3,881,521   5,349,445  $2,378,572  $2,577,069 
Accounts payable - related parties  102,868   9,554 
Advance from customers  16,537,745   8,326,929   2,804,646   3,110,181 
Other payables and accrued liabilities  3,308,257   2,424,228   1,867,587   1,946,578 
Other payables - related parties and director  6,631,575   4,230,118   6,971,614   6,372,163 
Lease liabilities - current  18,115   - 
Lease liabilities - current - related party  23,028   - 
Income taxes payable  1,706,318   898,424   523,567   558,011 
Current maturities of investment payable  139,336   2,505,871   132,972   136,314 
Current maturities of investment payable - related parties  116,054   507,143   110,754   204,648 
Current liabilities of discontinued operations  14,379,337   15,051,046 
Total current liabilities  33,141,618   48,365,755   29,313,060   29,965,564 
                
Other liabilities                
Investment payable  -   6,700,774 
Investment payable - related parties  370,936   504,359   -   279,764 
Lease liabilities - noncurrent  39,140   - 
Other liabilities of discontinued operations  579,857   - 
Total other liabilities  370,936   7,205,133   618,997   279,764 
                
Total liabilities  33,512,554   55,570,888   29,932,057   30,245,328 
                
Commitments and contingencies                
                
Equity                
Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued and outstanding  -   -   -   - 
Common stock: $0.001 par value, 1,000,000,000 shares authorized, 531,042,000 and 591,042,000 shares issued and outstanding as of April 30, 2019 and July 31, 2018, respectively  531,042   591,042 
Common stock: $0.001 par value, 1,000,000,000 shares authorized, 531,042,000 shares issued and outstanding as of April 30, 2020 and July 31, 2019  531,042   531,042 
Additional paid-in capital  40,680,195   9,860,068   40,680,195   40,680,195 
Subscription receivable  (250,000)  (310,000)  (250,000)  (250,000)
Statutory reserves  578,389   108,487   594,321   572,642 
Accumulated deficit  (4,128,247)  (6,743,399)  (23,175,872)  (8,292,847)
Accumulated other comprehensive loss  (548,035)  (932,061)  (2,265,013)  (1,425,617)
Total XT Energy Group, Inc. common stockholders’ equity  36,863,344   2,574,137   16,114,673   31,815,415 
                
Noncontrolling interest  2,393,374   882,925 
Noncontrolling interests  (283,519)  2,316,045 
                
Total equity  39,256,718   3,457,062   15,831,154   34,131,460 
                
Total liabilities and equity $72,769,272  $59,027,950  $45,763,211  $64,376,788 

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 (Loss) Income (Loss)

(Stated in U.S. Dollars)

(Unaudited)

  For the Three Months Ended
April 30,		  For the Nine Months Ended
April 30,		 
  2020  2019  2020  2019 
             
Revenue-products $230,459  $1,275,268  $3,156,482  $31,609,400 
Revenue-installation of power systems  -   -   -   392,267 
Total revenue  230,459   1,275,268   3,156,482   32,001,667 
                 
Cost of sales-products  3,362,283   1,157,883   7,744,978   26,961,012 
Cost of sales-installation of power systems  -   -   -   360,265 
Total cost of sales  3,362,283   1,157,883   7,744,978   27,321,277 
                 
Gross (loss) profit  (3,131,824)  117,385   (4,588,496)  4,680,390 
                 
Operating expenses:                
Selling expenses  6,862   96,272   223,921   826,482 
General and administrative expenses  520,677   1,002,250   2,692,847   3,571,431 
(Recovery of) provision for doubtful accounts  -   (1,421)  654,502   (200,057)
Change in estimated contingent liabilities  -   (177,182)  -   (21,438)
Impairment of advances to suppliers  -   -   538,809   - 
Impairment loss of long-lived assets  -   -   4,999,504   - 
Total operating expenses  527,539   919,919   9,109,583   4,176,418 
                 
(Loss) income from operations  (3,659,363)  (802,534)  (13,698,079)  503,972 
                 
Other income (expenses)                
Other expenses, net  (80,284)  (437,338)  (176,669)  (337,089)
Interest income  8,749   5,867   20,164   25,946 
Interest expense  -   (131,888)  (35,853)  (721,216)
Total other expenses, net  (71,535)  (563,359)  (192,358)  (1,032,359)
                 
Loss before income taxes  (3,730,898)  (1,365,893)  (13,890,437)  (528,387)
                 
Income tax benefit (expense)  16,482   36,060   4,498   (473,471)
                 
Loss from continuing operations  (3,714,416)  (1,329,833)  (13,885,939)  (1,001,858)
                 
Discontinued operations:                
Income (loss) from discontinued operations, net of applicable income taxes  58,454   1,479,358   (1,950,581)  4,459,636 
Loss on sale of discontinued operations, net of applicable income taxes  -   -   (454,067)  - 
Income (loss) from discontinued operations, net of applicable income taxes  58,454   1,479,358   (2,404,648)  4,459,636 
                 
Net (loss) income  (3,655,962)  149,525   (16,290,587)  3,457,778 
                 
Less: Net (loss) income attributable to noncontrolling interests from continuing operations  (162,315)  (18,384)  (1,377,393)  269,522 
Less: Net income (loss) attributable to noncontrolling interests from discontinued operations  -   76,121   (51,848)  103,202 
                 
Net (loss) income attributable to XT Energy Group, Inc. $(3,493,647) $91,788  $(14,861,346) $3,085,054 
                 
Net (loss) income $(3,655,962) $149,525  $(16,290,587) $3,457,778 
                 
Foreign currency translation adjustment  (610,642)  (229,348)  (859,811)  436,071 
                 
Total comprehensive (loss) income  (4,266,604)  (79,823)  (17,150,398)  3,893,849 
                 
Less:  Comprehensive (loss) income attributable to noncontrolling interests  (162,171)  49,325   (1,449,656)  424,769 
                 
Comprehensive (loss) income attributable to XT Energy Group, Inc. $(4,104,433) $(129,148) $(15,700,742) $3,469,080 
                 
(Loss) earnings per common share - basic and diluted                
Continuing operations $(0.01) $(0.00) $(0.02) $(0.00)
Discontinued operations $0.00  $0.00  $(0.00) $0.01 
                 
Weighted average number of common shares outstanding - basic and diluted  531,042,000   579,808,200   531,042,000   589,497,882 

 

  For the Three Months Ended
April 30,		  For the Nine Months Ended
April 30,		 
  2019  2018  2019  2018 
             
Revenue-products $8,427,067  $344,943  $49,936,729  $826,404 
Revenue-installation of power systems  -   78,701   392,267   184,677 
Total revenue  8,427,067   423,644   50,328,996   1,011,081 
                 
Cost of sales-products  4,778,526   249,736   36,302,530   651,716 
Cost of sales-installation of power systems  -   59,019   360,265   150,124 
Total cost of sales  4,778,526   308,755   36,662,795   801,840 
                 
Gross profit  3,648,541   114,889   13,666,201   209,241 
                 
Operating expenses:                
Selling expenses  349,326   106,001   1,154,644   170,324 
General and administrative expenses  2,158,812   691,141   5,777,084   2,238,458 
Change in estimated contingent liabilities  (177,182)  -   (21,438)  - 
Total operating expenses  2,330,956   797,142   6,910,290   2,408,782 
                 
Income (loss) from operations  1,317,585   (682,253)  6,755,911   (2,199,541)
                 
Other income (expenses)                
Other expenses, net  (417,875)  (2,340)  (293,834)  (6,348)
Interest income  6,888   3,822   32,273   4,436 
Interest expense  (170,845)  -   (874,426)  - 
Total other (expenses) income, net  (581,832)  1,482   (1,135,987)  (1,912)
                 
Income (loss) before income taxes  735,753   (680,771)  5,619,924   (2,201,453)
                 
Income tax expense  (586,228)  (4,347)  (2,162,146)  (8,190)
                 
Net income (loss)  149,525   (685,118)  3,457,778   (2,209,643)
                 
Less: Net income (loss) attributable to non-controlling interest  57,737   (3,361)  372,724   (3,361)
                 
Net income (loss) attributable to XT Energy Group, Inc. $91,788  $(681,757) $3,085,054  $(2,206,282)
                 
Net income (loss) $149,525  $(685,118) $3,457,778  $(2,209,643)
                 
Foreign currency translation adjustment  (229,348)  (41,628)  436,071   364,347 
                 
Total comprehensive income (loss)  (79,823)  (726,746)  3,893,849   (1,845,296)
                 
Less: Comprehensive income (loss) attributable to non-controlling interest  49,325   (3,361)  424,769   (3,361)
                 
Comprehensive income (loss) attributable to XT Energy Group, Inc. $(129,148) $(723,385) $3,469,080  $(1,841,935)
                 
Earnings (loss) per common share - basic and diluted $0.00  $(0.00) $0.01  $(0.00)
                 
Weighted average number of common shares outstanding - basic and diluted  579,808,200   591,042,000   589,497,882   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 Changes in Shareholders’Stockholders’ Equity

(Stated in U.S. Dollars)

(Unaudited)

 

                          Accumulated       
              Additional     Accumulated deficit  other       
  Preferred stock  Common stock  paid-in  Subscription  Statutory     comprehensive  Noncontrolling    
  Shares  Par Value  Shares  Par value  capital  receivable  reserves  Unrestricted  income (loss)  interest  Total 
BALANCE, August 1, 2017  -  $-   591,042,000  $591,042  $9,962,555  $(310,000) $-  $(5,377,094) $(860,369) $-  $4,006,134 
Rent contributed by shareholders  -   -   -   -   1,500   -   -   -   -   -   1,500 
Foreign currency translation adjustment  -   -   -   -   -   -   -   -   89,875   -   89,875 
Net loss  -   -   -   -   -   -   -   (855,540)  -   -   (855,540)
BALANCE, October 31, 2017 (Unaudited)  -   -   591,042,000   591,042   9,964,055   (310,000)  -   (6,232,634)  (770,494)  -   3,241,969 
Rent contributed by shareholders  -   -   -   -   1,500   -   -   -   -   -   1,500 
Foreign currency translation adjustment  -   -   -   -   -   -   -   -   316,100   -   316,100 
Net loss  -   -   -   -   -   -   -   (668,985)  -   -   (668,985)
BALANCE, January 31, 2018 (Unaudited)  -   -   591,042,000   591,042   9,965,555   (310,000)  -   (6,901,619)  (454,394)  -   2,890,584 
Rent contributed by shareholders  -   -   -   -   1,500.00   -   -   -   -   -   1,500 
Foreign currency translation adjustment  -   -   -   -   -   -   -   -   (41,628)  -   (41,628)
Net loss  -   -   -   -   -   -   -   (681,757)  -   (3,361)  (685,118)
BALANCE, April 30, 2018 (Unaudited)  -  $-   591,042,000  $591,042  $9,967,055  $(310,000) $-  $(7,583,376) $(496,022) $(3,361) $2,165,338 

                Accumulated                       Accumulated      
 Additional   Accumulated deficit other  Preferred        Additional     Accumulated deficit  other       
 Preferred stock Common stock paid-in Subscription Statutory  comprehensive  Noncontrolling   stock  Common stock  paid-in  Subscription  Statutory     comprehensive  Noncontrolling    
  Shares  Par Value  Shares  Par value  capital  receivable  reserves   Unrestricted  income (loss)  interest  Total  Shares  Par Value  Shares  Par value  capital  receivable  reserves  Unrestricted  loss  interests  Total 
BALANCE, August 1, 2018  -  $-   591,042,000  $591,042  $9,860,068  $(310,000) $108,487  $(6,743,399) $(932,061) $882,925  $3,457,062       -  $    -   591,042,000  $591,042  $9,860,068  $(310,000) $108,487  $(6,743,399) $(932,061) $882,925  $3,457,062 
Contribution by shareholder  -   -   -   -   14,533,003   -   -   -   -   -   14,533,003   -   -   -   -   14,533,003   -   -   -   -   -   14,533,003 
Statutory reserves  -   -   -   -       -   149,543   (149,543)  -   -   -   -   -   -   -   -   -   149,543   (149,543)  -   -   - 
Foreign currency translation adjustment  -   -   -   -   -   -   -   -   (358,701)  (22,285)  (380,986)  -   -   -   -   -   -   -   -   (358,701)  (22,285)  (380,986)
Net income attributable to XT Energy Group, Inc.  -   -   -   -   -   -   -   1,375,767   -   -   1,375,767   -   -   -   -   -   -   -   1,375,767   -   -   1,375,767 
Net income attributable to noncontrolling interest  -   -   -   -   -   -   -   -   -   202,442   202,442   -   -   -   -   -   -   -   -   -   202,442   202,442 
BALANCE, October 31, 2018 (Unaudited)  -   -   591,042,000   591,042   24,393,071   (310,000)  258,030   (5,517,175)  (1,290,762)  1,063,082   19,187,288 
BALANCE, October 31, 2018  -   -   591,042,000   591,042   24,393,071   (310,000)  258,030   (5,517,175)  (1,290,762)  1,063,082   19,187,288 
Contribution by shareholder  -   -   -   -   932,033   -   -   -   -   -   932,033   -   -   -   -   932,033   -   -   -   -   -   932,033 
Statutory reserves  -   -   -   -   -   -   223,281   (223,281)  -   -   -   -   -   -   -   -   -   223,281   (223,281)  -   -   - 
Foreign currency translation adjustment  -   -   -   -   -   -   -   -   963,663   82,742   1,046,405   -   -   -   -   -   -   -   -   963,663   82,742   1,046,405 
Net income attributable to XT Energy Group, Inc.  -   -   -   -   -   -   -   1,617,499   -   -   1,617,499   -   -   -   -   -   -   -   1,617,499   -   -   1,617,499 
Noncontrolling interest from acquisition  -   -   -   -   -   -   -   -   -   862,193   862,193   -   -   -   -   -   -   -   -   -   862,193   862,193 
Net income attributable to noncontrolling interest  -   -   -   -   -   -   -   -   -   112,545   112,545   -   -   -   -   -   -   -   -   -   112,545   112,545 
BALANCE, January 31, 2019 (Unaudited)  -   -   591,042,000   591,042   25,325,104   (310,000)  481,311   (4,122,957)  (327,099)  2,120,562   23,757,963 
BALANCE, January 31, 2019  -   -   591,042,000   591,042   25,325,104   (310,000)  481,311   (4,122,957)  (327,099)  2,120,562   23,757,963 
Contribution by shareholder  -   -   -   -   15,355,091   -   -   -   -   -   15,355,091   -   -   -   -   15,355,091   -   -   -   -   -   15,355,091 
Statutory reserves  -   -   -   -       -   97,078   (97,078)  -   -   -   -   -   -   -   -   -   97,078   (97,078)  -   -   - 
Cancellation of issued shares  -   -   (60,000,000)  (60,000)  -   60,000   -   -   -   -   -   -   -   (60,000,000)  (60,000)  -   60,000   -   -   -   -   - 
Foreign currency translation adjustment  -   -   -   -   -   -   -   -   (220,936)  (8,412)  (229,348)  -   -   -   -   -   -   -   -   (220,936)  (8,412)  (229,348)
Net income attributable to XT Energy Group, Inc.  -   -   -   -   -   -   -   91,788   -   -   

91,788

   -   -   -   -   -   -   -   91,788   -   -   91,788 
Contribution by noncontrolling interest shareholder  -   -   -   -   -   -   -   -   -   223,487   223,487   -   -   -   -   -   -   -   -   -   223,487   223,487 
Net income attributable to noncontrolling interest  -   -   -   -   -   -   -   -   -   57,737   57,737   -   -   -   -   -   -   -   -   -   57,737   57,737 
BALANCE, April 30, 2019 (Unaudited)  -  $-   531,042,000  $531,042  $40,680,195  $(250,000) $578,389  $(4,128,247) $(548,035) $2,393,374  $39,256,718 
BALANCE, April 30, 2019  -  $-   531,042,000  $531,042  $40,680,195  $(250,000) $578,389  $(4,128,247) $(548,035) $2,393,374  $39,256,718 
                                            
                  Accumulated      
 Preferred        Additional     Accumulated deficit  other       
 stock  Common stock  paid-in  Subscription  Statutory     comprehensive  Noncontrolling    
 Shares  Par Value  Shares  Par value  capital  receivable  reserves  Unrestricted  loss  interests  Total 
BALANCE, August 1, 2019      -  $    -   531,042,000  $531,042  $40,680,195  $(250,000) $572,642  $(8,292,847) $(1,425,617) $2,316,045  $34,131,460 
Statutory reserves  -   -   -   -       -   20,413   (20,413)  -   -   - 
Foreign currency translation adjustment  -   -   -   -   -   -   -   -   (893,143)  (55,196)  (948,339)
Net loss attributable to XT Energy Group, Inc.  -   -   -   -   -   -   -   (3,867,733)  -   -   (3,867,733)
Net loss attributable to noncontrolling interest  -   -   -   -   -   -   -   -   -   (260,505)  (260,505)
BALANCE, October 31, 2019  -   -   531,042,000   531,042   40,680,195   (250,000)  593,055   (12,180,993)  (2,318,760)  2,000,344   29,054,883 
Statutory reserves  -   -   -   -       -   (20,413)  20,413   -   -   - 
Foreign currency translation adjustment  -   -   -   -   -   -   -   -   664,533   34,637   699,170 
Net loss attributable to XT Energy Group, Inc.  -   -   -   -   -   -   -   (7,499,966)  -   -   (7,499,966)
Net loss attributable to noncontrolling interest  -   -   -   -   -   -   -   -   -   (1,006,421)  (1,006,421)
Deconsolidation of discontinued operations  -   -   -   -   -   -   -   -   -   (1,149,908)  (1,149,908)
BALANCE, January 31, 2020  -   -   531,042,000   531,042   40,680,195   (250,000)  572,642   (19,660,546)  (1,654,227)  (121,348)  20,097,758 
Statutory reserves  -   -   -   -       -   21,679   (21,679)  -   -   - 
Foreign currency translation adjustment  -   -   -   -   -   -   -   -   (610,786)  144  (610,642)
Net loss attributable to XT Energy Group, Inc.  -   -   -   -   -   -   -   (3,493,647)  -   -   (3,493,647)
Net loss attributable to noncontrolling interest  -   -   -   -   -   -   -   -   -   (162,315)  (162,315)
BALANCE, April 30, 2020  -  $-   531,042,000  $531,042  $40,680,195  $(250,000) $594,321  $(23,175,872) $(2,265,013) $(283,519) $15,831,154 

 

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.)

Unaudited Condensed Consolidated Statements of Cash Flows

(Stated in U.S. Dollars)

 For the Nine Months
Ended April 30,		  For the Nine Months Ended
April 30,		 
 2019  2018  2020  2019 
Cash flows from operating activities:          
Net income (loss) $3,457,778  $(2,209,643)
Net (loss) income $(16,290,587) $3,457,778 
Net (loss) income from discontinued operations  (2,404,648)  4,459,636 
Net loss from continuing operations  (13,885,939)  (1,001,858)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                
Depreciation expense  790,980   317,293   179,584   251,346 
Amortization expense  620,369   -   42,907   206,948 
Recovery of allowance for doubtful accounts  (65,221)  - 
Amortization of operating lease right-of-use assets  12,887   - 
Amortization of operating lease right-of-use assets - related party  15,747   - 
Allowance for (recovery of) doubtful accounts  654,502   (200,057)
Impairment of inventories  4,747,539   - 
Gain from sales of equipment  (51,457)  -   (819)  (51,457)
Amortization of debt discount  378,632   -   35,848   378,632 
Rent contributed by shareholders  -   4,500 
Change in estimated contingent liabilities  (21,438)  -   -   (21,438)
Impairment of advances to suppliers  538,809   - 
Impairment loss of long-lived assets  4,999,504   - 
Changes in operating assets and liabilities                
Notes receivable  605,470   -   1,113,189   805,684 
Accounts receivable  (422,537)  1,261,155   545,805   533,148 
Inventories  (1,763,162)  (776,757)  268,692   (826,757)
Advances to suppliers  (2,572,447)  (1,369,080)  1,354,224   (2,021,789)
Costs and estimated earnings in excess of billings  2,880,832   62,576 
Contract assets  -   2,880,832 
Prepaid expenses  (267,192)  -   204,600   (329,918)
Other receivables  (2,247)  (912,656)  303,396   45,325 
Accounts payable  (1,515,289)  (1,161,195)  (33,449)  (1,977,930)
Accounts payable - related party  (8,530)  - 
Advance from customers  7,981,930   2,371,167   (230,406)  (3,526,654)
Taxes payable  785,776   22,028 
Operating lease liabilities  1,958   - 
Operating lease liabilities - related party  (10,683)  - 
Other payables and accrued liabilities  (5,419,975)  (136,400)  (519,354)  739,873 
Net cash provided by (used in) operating activities  5,400,802   (2,527,012)
Income taxes payable  (20,866)  (73,768)
Net cash provided by (used in) operating activities from continuing operations  309,145   (4,189,838)
Net cash (used in) provided by operating activities from discontinued operations  (1,347,934)  9,590,640 
Net cash (used in) provided by operating activities  (1,038,789)  5,400,802 
                
Cash flows from investing activities:                
Payment to former shareholders on businesses acquired  (9,446,738)  -   (399,388)  (9,446,738)
Purchases of property and equipment  (2,834,724)  (98,642)
Purchases of property, plant and equipment  (4,773)  (156,674)
Proceeds from disposal of equipment  926   - 
Purchase of short-term investment  (445,448)  -   -   (445,448)
Refund of long-term investment  118,655   -   -   118,655 
Refund of short-term investment  427,168   - 
Purchase of intangible assets  (6,471)  -   -   (2,083)
Collection of loan receivable  1,757,855   -   -   1,757,855 
Deposit made to investment  -   (473,747)
Loan to related party  (640,752)  - 
Net cash used in investing activities from continuing operations  (616,819)  (8,174,433)
Net cash used in investing activities from discontinued operations  (1,962,850)  (2,682,438)
Net cash used in investing activities  (10,856,871)  (572,389)  (2,579,669)  (10,856,871)
                
Cash flows from financing activities:                
(Repayments to) borrowings from related parties  (1,893,774)  1,802,781 
Borrowings from related parties  616,861   1,848,179 
Capital contribution from stockholders  30,820,127   -   -   30,820,127 
Contribution by noncontrolling interest shareholder  223,487   - 
Payments of short-term loan - bank  (3,066,371)  - 
Payments of third party loan  (175,786)  - 
Payments of from third party loan  -   (1,933,641)
Proceeds from related party loans  15,234,747   500,410   -   15,234,747 
Payments of related party loans  (35,362,191)  -   -   (35,362,191)
Proceeds from note payable  77,346   2,179,234 
Net cash provided by financing activities from continuing operations  616,861   10,607,221 
Net cash provided by (used in) financing activities from discontinued operations  431,440   (4,749,636)
Net cash provided by financing activities  5,857,585   4,482,425   1,048,301   5,857,585 
                
Effect of exchange rate change on cash  20,799   505,475 
Effect of exchange rate change on cash and restricted cash  (106,051)  20,799 
                
Net change in cash and restricted cash  422,315   1,769,800   (2,676,208)  422,315 
                
Cash and restricted cash - beginning of period  14,245,783   1,156,969   5,466,380   14,245,783 
                
Cash and restricted cash - end of period $14,668,098  $2,926,769   2,790,172   14,668,098 
                
Less: Cash and restricted cash from discontinued operations  (1,272,220)  (2,016,997)
        
Cash and restricted cash from continuing operations, end of period $1,517,952  $12,651,101 
        
Supplemental disclosure of cash flow information:                
Interest paid $299,699  $582  $-  $299,699 
Income tax paid $1,166,544  $19,537  $16,368  $1,166,544 
                
Supplemental non-cash investing and financing information:        
Rent contributed by shareholders $-  $4,500 
Receipt of property, plant and equipment from deposit made in prior year $-  $2,061,683 
Transfers from advances to suppliers to inventories $-  $321,013 
Supplemental non-cash information:        
Operating lease right-of-use assets obtained in exchange for operating lease liabilities $2,635,069  $- 
Operating lease right-of-use assets obtained in exchange for operating lease liabilities of related party $33,823  $- 
Unpaid other receivables balance resulted from sale of discontinued operations $9,611,277  $- 
Recognition of other payables to former subsidiary upon sale of discontinued operations $479,909  $- 
Reclassification of accounts receivable to related party upon change of related party status $17,279  $- 
Reclassification of accounts payable to related party upon change of related party status $102,532  $- 
Other receivables - related party offset with other payables - related party upon execution of offset agreement $566,805  $- 
Loan to third party offset with investment payable $522,998  $-  $-  $522,998 
Other receivables outstanding from sales of equipment $301,205  $-  $-  $301,205 

 

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

 

  April, 30  July, 31 
  2019  2018 
  (Unaudited)    
Cash   $14,589,699  $14,245,783 
Restricted cash  78,399   - 
Total cash and restricted cash shown in the consolidated statements of cash flows $14,668,098  $14,245,783 
  April 30,  July, 31 
  2020  2019 
Total cash shown in the consolidated statements of cash flows from continuing operations $1,517,952  $2,279,173 
Total cash and restricted cash shown in the consolidated statements of cash flows from discontinued operations  1,272,220   3,187,207 
Total cash and restricted cash shown in the consolidated statements of cash flows $2,790,172  $5,466,380 

 

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

4

 


XT Energy Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 – Nature of business and organization

XT Energy Group, Inc., 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 (“Luck Sky”), an entity owned and controlled by Zhou Deng Rong, the former Chief Executive Officer and director of the Company, and certain of the Company’s former stockholders who owned, in the aggregate, 7,200,000 shares of the Company’s common stock (90% of the then outstanding shares). On May 15, 2012, Luck Sky purchased all 7,200,000 shares for an aggregate of $235,000. 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 (Shenzhen) Aerodynamic Electricity Limited (“Xiangtian Shenzhen”) became the Company’s indirect subsidiary through Xiangtian HK.

Effective October 31, 2016, the Company was reincorporated infrom Delaware into Nevada as a result of its merger with and into ourits wholly owned Nevada subsidiary.

The Company is engaged in a variety of energy-related businesses through its subsidiaries and controlled entities in China.China carried out through the Company’s variable interest entities (“VIEs”), formerly Sanhe Luck Sky Electrical Engineering Co., Ltd. (“Sanhe Xiangtian”) and now Xianning Xiangtian Energy Holding Group Co. Ltd. (“Xianning Xiangtian”), formerly known as Xianning Sanhe Power Equipment Manufacturing Co. Ltd. One of the businesses is in the field of Compressed Air Energy Storage in China and the Company produces electricity generation systems that combine its compressed air storage technology with photovoltaic (“PV”) panels to achieve a continuous supply of power under weather conditions that are unfavorable to the generation of electricity from PV panels alone. The sales and installation of power generation systems and PV systems and the sales of PV panels, air compression equipment and heat pump products have been carried out through the Company’s variable interest entities (“VIEs”), formerly Sanhe Luck Sky Electrical Engineering Co., Ltd. (“Sanhe Xiangtian”) and now Xianning Xiangtian Energy Holding Group Co. Ltd. (“Xianning Xiangtian”), formerly known as Xianning Sanhe Power Equipment Manufacturing Co. Ltd.Xiangtian.

In March 2018, Xianning Xiangtian formed Xiangtian Zhongdian (Hubei) New Energy Co. Ltd. (“Xiangtian Zhongdian”), a joint venture in China, in which Xianning Xiangtian holds a 70% ownership interest with the remaining 30% ownership held by Nanjing Zhongdian Photovoltaic Co. Ltd. Xiangtian Zhongdian is in the business of manufacturing and sales of PV panels.

In April 2018, Xianning Xiangtian formed a wholly owned subsidiary, Jingshan Sanhe Xiangtian New Energy Technology Co. Ltd. (“Jingshan Sanhe”), which is engaged in the business of researching, manufacturing and sales of high-grade synthetic fuel products.

In June 2018, Xianning Xiangtian acquired Hubei Jinli Hydraulic Co., Ltd. (“Hubei Jinli”), which is engaged in the business of manufacturing and sales of hydraulic parts and electronic components, and acquired Tianjin Jiabaili Petroleum Products Co. Ltd. (“Tianjin Jiabaili”), which is engaged in the business of manufacturing and sales of petroleum products (See Note 3 – Business combinations).

In August 2018, Xianning Xiangtian formed a wholly owned subsidiary, Xianning Xiangtian Trade Co. Ltd. (“Xiangtian Trade”), which is expected to engageengaged in trading chemical raw materials for the purpose of providing a stable supply for fuel products operation.general merchandise.

In September and October 2018, January 2019 and March 2019, Mr. Jian Zhou, the Company’s Chairman and principal shareholder as well as a shareholder of Xianning Xiangtian, and Zhou Deng Rong, the Company’s former Chief Executive Officer and director, injected an aggregate of Renminbi (“RMB”) 209,260,000 (approximately $30.8 million) as capital contribution to Xianning Xiangtian.


On November 5, 2018, the Company changed its name to XT Energy Group, Inc. through a merger with and into a newly formed, wholly-owned subsidiary, which subsidiary was formed for purposes of the name change.


In December 2018, Xianning Xiangtian acquired 90% of the equity interest in each of Hubei Rongentang Wine Co., Ltd. (“Wine Co.”), which is engaged in the business of manufacturing and sales of wine, and Hubei Rongentang Herbal Wine Co., Ltd. (“Herbal Wine Co.,” collectively with “Wine Co.,” “Rongentang”), which is engaged in the business of manufacturing and sales of herbal wine products (See Note 3 – Business combinations)Combinations).

On January 6, 2020, the Company entered into an equity transfer agreement with Kairui Tong and Hao Huang (the “Buyers”), which the Company agreed to sell its 90% ownership in Wine Co. and Herbal Wine Co. to the Buyers for approximately $9.6 million (RMB 67.5 million), of which, 54% ownership are sold to Kairui Tong, the legal representative and general manager of Wine Co. and Herbal Wine Co, and 36% ownership are sold to Hao Huang, an unrelated third party. The Company believes the acquisitionresult of operations of Rongentang representedwas presented as discontinued operations for nine months ended April 30, 2020 unaudited condensed consolidated financial statements. (See Note 4 – Discontinued Operations).

On April 14, 2020, the Company’s Board of Directors (the “Board”), discussed a good investmentplan to pursue the potential sale of all its ownership interest in that Rongentang possesses landJingshan Sanhe and buildings worth approximately $6.8 millionHubei Jinli due to the coronavirus outbreak might affect the Company’s future business operations and desired to scale back its variety of businesses. The decision and action taken by the Company believes it can recoupof disposing Jingshan Sanhe and Hubei Jinli represent a major shift that had a major effect on the Company’s operations and financial results, which trigger discontinued operations accounting in accordance with ASC 205-20-45.

On May 1, 2020, the Company acquired the remaining 30% ownership held by Nanjing Zhongdian Photovoltaic Co. Ltd. in Xiangtian Zhongdian at RMB 1 due to Xiangtian Zhongdian was at a net deficit position and Xiangtian Zhongdian became the Company’s wholly owned subsidiary.

On June 28, 2020, the Company entered into two equity transfer agreements with Xubin Zhang and Jian Zheng (the “Buyers”), which the Company agreed to sell its investment within a short period100% ownership in Hubei Jinli to the Buyers for approximately $21.3 million (RMB 150.0 million), of time by selling Rongentang’s winewhich, 60% ownership are sold to Xubin Zhang, an unrelated third party, and herbal wine inventories through40% ownership are sold to Jian Zheng, an unrelated third party. The result of operations of Hubei Jinli was presented as discontinued operations for three and nine months ended April 30, 2020 unaudited condensed consolidated financial statements. (See Note 4 – Discontinued Operations).

On June 29, 2020, the Company entered into two equity transfer agreements with Xue Wang and Chao Feng (the “Buyers”), which the Company agreed to sell its distribution network.100% ownership in Jingshan Sanhe to the Buyers for approximately $4.3 million (RMB 30.0 million), of which, 60% ownership are sold to Xue Wang, an unrelated third party, and 40% ownership are sold to Chao Feng, an unrelated third party. The result of operations of Jingshan Sanhe was presented as discontinued operations for three and nine months ended April 30, 2020 unaudited condensed consolidated financial statements. (See Note 4 – Discontinued Operations).

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”);

6

●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 usthe Company to:

●exercise effective control over Xianning Xiangtian;

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

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

 

The New VIE Agreements include the following:

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

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 agreeagreed to share the cooperation profits as set forth in the New VIE Agreements. The term of cooperation is 10 years and may be unilaterally extended by Xiangtian Shenzhen.


Agreement of Exclusive Management, Consulting and Training and Technical Service

Pursuant to the Agreement of Exclusive Management, Consulting and Training and Technical Service between Xiangtian Shenzhen and Xianning Xiangtian, Xianning Xiangtian engaged Xiangtian Shenzhen to provide consulting, training, management services and technical support exclusively for a term of 10 years, which may be unilaterally extended by Xiangtian Shenzhen. Xianning Xiangtian agrees to pay Xiangtian Shenzhen a service fee equal to one hundred percent (100%) of Xianning Xiangtian’s net income determined pursuant to the generally accepted accounting principles, payable quarterly.

Exclusive Option Agreement

Pursuant to the Exclusive Option Agreement among Xiangtian Shenzhen, Xiangtian HK, Xianning Xiangtian and the shareholders holding an aggregate of 100% of Xianning Xiangtian’s equity interest (“Xianning Xiangtian Shareholders”), the Xianning Xiangtian Shareholders irrevocably granted Xiangtian Shenzhen and Xiangtian HK an exclusive option to purchase from them, at its discretion, to the extent permitted under the PRC law, all or part of their equity interest in Xianning Xiangtian, and the purchase price will be the lowest price permitted by applicable PRC laws. The timing, method and times of exercise of this option to purchase isare within Xiangtian Shenzhen and Xiangtian HK’s sole discretion. In addition, each of the Xianning Xiangtian Shareholders agreesagreed to waive their respective preemptive rightrights when the other shareholder transfers the equity interest of Xianning Xiangtian to Xiangtian Shenzhen or its designated party. The Xianning Xiangtian Shareholders further agree,agreed, among other things, without the prior written consent of Xiangtian Shenzhen and Xiangtian HK, not to transfer, sell or pledge their equity interest of Xianning Xiangtian. Without the prior written consent of Xiangtian Shenzhen and Xiangtian HK, Xianning Xiangtian may not amend its articles of association, change the amount and structure of its registered capital or sell any of its assets or beneficial interest.

Equity Pledge Agreement

Pursuant to the Equity Pledge Agreement among Xiangtian Shenzhen, Xianning Xiangtian and the Xianning Xiangtian Shareholders, the Xianning Xiangtian Shareholders pledged all of their respective equity interest in Xianning Xiangtian to Xiangtian Shenzhen to guarantee the performance of Xianning Xiangtian’s obligations under the New VIE Agreements, other than the Equity Pledge Agreement. Xiangtian Shenzhen will be deemed to have created the encumbrance of the first order in priority on the pledged equity interest. In the event of any breach of the VIE Agreements, other than this Equity Pledge Agreement, or failure to satisfy the guaranteed obligations, Xiangtian Shenzhen will have the right to dispose of the pledged equity interest. The Xianning Xiangtian Shareholders may receive dividends or share profits only with prior consent from Xiangtian Shenzhen, and such dividends and profits will be deposited into a bank account designated by and under supervision of Xiangtian Shenzhen and to be used for repayment of any liability due to any breach of the VIE Agreements by Xianning Xiangtian or the Xianning Xiangtian Shareholders. The agreement will remain effective until the termination of the VIE Agreements, other than this Equity Pledge Agreement.

Know-How Sub-License Agreement

Pursuant to the Know-How Sub-License Agreement between Xiangtian Shenzhen and Xianning Xiangtian, Xiangtian Shenzhen agreed to grant an exclusive and non-transferable sublicense to use the patents, patent applications and all related trade secrets and technology and improvements on photovoltaic installation and the air energy storage power generation technology (“Technology”) but without sublease right in the territory of China, exclusive of the Hong Kong Special Administrative Region, the Macao Special Administrative Region and the Taiwan Region for the purpose of the agreement. Xianning Xiangtian agreed to pay Xiangtian Shenzhen a quarterly royalty fee equal to five percent (5%) of Xianning Xiangtian’s gross revenue of each quarter. The shareholders of Xianning Xiangtian pledged all of their equity interest of Xianning Xiangtian as collateral for the royalty fee payable under this agreement. The agreement will remain effective throughout the entire duration of Xianning Xiangtian operations, unless terminated by Xiangtian Shenzhen with a 30-day prior written notice.

8

 


Power of Attorney

Pursuant to the Powers of Attorney executed by the Xianning Xiangtian Shareholders, each of the shareholders irrevocably appointed Xiangtian Shenzhen as his attorney-in-fact to exercise any and all rights as a shareholder of Xianning Xiangtian, including, but not limited to, the right to attend shareholders’ meetings, to execute shareholders’ resolutions, to sell, assign, transfer or pledge any or all of his equity interest of Xianning Xiangtian, to vote as a shareholder for all matters, as well as full power to execute equity transfer agreement as referenced in the Exclusive Option Agreement and to perform under the Exclusive Option Agreement and Equity Pledge Agreement without limitation. Xiangtian Shenzhen is also authorized to transfer, allocate or use any cash dividends and non-cash income in accordance with the respective shareholder’s instructions and to exercise all the necessary rights associated with the equity interest at Xiangtian Shenzhen’s sole discretion and without the consent of the Xianning Xiangtian Shareholders. The Powers of Attorney will remain effective as long as the Xianning Xiangtian Shareholders remain the shareholders of Xianning Xiangtian.

Spousal Consent Letters

Pursuant to the Spousal Consent Letters, each of the spouses of the Xianning Xiangtian Shareholders unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Exclusive Option Agreement and Power of Attorney entered by her spouse and the disposal of equity interest of Xianning Xiangtian held by her spouse. Each of the spouses also agreed that she will not assert any rights over the equity interest in Xianning Xiangtian held by and registered in the name of her respective spouse. The Xianning Xiangtian Shareholders’ actions to perform, amend or terminationterminate 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:

NameBackgroundOwnership
Xiangtian HK● A Hong Kong company100% owned by XT Energy
Xiangtian BVI● A British Virgin Islands company100% 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% (before May 1, 2020) and 100% (On May 1, 2020 and thereafter ) owned by Xianning Xiangtian
Jingshan Sanhe (2)

● 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 (3)

● A PRC limited liability company


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


● Manufacturing and sales of hydraulic parts and electronic components

100% owned by Xianning Xiangtian
Tianjin Jiabaili

● A PRC limited liability company


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


● Manufacturing and sales of petroleum products

100% owned by Xianning Xiangtian
Xiangtian Trade

● A PRC limited liability company


● Incorporated on August 9, 2018


● Expected to engage in trading chemical raw materials to support fuel production

100% owned by Xianning Xiangtian
Wine Co. (1)

● A PRC limited liability company


● Incorporated on August 9, 2011 and acquired on December 14, 2018


● Manufacturing and sales of wine products

90% owned by Xianning Xiangtian

Disposed in January 2020

Herbal Wine Co. (1)

● A PRC limited liability company


● Incorporated on August 9, 2018 and acquired on December 14, 2018


● Manufacturing and sales of herbal wine products

90% owned by Xianning Xiangtian

Disposed in January 2020


(1)Xianning Xiangtian sold Rongentang for approximately $9.6 million to two unrelated third parties in January 2020, resulting in approximately $0.5 million of loss from disposal of subsidiary. See Note 4 – Discontinued operations for details.

(2)Xianning Xiangtian sold Jingshan Sanhe for approximately $4.3 million to two unrelated third parties in June 2020.

(3)Xianning Xiangtian sold Hubei Jinli for approximately $21.3 million to two unrelated third parties in June 2020.

Note 2 – Summary of significant accounting policies

LiquidityGoing concern

In assessing the Company’s liquidity, the Company monitors and analyzes its cash on-hand and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. Debt financing in the form of loans payable and loans from related parties have been utilized to finance the working capital requirements of the Company and acquisitions of businesses. As of April 30, 2019,2020, the Company’s working capitaldeficit was approximately $2.6$7.4 million and the Company had cash of approximately $14.6$1.5 million. Excluding other payables to related parties and director of approximately $7.0 million, the Company’s working deficit was approximately $0.4 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 expectsCompany’s management has considered whether there is a going concern issue due to realize the balance ofCompany’s recurring losses from operations. Management has determined there is substantial doubt about its current assets within the normal operating cycle ofability to continue as a twelve month period.going concern. If the Company is unable to realize its current assets within the normal operating cycle of a twelve month period,generate significant revenue, the Company may havebe required to consider supplementingcease or curtail its available sources of fundsoperations. Management is trying to alleviate the going concern risk through the following sources:

●the Company will continuously seek equity financing (including an a proposed underwritten public offering pursuant to a registration statement on Form S-1 filed with the SEC on February 1, 2019) to support its working capital;
   
●other available sources of financing from PRC banks and other financial institutions;
●financial support and credit guarantee commitments from the Company’s related parties.

  


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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, 20182019 annual report on Form 10-K filed on October 30, 2018.15, 2019.

Principles of consolidation

The unaudited condensed consolidated financial statements include the financial statements of the Company, its subsidiaries, the VIEs for which the Company or its subsidiary is the primary beneficiary and the VIEs’ subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

Use of estimates and assumptions

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include the estimated cost used to calculate the percentage of completion recognized in the Company’s revenues, the useful lives of property, plant and equipment, impairment of long-lived assets, right-of-use assets, lease classification and liabilities, allowance for accounts receivable doubtful accounts, allowance for other accounts receivable doubtful accounts, allowance for inventory obsolescence reserve, allowance for advance to suppliers doubtful accounts, allowance for deferred tax assets, fair value of the assets and the liabilities of the entityentities 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;

11

●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 agreementsNew VIE Agreements entered into among Xianning Xiangtian and Xiangtian Shenzhen, the primary beneficiary, are described below:

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

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

●Exclusive Option Agreement, entered among Xiangtian HK, Xiangtian Shenzhen, Zhou Deng Rong,Fei Wang, Zhou Jian and Xianning Xiangtian, pursuant to which Zhou Deng RongFei Wang and Zhou Jian, the owners of Xianning Xiangtian, have granted to Xiangtian Shenzhen and Xiangtian HK the irrevocable right and option to acquire all of their equity interests in Xianning Xiangtian.

 ●
●Equity Pledge Agreement, entered among Xiangtian Shenzhen, Zhou Deng Rong,Fei Wang, Zhou Jian, and Xianning Xiangtian, pursuant to which Zhou Deng RongFei Wang and Zhou Jian, the owners of Xianning Xiangtian, have pledged all of their rights, titles and interests in Xianning Xiangtian to Xiangtian Shenzhen to guarantee Xianning Xiangtian’s performance of its obligations under all the other VIE Agreements.

●Know-How Sub-License Agreement, entered between Xiangtian Shenzhen and Xianning Xiangtian, pursuant to which Xiangtian Shenzhen has granted Xianning Xiangtian an exclusive right to use and develop a series of aerodynamics related patents and technologies with respect to electrical generation for commercial and residential structures, not including automobile and wind towers. Xiangtian Shenzhen possesses the rights licensed under this agreement through two license agreements dated September 30, 2018 with Zhou Deng Rong,Fei Wang, Zhou Jian and Xianning Lucksky Group,Aerodynamic Electricity (“Xianning Lucksky”), the owners of the aforesaid patents and technologies. For the sublicense contemplated under this agreement, Xianning Xiangtian will pay Xiangtian Shenzhen an annuala quarterly royalty fee of five percent of revenue. For the nine months ended April 30, 2019,2020, the annualquarterly 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.


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●Spousal Consent Letters. Pursuant to the PowersSpousal Consent Letters, each of Attorney executed bythe spouses of the Xianning Xiangtian Shareholders eachunconditionally and irrevocably agreed to the execution of the shareholders irrevocably appoints Xiangtian Shenzhen as his attorney-in-fact to exercise anyEquity Pledge Agreement, Exclusive Option Agreement and all rights as a shareholderPower of Xianning Xiangtian, including, but not limited to,Attorney entered by her spouse and the right to attend shareholders’ meetings, to execute shareholders’ resolutions, to sell, assign, transfer or pledge any or alldisposal 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 inheld by her spouse. Each of the Exclusive Option Agreement and to perform under the Exclusive Option Agreement and Equity Pledge Agreement without limitation.  Xiangtian Shenzhen isspouses also authorized to transfer, allocate or useagreed that she will not assert any cash dividends and non-cash income in accordance with the respective shareholder’s instructions and to exercise all the necessary rights associated withover the equity interest atin Xianning Xiangtian Shenzhen’s sole discretionheld by and withoutregistered in the consentname of her respective spouse. The Xianning Xiangtian Shareholders’ actions to perform, amend or terminate the above-mentioned agreement do not need their spouses’ authorization or consent. In addition, in the event that any of the spouses obtains any equity interest in Xianning Xiangtian Shareholders.  The Powers of Attorney will remain effective as long as the Xianning Xiangtian Shareholders remain the shareholders of Xianning Xiangtian.held by her respective spouse for any reason, such spouse agrees to enter into similar contractual arrangements.

The Framework Agreement and the Exclusive Management Agreement have initial terms of ten years but each contains a renewal provision that allows Xiangtian Shenzhen to extend the term of such agreements at its sole option by written notice with no limitation as to such extensions. The Know-How Sub-License Agreement is valid for the duration of Xianning Xiangtian’s operation. The other agreements are of unlimited duration.

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 April 30, 20192020 and July 31, 20182019 and for the three and nine months ended April 30, 2020 and 2019, and 2018, respectively:

  April 30,
2020		  July 31,
2019		 
       
Current assets $14,738,906  $15,778,269 
Current assets of discontinued operations  6,689,439   11,861,434 
Non-current assets  273,057   5,598,428 
Non-current assets of discontinued operations  23,553,550   30,722,558 
Total assets $45,254,952  $63,960,689 
         
Current liabilities $7,946,587  $4,765,922 
Current liabilities of discontinued operations  14,379,337   15,051,046 
Non-current liabilities  39,140   279,764 
Non-current liabilities of discontinued operations  579,857   - 
Total liabilities $22,944,921  $20,096,732 

  For the
Three Months
Ended
April 30,
2020		  For the
Three Months
Ended
April 30,
2019		  For the
Nine Months
Ended
April 30,
2020		  For the
Nine Months
Ended
April 30,
2019		 
             
Revenues $230,459  $1,275,268  $3,156,482  $32,001,667 
Gross (loss) profit $(3,131,824) $117,385  $(4,588,496) $4,680,390 
(Loss) income from continuing operations $(3,434,068) $(300,390) $(12,886,759) $2,079,080 
Net (loss) income from continuing operations attributable to XT Energy Group, Inc. $(3,328,215) $(841,649) $(12,156,150) $298,981 
Net income (loss) from discontinued operations attributable to XT Energy Group, Inc.  58,454   1,403,237   (1,898,733)  4,356,434 
Net (loss) income attributable to XT Energy Group, Inc. $(3,269,761) $561,588  $(14,054,883) $4,655,415 

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  April 30,
2019		  July 31,
2018		 
       
Current assets $35,074,836  $33,240,433 
Non-current assets  36,970,352   25,568,517 
Total assets $72,045,188  $58,808,950 
         
Current liabilities $29,300,888  $46,576,026 
Non-current liabilities  370,936   7,205,133 
Total liabilities $29,671,824  $53,781,159 

  For the Three Months Ended
April 30,
2019		  For the Three Months Ended
April 30,
2018		  For the Nine Months Ended
April 30,
2019		  For the Nine Months Ended
April 30,
2018		 
             
Revenues $8,427,067  $423,644  $50,328,996  $1,011,081 
Gross Profit $3,648,541  $114,889  $13,666,201  $209,241 
Income (loss) from operations $1,612,546  $(517,261) $8,309,581  $(1,554,290)
Net income (loss) $561,588  $(520,007) $4,655,415  $(1,560,636)


Business Combinations

The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. The results of operations of the acquired business are included in the Company’s operating results from the date of acquisition.

Cash

Cash denominated in RMB with a U.S. dollar equivalent of $14,085,235$1,193,540 and $14,207,358$2,071,210 at April 30, 20192020 and July 31, 2018,2019, respectively, were held in accounts at financial institutions located in the PRC‚ which is not freely convertible into foreign currencies. In addition,$711,695 and $1,373,562 of these balances are not covered by insurance.insurance as the deposit insurance system in China only insured each depositor per bank for a maximum of approximately $71,000 (RMB500,000). While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness. The Company, its subsidiaries and VIE have not experienced any losses in such accounts and do not believe the cash is exposed to any significant risk. As of April 30, 20192020 and July 31, 2018,2019, cash balance of $472,902$284,647 and $2,481,$177,107, respectively, were maintained at U.S. financial institutions,institutions. $24,720 and $0 of these balance were not insured by the Federal Deposit Insurance Corporation or other programs subject to certain limitations up to $250,000 per depositor. As of April 30, 20192020 and July 31, 2018,2019, cash balance of $26,496$28,840 and $26,402,$26,288, respectively, were maintained at financial institutions in Hong Kong, and all were insured by the Hong Kong Deposit Protection Board up to a limit of HK $500,000 (approximately $64,000).

Restricted Cash

Restricted cash represents cash held by banks as guarantee deposit collateralizing notes payable. payable pending release back to unrestricted cash upon completion of administrative process. 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (230): Restricted Cash. The amendments in this Updateupdate require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. For public business entities, the amendments in this Updateupdate are effective for fiscal years beginning after December 15, 2017, and interim periods within those annual periods. Earlier adoption is permitted. The amendments in this Updateupdate should be applied using a retrospective transition method to each period presented. On August 1, 2018, the Company adopted this guidance on a retrospective basis.

Short-term Investment

Short-term investment consists of time deposit placed with a bank, which contains a fixed or variable interest rate and has original maturity within one year. Such investment is permitted to be redeemed early without penalties prior to maturity. Given the short-term nature, the carrying value of short-term investment approximates its fair value. The Company does not intend to withdraw early. There was no other-than-temporary impairment of short-term investment for the three and nine months ended April 30, 20192020 and July 31, 2018.2019.

Notes Receivable

Notes receivable represents commercial notes due from various customers where the customers’ banks have guaranteed the payments. The notes are noninterest bearing and normally paid within three to six months. The Company has the ability to submit requests for payments to the customer’s banks earlier than the scheduled payments date, but will incur an interest charge and a processing fee.

14

 

Accounts Receivable, net

Accounts receivables, net, are recognized and carried at the original invoiced amount less an allowance for any uncollectible accounts. The Company uses the aging method to estimate the valuation allowance for anticipated uncollectible receivable balances. Under the aging method, bad debts determined by management are based on historical experience as well as the current economic climate and are applied to customers’ balances categorized by the number of months the underlying invoices have remained outstanding. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. The Company’s management continues to evaluate the reasonableness of the valuation allowance policy and update it if necessary.


Inventories, net

Inventories, net, consist of raw materials, work in progress and finished goods and are stated at the lower of cost or net realizable value using the weighted average method. When appropriate, allowancesimpairment to inventories are recorded to write down the cost of inventories to their net realizable value. As of April 30, 2019 and July 31, 2018, there were no such allowances.

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. AsFor the three and nine months ended April 30, 2020, $0 and $538,809 impairment of advances to suppliers was recognized, respectively. For the three and nine months ended April 30, 2019, and July 31, 2018, there were no such allowances.impairment of advances to suppliers was recognized.

Costs and Estimated Earnings in Excess of BillingsContract Assets

Costs and estimated earnings in excess of billings represents revenues recognized in excess of amounts billed. AtThe differences between the time a loss on a contract becomes known, the entire amounttiming of the estimated ultimate loss isCompany’s revenue recognized (based on costs incurred) and customer billings (based on unconditional rights to receive the consideration in the unaudited condensed consolidated financial statements.contractual terms) results in changes to the Company’s contract asset or contract liability positions. Provisions for estimated losses of contract assets on uncompleted contracts are made in the period in which such losses are determined.

Prepaid Expenses

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

Other Receivables, net

Other receivables, net primarily include advances to employees, receivables from sales of equipment, and other deposits. Management regularly reviews the aging of receivables and changes in payment trends and records allowances when management believes collection of amounts due are at risk. Accounts considered uncollectable are written off against allowances after exhaustive efforts at collection are made. No allowance was required as ofAllowance for doubtful accounts amounted to $0 for the three months ended April 30, 2020 and 2019. Allowance for doubtful accounts amounted to $292,362 and $0 for the nine months ended April 30, 2020 and 2019, and July 31, 2018, respectively.

15

 

Loans Receivables

Other Receivables – Related Parties

Loans

Other receivables represents interest free– related parties present advances to the former shareholdermanagement of Hubei Jinli by the Company prior to the acquisition of Hubei Jinli on June 30, 2018. These advances were unsecuredfor business development and due on demand. Full outstanding balance in amount of $1,759,428 as of July 31, 2018 was repaid in August 2018.travel advances.

Property, Plant and Equipment, net

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

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


The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the unaudited condensed consolidated statements of operations and other comprehensive loss. Expenditures for maintenance and repairs are charged to earnings as incurred, while additions, renewals and betterments, which are expected to extend the useful life of assets, are capitalized.

Construction-in-progress represents contractor and labor costs, design fees and inspection fees in connection with the construction of the Company’s synthetic fuel raw materials production warehouses, cafeteria,line, factory plantation and employee dormitory.fire safety equipment installation. No depreciation is provided for construction-in-progress until it is completed and placed into service.

Intangible Assets, net

Intangible assets, net, are stated at cost, less accumulated amortization. Amortization expense is recognized on the straight-line basis over the estimated useful lives of the assets as follows:

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

All land in the PRC is owned by the government; however, the government grants “land use rights.” The Company has obtained rights to use various parcels of land for 50 years through the acquisition of Hubei Jinli in June 2018 and through the acquisition of Wine Co. in December 2018.

Technology know-hows, including LSC Hand-Held Diesel Pump, CB-39 Motor Oil Pump, 0-16 MPa series hydraulic cylinder, brake cylinder and hydraulic value, and certain special operating and production licenses were acquired through the acquisition of Hubei Jinli and Tianjin Jiabaili in June 2018 and through the acquisition of Herbal Wine Co. and Wine Co. in December 2018 with estimated finite useful lives between 4.5 years to 10 years.

Certain PV panel certifications were contributed by the Company’s noncontrolling interest shareholders as capital contribution in March 2018 with an estimated finite useful lives of 10 years.

The Company also acquired a safety production license and an accounting software with a finite useful life of 3 years in June 2018 and January 2019, respectively.

In-Process Research and DevelopmentGoodwill

In-process R&D is a type of ginseng antler wine which was acquired through the acquisition of Wine Co. The wine is currently in the development stage and the Company will be applying for its patent. Once the patent is applied and approved the Company is expected to amortize the wine patent with an estimated useful life of approximately 10 years.

Goodwill

Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiaries at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the unaudited condensed consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed.


The Company reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist annually or more frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has the option to access qualitative factors to determine whether it is necessary to perform the two-step in accordance with ASC 350-20. If the Company believes, as a result of the qualitative carrying amount, the two-step quantities impairment test described below is required.

The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required.

If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business acquisition with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow.

If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the unaudited condensed consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed. As ofFor the three and nine months ended April 30, 20192020 and July 31, 2018,2019, no impairment of goodwill was recognized.


Impairment for Long-Lived Assets

Long-lived assets, including plant and equipment and intangible with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. As

For the three and nine months ended April 30, 2020, an impairment of $0 and $4,353,609 of equipment were recognized, respectively. For the three and nine months ended April 30, 2019, 0 impairment was recognized for equipment.

For the three and July 31, 2018, nonine months ended April 30, 2020, an impairment of long-lived$0 and $645,895 were recorded for intangible assets, respectively. For the three and nine months ended April 30, 2019, 0 impairment was recognized.recognized for intangible assets.

Subscription Receivable

Subscription receivable represents unpaid capital contribution from its shareholders.

Short-Term Note Payable

Short-term note payable is a line of credit extended by a bank. The bank in-turn issues the Company a banker’s acceptance note, which can be endorsed and assigned to vendors as payments for purchases. The note payable is generally payable at a determinable period, generally three to six months. This short-term note payable bears no interest and is guaranteed by the bank for its complete face value and usually matures within three to six month period. The bank usually requires the Company to deposit a certain amount of cash at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash.

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.

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Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

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

There were no assets or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of April 30, 2019.


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 April 30, 2019 and July 31, 2018:2019:

 Carrying
Value as of 
July 31,		 Fair Value Measurements at
July 31, 2019
Using Fair Value Hierarchy		 
Financial Assets Carrying
Value as of
April 30,
2019		  Fair Value Measurements at April 30, 2019
Using Fair Value Hierarchy		  2019 Level 1 Level 2 Level 3 
    Level 1  Level 2  Level 3 
Short-term investment $445,448  $445,448  $   -  $     -  $435,787 $435,787 $   - $   - 

Financial Liabilities Carrying
Value as of
April 30, 2019		  Fair Value Measurements at April 30, 2019
Using Fair Value Hierarchy		 
     Level 1  Level 2  Level 3 
Contingent payment consideration liabilities (see Note 3) $313,990  $         -  $        -  $313,990 

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 on level 3 measurements for the nine months ended April 30, 20192020 and for the year ended July 31, 2018:2019:

 April 30,
2019		  July 31,
2018		  April 30,
2020		  July 31,
2019		 
Beginning balance $331,505  $-  $  -  $331,505 
Contingent liability obligated from business combinations  -   341,411 
Change in estimated contingent liabilities  (21,438)  -   -   243,658 
Release from level 3 measurement due to contingent payments has been finalized  -   (570,322)
Exchange rate effect  3,923   (9,906)  -   (4,841)
Ending balance $313,990  $331,505  $-  $- 

The Company believes the carrying amount reported in the unaudited condensed consolidated balance sheet for cash, restricted cash, notes receivable, accounts receivable, inventories, advance to suppliers, costs and estimated earnings in excess of billings,contract assets, prepaid expenses, other receivables, loan receivables, deposit for prepayments, note payable, short-term loans, accounts payable, advances from customers, other payables and accrued liabilities, tax payables and short-term investment payable approximate fair value because of the short-term nature of such instruments. The carrying amount of long-term investment payable reported in the unaudited condensed consolidated balance sheets at carrying value, which approximates fair value as the rate of amortization of investment payment discount used were similar to interest rate charged by the bank in the PRC. The carrying amount of long-term loan – related party reported in the consolidated balance sheets at carrying value, which approximates fair value as the interest rate of the loan were similar to interest rate charged by the bank in the PRC. As of April 30, 20192020 and July 31, 2018,2019, long-term investment payable balance was $370,936,$0 and $279,764, net of discount of $45,543 and $7,205,133, net of discount of $869,173,$25,999, respectively.


Leases

Effective August 1, 2019, the Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the practical expedients that does not require us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. For lease terms of twelve months or fewer, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. The Company also adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. On August 1, 2019, the Company recognized approximately $2.7 million right of use (“ROU”) assets and approximately $2.1 million lease liabilities based on the present value of the future minimum rental payments of leases, using incremental borrowing rate of 4.75% and 4.90% based on duration of lease terms.

Operating lease ROU assets and lease liabilities are recognized at the adoption date of August 1, 2019 or the commencement date, whichever is earlier, based on the present value of lease payments over the lease term. Since the implicit rate for the Company’s leases is not readily determinable, the Company use its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term.

Lease terms used to calculate the present value of lease payments generally do not include any options to extend, renew, or terminate the lease, as the Company does not have reasonable certainty at lease inception that these options will be exercised. The Company generally considers the economic life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. The Company has elected the short-term lease exception, therefore operating lease ROU assets and liabilities do not include leases with a lease term of twelve months or less. Its leases generally do not provide a residual guarantee. The operating lease ROU asset also excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term.

The Company reviews the impairment of its ROU assets consistent with the approach applied for its other long-lived assets. The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on its ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. The Company has elected to include the carrying amount of operating lease liabilities in any tested asset group and includes the associated operating lease payments in the undiscounted future pre-tax cash flows.

Discontinued operations

In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the criteria in paragraph 205-20-45-1E to be classified as discontinued operations. When all of the criteria to be classified as discontinued operations are met, including management having the authority to approve the action and committing to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from the balances of the continuing operations. At the same time, the results of discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45. See Note 4 – Discontinued operations.

Revenue Recognition

On August 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method for contracts that were not completed as of July 31, 2018. This did not result in an adjustment to the retained earnings upon adoption of this new guidance as the Company’s revenue was recognized based on the amount of consideration expected to receive in exchange for satisfying the performance obligations.


The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized over time for the Company’s sale and installation of power generation systems and are recognized at a point in time for the Company’s sale of products.

The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition.

Gross versus Net Revenue Reporting

In the normal course of the Company’s trading business, the Company orders products directly from its suppliers and drop ships the products directly to its customers. In these situations, the Company generally collects the sales proceeds directly from its customers and pays for the inventory purchases to its suppliers separately. The determination of whether revenues should be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the transaction. In determining whether the Company is the principal or an agent, the Company follows the accounting guidance for principal-agent considerations. Because the Company is not the primary obligor and is not responsible for (i) fulfilling the resale products delivery, (ii) establishing the selling prices for delivery of the resale products , (iii) performing all billing and collection activities including retaining credit risk and (iv) baring the back-end risk of inventory loss with respect to any product return from its customer, the Company has concluded that it is the agent in these arrangements, and therefore reports revenues and cost of revenues on a net basis.

Sale and installation of power generation systems

Sales of power generation systemsystems in conjunction of system installation are generally recognized based on the Company’s efforts or inputs to the satisfaction of a performance obligation using an input measure method, which was essentially the same as the percentage of completion method prior to August 1, 2018 for its installation project. Therefore, take into account the costs, estimated earnings and revenue to date on contracts not yet completed. Revenue recognized is that percentage of the total contract price that costs expended to date bear to anticipated final total costs, based on current estimates of costs to complete. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor and supplies. Adjustments to the original estimates of the total contract revenue, total contract costs, or the extent of progress toward completion are often required as work progresses. Such changes and refinements in estimation are reflected in reported results of operations as they occur; if material, the effects of changes in estimates are disclosed in the notes to the unaudited condensed consolidated financial statements.

The key assumptions used in the estimate of costs to complete relate to the unit material cost, the quantity of materials to be used, the installation cost and those indirect costs related to contract performance. The estimate of unit material cost is reviewed and updated on a quarterly basis, based on the updated information available in the supply markets. The estimate of material quantity to be used for completion and the installation cost is also reviewed and updated on a quarterly basis, based on the updated information on the progress of project execution. If the supply market conditions or the progress of project execution were different, it is likely that materially different amounts of contract costs would be used in the percentage of completioninput 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.


TheIf the sales of equipment is combined within the contract of the installation of power generation system with the Company performing significant service of integrating the equipment into the power generation system, the installation revenues and sales of equipment and system component are combined and considered as one performance obligation. The promises to transfer the equipment and system component and installation are not separately identifiable, which is evidencing by the fact that the Company provides a significant servicesservice of integrating the goods and services into a power generation system for which the customer has contracted. The Company currently does not have any modification of contract and the contract currently does not have any variable consideration.

There was no sale and installation of power generation systems revenue for the three months ended April 30, 2020 and 2019. The Company’s sale and installation of power generation systems revenue for the nine months ended April 30, 2020 and 2019 were $0 and $392,267, respectively.

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Sales of products

TheSales of products includes sales of PV panels, air compression equipment and other components, heat pumps, high-grate synthetic fuel, hydraulic parts and electronic components, wine and herbal wine. When these products are not being integrated into a service contract and being sold individually, the Company continues to derive its revenues from sales contracts with its customers with revenues being recognized upon delivery of products. Persuasive evidence of an arrangement is demonstrated via sales contract and invoice; and the sales price to the customer is fixed upon acceptance of the sales contract and there is no separate sales rebate, discount, or other incentive. Such revenues are recognized at a point in time after all performance obligations are satisfied and based on when control of goods transfer to a customer, which is generally similar to when its delivery has occurred prior to August 1, 2018.

The Company’s disaggregate Revenues - sale of products streamsinformation for the three and nine months ended April 30, 20192020 and 20182019 are summarized as follows:

  For the
Three Months
Ended
April 30,
2020		  For the
Three Months
Ended
April 30,
2019		  

For the
Nine Months
Ended
April 30,
2020

  

For the
Nine Months
Ended
April 30,
2019

 
Revenues (sales returns) – sales of products            
PV panels and others $-  $849,720  $1,850,097  $21,259,433 
Air compression equipment and other components  -   -   -   1,391,714 
Heat pumps  230,459   417,146   1,306,385   7,999,582 
High-grade synthetic fuel  5,769   4,585,464   140,911   12,865,526 
Hydraulic parts and electronic components  1,759,322   1,137,823   4,836,660   4,482,117 
Wine and herbal wine  -   1,436,914   (126,240)  1,938,357 
Total revenue – sales of products  1,995,550   8,427,067   8,007,813   49,936,729 
Less: revenues – sales of products from discontinued operations  (1,765,091)  (7,151,799)  (4,851,331)  (18,327,329)
Revenues – sales of products from continuing operations $230,459  $1,275,268  $3,156,482  $31,609,400 

Gross versus Net Revenue Reporting

The Company’s trading segment, Xiangtian Trade, engages in trading of general merchandise, primarily consisting of tealeaves. The determination of whether revenues should be reported on a gross or net basis is based on its assessment of whether it is the principal or an agent in the transaction in accordance with ASC 606-10-55 and depends on whether the promise to the customer is to provide the products or to facilitate a sale by a third party. The nature of the promise depends on whether the Company controls the products prior to transferring it. When the Company controls the product, the promise is to provide and deliver the products and revenue is presented gross. When the Company does not control the products, the promise is to facilitate the sale and revenue is presented net.

To distinguish a promise to provide products from a promise to facilitate the sale from a third party, the Company considers the guidance of control in ASC 606-10-55-37A and the indicators in 606-10-55-39. The Company considers this guidance in conjunction with the terms in the Company’s arrangements with both suppliers and customers.

In general, the Company does not have the responsibility of fulfilling the promise to provide the products as the products can be returned to its suppliers if its customers do not accept the products. Furthermore, the Company does not control the products as it has no obligation to (i) fulfill the resale products delivery, and (ii) bear any inventory risk. In addition, when establishing the selling prices for delivery of the resale products, the Company has such discretion of establishing price to ensure it would generate profit for the services of the products delivery arrangements. The Company believes that all these factors indicate that the Company is acting as an agent in this transaction. As a result, revenue from the trading segment is presented on a net basis.

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For the Three
Months Ended

April 30,
2019

  

For the Three
Months Ended 

April 30,
2018

  

For the Nine
Months Ended

April 30,
2019

  

For the Nine
Months Ended

April 30,
2018

 
Revenues            
PV panels and others $849,720  $344,943  $21,259,433  $826,404 
Air compression equipment and other components  -   -   1,391,714   - 
Heat pumps  417,146   -   7,999,582   - 
High-grade synthetic fuel  4,585,464   -   12,865,526   - 
Hydraulic parts and electronic components  1,137,823   -   4,482,117   - 
Wine and herbal wine  1,436,914   -   1,938,357   - 
Total revenue $8,427,067  $344,943  $49,936,729  $826,404 

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 recordrecorded for the three and nine months ended April 30, 20192020 and 2018.2019. No right of return exists on sales of inventory. As of April 30, 20192020 and July 31, 2018,2019, accrued warranty expense amounted to $66,627$63,584 and $67,651,$65,182, respectively, and classified in the caption “other payables and accrued liabilities” in the accompanying unaudited condensed consolidated balance sheets.


Advertising costsCosts

Advertising costs are expensed as incurred and included in selling and general and administrative expenses. Advertising costs amounted to $20,157$0 and $2,081$17,971 for the three months ended April 30, 20192020 and 2018,2019, respectively. Advertising costs amounted to $61,168$31,594 and $5,112$55,489 for the nine months ended April 30, 2020 and 2019, and 2018, respectively.

Employee benefitBenefit

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 $61,996$15,041 and $27,822$39,484 for the three months ended April 30, 20192020 and 2018,2019, respectively. Total expenses for the plans were $197,095$107,792 and $71,534$125,157 for the nine months ended April 30, 2020 and 2019, respectively.

Research and 2018, respectively.development (“R&D”)

Research and development expenses include salaries and other compensation-related expenses paid to the Company’s research and product development personnel while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses amounted to $0 for the three months and the nine months ended April 30, 2020 and 2019.

Value added taxesAdded Taxes

The Company is subject to value added tax (“VAT”). Revenue from sales of goods purchased from other entities is generally subject to VAT at the rate of 13% tostarting in April 2019, 16% starting in April 20192018 and 17% inprior to April 2018 and prior for all of its products except Herbal Wine which is at the rate of 3%. The Company is entitled to a refund for VAT already paid on goods purchased. The VAT balance is recorded in other payables on the unaudited condensed consolidated balance sheets. Revenues are presented net of applicable VAT.

Income taxesTaxes

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.

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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 20182019 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 of $229,348$610,642 and $41,628$229,348 for the three months ended April 30, 20192020 and 2018,2019, respectively, from foreign currency translation adjustments. The Company had other comprehensive (loss) income of $436,071$(859,811) and $364,347$436,071 for the nine months ended April 30, 20192020 and 2018,2019, respectively, from foreign currency translation adjustments.


Foreign Currency Translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company is the RMB as substantially all of the Company’s PRC subsidiaries’ operations use this denomination. Foreign denominated monetary assets and liabilities are translated into their United States dollar equivalents using foreign exchange rates which prevailed at the balance sheet date. Non-monetary assets and liabilities are translated at the exchange rates prevailing at the transaction date. Revenues and expenses are translated at average rates of exchange during the year. Gains or losses resulting from foreign currency transactions are included in results of operations.

For the purpose of presenting these financial statements of subsidiaries in PRC, the Company’s assets and liabilities are expressed in U.S. dollars at the exchange rate on the balance sheet date, which is 6.73487.0571 and 6.82046.8841 as of April 30, 20192020 and July 31, 2018,2019, respectively; stockholders’ equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rate during the period, which is 6.72337.0245 and 6.31726.7233 for the three months ended April 30, 20192020 and 2018,2019, respectively. Weighted average exchange rate is 6.82657.0230 and 6.49346.8265 for the nine months ended April 30, 20192020 and 2018,2019, respectively. The resulting translation adjustments are reported under accumulated other comprehensive income (loss) in the stockholders’ equity section of the unaudited condensed consolidated balance sheets.

For the purpose of presenting these financial statements of the subsidiary in Hong Kong, the Company’s assets and liabilities are expressed in U.S. dollars at the exchange rate on the balance sheet date, which is 7.84567.7514 and 7.84907.8275 as of April 30, 20192020 and July 31, 2018,2019, respectively; stockholders’ equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rate during the period, which is 7.84737.7634 and 7.83747.8473 for the three months ended April 30, 20192020 and 2018,2019, respectively. Weighted average exchange rate is 7.8016 and 7.8397 7.8212 for the nine months ended April 30, 20192020 and 2018,2019, respectively. The resulting translation adjustments are reported under accumulated other comprehensive loss in the stockholders’ equity section of the unaudited condensed consolidated balance sheets.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted loss per share gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Loss per share excludes all potential dilutive shares of common stock if their effect is anti-dilutive.  There were no potential dilutive securities for the three and nine months ended April 30, 2019 and 2018.

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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 accumulateaccumulated loss. For the nine months ended April 30, 20192020 and 2018,2019, the Company has contributed $469,902$21,679 and $0,$469,902, respectively, to the statutory reserves.


Contingencies

Contingencies

From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company’s management does not expect any liability from the disposition of such claims and litigation individually or in the aggregate would have a material adverse impact on the Company’s unaudited condensed consolidated financial position, results of operations and cash flows.

Recently issued accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase the transparency and comparability about leases among entities. The new guidance requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and requires a modified retrospective approach to adoption assuming the Company will remain an emerging growth company at that date. Early adoption is permitted. In SeptemberJanuary 2017, the FASB issued ASU No. 2017-13,2017-04, Intangibles - Goodwill and Other (Topic 350) which to clarify effective datessimplifies goodwill impairment testing by requiring that public business entities and other entities were required to adopt ASC Topic 842 for annual reporting. A public business entity that otherwise would not meetsuch periodic testing be performed by comparing the definitionfair value of a public business entity exceptreporting unit with its carrying amount and recognizing an impairment charge for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing withamount by which the SEC adopting ASC Topic 842carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for the Company for annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. ASU No. 2017-13 also amended that all components of a leveraged lease be recalculated from inception of the lease based on the revised after tax cash flows arising from the change in the tax law, including revised tax rates. The difference between the amounts originally recorded and the recalculated amounts must be included in income of the year in which the tax law is enacted. The Company plans to adopt this update in the first quarter of fiscal yearAugust 1, 2020. The Company is currently evaluating the impact of this new standard on its unaudited condensed consolidated financial statements and related disclosures.disclosures, which is effective for fiscal years, including interim periods, beginning after December 15, 2019.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. Management does not believeThe Company adopted this ASU on August 1, 2019 and determined the adoption of this ASU woulddid not have a material effect on the Company’s unaudited condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—ChangesFramework —Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 eliminates certain disclosures related to transfers and the valuations process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. ASU 2018-13 is effective for the Company for annual and interim reporting periods beginning JulyAugust 1, 2020. The Company is currently evaluating the impact ASU 2018-13 will haveof this new standard on its unaudited condensed consolidated financial statements.statements and related disclosures.

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In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. In November 2019, the FASB issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-13 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses standard.  The new effective date for these preparers is for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.   The Company has not early adopted this update and it will become effective on February 1, 2023 assuming the Company will remain eligible to be smaller reporting company. The Company is currently evaluating the impact of this new standard on its unaudited condensed consolidated financial statements and related disclosures.

In January 2020, the FASB issued ASU 2020-01 to clarify the interaction of the accounting for equity securities under ASC 321 and investments accounted for under the equity method of accounting in ASC 323 and the accounting for certain forward contracts and purchased options accounted for under ASC 815. With respect to the interactions between ASC 321 and ASC 323, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting when applying the measurement alternative in ASC 321, immediately before applying or upon discontinuing the equity method of accounting. With respect to forward contracts or purchased options to purchase securities, the amendments clarify that when applying the guidance in ASC 815-10-15-141(a), an entity should not consider whether upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in ASC 323 or the fair value option in accordance with ASC 825. The ASU is effective for interim and annual reporting periods beginning after December 15, 2020.  Early adoption is permitted, including adoption in any interim period.  The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

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 combinationscombination

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.

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 

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.

The change in fair value measurement of contingent liability amounted to $177,182 and $21,438 for the three and nine months ended April 30, 2019 as the operation results of Hubei Jinli changed and the contingent liability decreased to $113,539.

The following unaudited pro forma combined results of operations present 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 it 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  For the Nine Months Ended 
  April 30,
2018		  April 30,
2018		 
Revenue $954,373  $3,352,028 
Cost of revenue  617,767   2,236,351 
Gross profit  336,606   1,115,677 
Total operating expenses  1,051,515   3,211,206 
Loss from operations  (714,908)  (2,095,529)
Other income (expenses), net  28,513   (26,715)
Loss before income taxes  (686,395)  (2,122,244)
Income tax expense  (5,422)  (86,192)
Net loss attributable to XT Energy Group, Inc. $(691,817) $(2,208,436)
Weighted average number of common shares outstanding - basic and diluted  591,042,000   591,042,000 
Net loss per common share - basic and diluted $(0.00) $(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.

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. 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.

For three and nine months ended April 30, 2018, the impact of the acquisition of Tianjin Jiabaili to the unaudited condensed consolidated statements of operations and other comprehensive loss was not material.

Acquisition of Wine Co. and Herbal Wine Co.

On December 21, 2018, Xianning Xiangtian completed its acquisition (the “Transaction”) of 90% of the equity interests in each of Wine Co. and Herbal Wine Co., each a limited liability company incorporated in the PRC, pursuant to an equity investment agreement dated December 14, 2018 (the “Agreement”), by and between Xianning Xiangtian and the Rongentang Shareholders, who are unrelated to the Company or Xianning Xiangtian. Wine Co. is engaged in the business of manufacturing and sales of compound wine products and Herbal Wine Co. is engaged in the business of manufacturing and sales of herbal wine products.

Pursuant to the Agreement, Xianning Xiangtian paid a total cash consideration of RMB67.5 million (approximately $9,786,488)$9.7 million) (“Total Consideration”) to the Rongentang Shareholders, the full amount of which would be contributed into Wine Co. as registered capital. RMB60 million (approximately $8,699,100)$8.7 million) of the Total Consideration was deposited into an escrow account held by Xianning Wenquan Branch of Agricultural Bank of China as escrow agent on December 14, 2018. As of December 21, 2018, the Rongentang Shareholders completed the equity interest transfer registration with relevant PRC government authorities and the fund in the escrow was released.


In addition, Rongentang Shareholders completed the title transfer procedures with the PRC government authorities for all the real property and land use rights possessed by Rongentang to Wine Co. (“Title Transfer”) from the owner of such real property and land use rights, Xianning Rongentang Wine Co., Ltd. (“Xianning Rongentang”), an entity controlled by the Rongentang Shareholders, in February 2019. Rongentang also obtained a three-year royalty-free license from Xianning Rongentang, the owner of the trademark “Rongentang,” to use such trademark, in January 2019. The Company paid the remaining RMB7.5 million (approximately $1,087,388)$1.1 million) of the Total Consideration to Wine Co. as registered capital in March 2019.

Rongentang Shareholders were responsible for taxes and undisclosed liabilities of Rongentang prior to the closing, including but not limited to, the guarantee liability of Wine Co. under certain loan agreement, pursuant to which a security interest in the real property possessed by Rongentang was granted to secure the repayment of a loan of a party related to Rongentang Shareholders of up to RMB10 million (approximately $1,449,850)$1.5 million) to a PRC commercial bank. RMB10 million (approximately $1,449,850)$1.5 million) of the funds received by the Rongentang Shareholders in connection with the Transaction was used to pay off this loan on January 18, 2019.

Upon closing of the Transaction, Rongentang became majority owned subsidiaries of Xianning Xiangtian and the Company is now engagedbegan in business of the production and sales of compound wine and herbal wine products through Rongentang.

The Company’s acquisition of Wine Co. and Herbal Wine Co. was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Wine Co. and Herbal Wine Co. based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. The Company estimated the fair values of the assets acquired and liabilities assumed at the acquisition date in accordance with the business combination standard issued by the FASB with the valuation methodologies using level 3 inputs, except for other current assets and current liabilities were valued using the cost approach. Management of the Company is responsible for determining the fair value of assets acquired, liabilities assumed and intangible assets identified as of the acquisition date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense.


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

  Fair Value 
Cash $6,890 
Accounts receivable, net  23,612 
Inventories, net  1,035,186 
Advances to suppliers  25,719 
Other receivables  244,279 
Plant and equipment, net  4,351,805 
Intangible assets, net  2,999,442 
Goodwill  1,976,878 
Total assets  10,663,811 
     
Advance from customers  13,904 
Other payables and accrued liabilities  6,128,289 
Other payables – related parties and director  3,653,843 
Taxes payable  5,582 
Total liabilities  9,801,618 
Net assets acquired prior to capital contribution $862,193 
Total consideration for capital injection  9,699,669 
Additional capital contribution by noncontrolling shareholder  215,548 
Net assets acquired after capital contribution  10,777,410 
Percentage of interest acquired  90.0%
Total net assets acquired $9,699,669 

26

 

  Fair Value 
Cash $6,890 
Accounts receivable, net  23,612 
Inventories, net  1,173,938 
Advances to suppliers  25,719 
Other receivable  244,279 
Plant and equipment  4,351,805 
Intangible assets  3,160,442 
Goodwill  1,677,127 
Total assets  10,663,812 
     
Advance from customers  13,906 
Other payables and accrued liabilities  6,128,289 
Other payables – related parties and director  3,653,843 
Taxes payable  5,582 
Total liabilities  9,801,620 
Net assets acquired prior to capital contribution $862,193 
Total consideration for capital injection  9,699,669 
Additional capital contribution by noncontrolling shareholder  215,548 
Net assets acquired after capital contribution  10,777,410 
Percentage of interest acquired  90.0%
Total net assets acquired $9,699,669 

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 acquisition date on December 21, 2018.

Approximately $1.7$1.9 million of goodwill arising from the acquisition consists largely of synergies expected from the sales distribution networks of the Company to boost its wine and herbal wine sales. None of the goodwill is expected to be deductible for income tax purposes.

For the three and nine months ended April 30, 2019, and 2018, the impact of the acquisition of Wine Co. and Herbal Wine Co. to the unaudited condensed consolidated statements of operations and comprehensive income (loss) was not material.

Contingent liabilities

Contingent liabilities represent estimated contingent profit sharing payments thatOn January 6, 2020, the Company entered into an equity transfer agreement with Kairui Tong and Hao Huang (the “Buyers”), which it agreed to as a purchase price considerationsell its 90% ownership in relationWine Co. and Herbal Wine Co. to the acquisitionBuyers for approximately $9.6 million (RMB 67.5 million), of Hubei Jinliwhich, 54% ownership are sold to Kairui Tong, the legal representative and Tianjin Jiabailigeneral manager of Wine Co. and Herbal Wine Co, and 36% ownership are sold to Hao Huang, an unrelated third party. Therefore, the former shareholders’result of Hubei Jinlioperations was presented as discontinued operations for the nine months ended April 30, 2020 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.


The change in fair value measurement of contingent liability amounted to $177,182 and $21,438 for the three and nine months ended April 30, 2019 as the operations result of Hubei Jinli has changed. As of April 30, 2019, estimated contingent liabilities payables to the former shareholders of Hubei Jinli was $113,539 and classified in the caption “other payables and accrued liabilities” in the accompanying unaudited condensed consolidated balance sheets.financial statements. (See Note 4 – Discontinued operations)

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 April 30, 2019, estimated contingent liabilities payables to the former shareholders of Tianjin Jiabaili was $200,451 and classified in the caption “other payables and accrued liabilities” in the accompanying unaudited condensed consolidated balance sheets. No change to the fair value since June 30, 2018 as the estimated potential profit sharing payments remained the same as of the acquisition date.

Investment payable

Investment payable consists of the following:

Name of Payee Relationship Nature April 30,
2019		  July 31,
2018		  Relationship Nature April 30,
2020		  July 31,
2019		 
                  
Sheng Zhou Former shareholder of Hubei Jinli Payment for acquisition of Hubei Jinli $-  $9,069,058 
Guifen Wang Former shareholder of Hubei Jinli Payment for acquisition of Tianjin Jiabaili  139,336   137,587  Former shareholder of Tianjin Jiabaili Payment for acquisition of Tianjin Jiabaili  132,972   136,314 
Total      139,336   9,206,645       132,972   136,314 
Short-term      (139,336)  (2,505,871)      (132,972)  (136,314)
Long-term     $-  $6,700,774      $-  $- 


The maturities schedule is as follows as of April 30, 2019:2020:

Repayment date Amount 
Due on demand $139,336 
June 2020  18,990 
June 2021  188,121 
Debt discount  (207,111)
Total $139,336 
Repayment date Amount 
Due on demand (see Note 15 – Commitments and Contingencies) $132,972 
Total $132,972 

Investment payable – related parties

Investment payable – related parties consist of the following:

Name of Related Party Relationship Nature April 30,
2020		  July 31,
2019		 
           
Wenhe Han (see Note 15 – Commitments and Contingencies) Vice general manager of Tianjin Jiabaili Payment for acquisition of Tianjin Jiabaili $110,754  $113,537 
Heping Zhang General manager of Hubei Jinli Payment for acquisition of Hubei Jinli  -   370,875 
Total      110,754   484,412 
Short-term      (110,754)  (204,648)
Long-term     $-  $279,764 

27

 

Name of Related Party Relationship Nature April 30,
2019		  July 31,
2018		 
           
Wenhe Han Vice general manager of Tianjin Jiabaili Payment for acquisition of Tianjin Jiabaili $116,054  $261,216 
Heping Zhang General manager of Hubei Jinli Payment for acquisition of Hubei Jinli  370,936   750,286 
Total      486,990   1,011,502 
Short-term      (116,054)  (507,143)
Long-term     $370,936  $504,359 

The maturities schedule is as follows as of April 30, 2019:2020:

Repayment date Amount 
Due on demand $116,054 
June 2019  - 
June 2020  103,938 
June 2021  312,541 
Debt discount  (45,543)
Total $486,990 
Repayment date Amount 
Due on demand $110,754 
Total $110,754 

Debt discount

Debt discount, net of accumulated amortization, totaled $252,654$0 and $1,021,413$36,571 as of April 30, 20192020 and July 31, 2018,2019, respectively, are recognized as a reduction of investment payable. Amortization expense related to the debt discount, included in interest expense, was $129,457$0 and $0$129,457 for the three months ended April 30, 20192020 and 2018,2019, respectively. Amortization expense related to the debt discount, included in interest expense, was $378,632$35,853 and $0$378,632 for the nine months ended April 30, 2020 and 2019, respectively.

Note 4 – Discontinued operations

Wine Co. and 2018, respectively.Herbal Wine Co.

On May 24, 2019, the Company’s Board, discussed a plan to pursue the potential sale of all its ownership interest in Herbal Wine Co. and Wine Co. in order to shift the business focus on its energy related business. The decision and action taken by the Company repaidof disposing Herbal Wine Co. and Wine Co. represent a major shift that will have a major effect on the payment for acquisition of Hubei Jinli priorCompany’s operations and financial results, which trigger discontinued operations accounting in accordance with ASC 205-20-45. On January 6, 2020, the Company entered into an equity transfer agreement with Kairui Tong and Hao Huang (the “Buyers”), which it agreed to sell its 90% ownership in Wine Co. and Herbal Wine Co. to the original dueBuyers for approximately $9.6 million (RMB 67.5 million), of which, 54% ownership are sold to Kairui Tong, the legal representative and general manager of Wine Co. and Herbal Wine Co, and 36% ownership are sold to Hao Huang, an unrelated third party. As of the date as a result,of this report, the Company recognized a one-time finance expensesreceived full payment from the Buyers.

The fair value of $392,609 at the time for which the discount portiondiscontinued operations, determined as of January 6, 2020, includes estimated consideration expected to be received, less costs to sell. After consideration of the original due date payment were prepaiddetermination of fair value of the discontinued operations, no impairment was indicated as of January 6, 2020 and July 31, 2019.

Reconciliation of the carrying amounts of major classes of assets and liabilities from discontinued operations in the audited consolidated balance sheets, including Herbal Wine Co. and Wine Co. as of July 31, 2019.

Carrying amounts of major classes of assets included as part of discontinued operations of Wine Co. and Herbal Wine Co:

  July 31,
2019		 
CURRENT ASSETS:   
Cash $1,929,899 
Accounts receivable, net  471,889 
Inventories  1,785,176 
Advances to suppliers  181,101 
Other current assets  73,707 
Total current assets of discontinued operations  4,441,772 
     
OTHER ASSETS:    
Property, plant and equipment, net  4,588,449 
Intangible assets, net  2,950,343 
Goodwill  1,998,387 
Total other assets of discontinued operations  9,537,179 
     
Total assets of the disposal group classified as discontinued operations $13,978,951 
Carrying amounts of major classes of liabilities included as part of discontinued operations:    
CURRENT LIABILITIES:    
Accounts payable $25,266 
Advance from customers  1,124,608 
Other payables and accrued liabilities  42,778 
Income taxes payable  306,360 
Total current liabilities of discontinued operations  1,499,012 
     
Total liabilities of the disposal group classified as discontinued operations $1,499,012 

28

Reconciliation of the amounts of major classes of income and losses from discontinued operations in the unaudited condensed consolidated statements of operations and comprehensive loss, including Herbal Wine Co. and Wine Co. for the nine months ended April 30, 2020 and for the three and nine months ended April 30, 2019 and is included2019.

  For the
Three Months
Ended
April 30,		  For the
Nine Months
Ended
April 30,		  For the
Nine Months
Ended
April 30,		 
  2019  2020  2019 
Revenue:         
Revenue-products $1,436,915  $(126,240) $1,938,356 
Total revenue  1,436,915   (126,240)  1,938,356 
             
Cost of sales-products  151,655   (2,269)  207,071 
             
Gross profit (loss)  1,285,260   (123,971)  1,731,285 
             
OPERATING EXPENSES:            
Selling expenses  10,913   13,182   13,125 
General and administrative expenses  129,854   458,689   206,762 
Total operating expenses  140,767   471,871   219,887 
             
Income (loss) from operations  1,144,493   (595,842)  1,511,398 
             
OTHER INCOME (EXPENSES)            
Other expenses, net  (121,186)  (21,873)  (127,255)
Interest income  289   1,809   939 
Total other loss, net  (120,897)  (20,064)  (126,316)
             
Income (loss) before income taxes  1,023,596   (615,906)  1,385,082 
             
Income tax (expense) benefit  (262,386)  97,431   (353,068)
             
Net income (loss) from discontinued operations  761,210   (518,475)  1,032,014 
             
Less: Net income (loss) attributable to non-controlling interest from discontinued operations  76,121   (51,848)  103,202 
             
Net income (loss) from discontinued operations attributable to XT Energy Group, Inc. $685,089  $(466,627) $928,812 

29

As of January 6, 2020, the net assets of discontinued operations in the caption “other expenses, net”consolidated balance sheets, including Herbal Wine Co. and Wine Co. and reconciliation of loss on sale of discontinued operations are as follows:

  January 6,
2020		 
CURRENT ASSETS:   
Cash $389,569 
Accounts receivable, net  318,895 
Inventories  2,048,320 
Advances to suppliers  21,674 
Other current assets  594,880 
Total current assets  3,373,338 
     
OTHER ASSETS:    
Property, plant and equipment, net  4,421,786 
Intangible assets, net  2,858,308 
Goodwill  1,972,004 
Total other assets  9,252,098 
     
Total assets $12,625,436 
     
CURRENT LIABILITIES:    
Accounts payable $9,718 
Advance from customers  1,108,430 
Other payables and accrued liabilities  24,025 
Income taxes payable  224,584 
Total current liabilities  1,366,757 
     
Total liabilities $1,366,757 
     
Total net assets $11,258,679 
Noncontrolling interests  (1,149,908)
Total consideration  (9,675,755)
Exchange rate effect  21,051 
Total loss on sale of discontinued operations $454,067 

Jingshan Sanhe

On April 14, 2020, the Company’s Board of Directors (the “Board”), discussed a plan to pursue the potential sale of all its ownership interest in Jingshan Sanhe due to the coronavirus outbreak might affect the Company’s future business operations and desired to scale back its variety of businesses. The decision and action taken by the Company of disposing Jingshan Sanhe represent a major shift that had a major effect on the accompanyingCompany’s operations and financial results, which trigger discontinued operations accounting in accordance with ASC 205-20-45.

On June 29, 2020, the Company entered into two equity transfer agreements with Xue Wang and Chao Feng (the “Buyers”), which the Company agreed to sell its 100% ownership in Jingshan Sanhe to the Buyers for approximately $4.3 million (RMB 30.0 million), of which, 60% ownership are sold to Xue Wang, an unrelated third party, and 40% ownership are sold to Chao Feng, an unrelated third party. The result of operations of Jingshan Sanhe was presented as discontinued operations for three and nine months ended April 30, 2020 and 2019 unaudited condensed consolidated financial statements.

30

Reconciliation of the carrying amounts of major classes of assets and liabilities from discontinued operations in the audited consolidated balance sheets, including Jingshan Sanhe as of April 30, 2020 and July 31, 2019.

  April 30,
2020		  July 31,
2019		 
CURRENT ASSETS:      
Cash $448,576  $1,013,619 
Notes receivable  -   217,893 
Accounts receivable, net  1,662   - 
Inventories  825,814   380,627 
Advances to suppliers  77,586   770,699 
Prepaid expenses  612,900   759,390 
Other current assets  82,118   102,521 
Total current assets of discontinued operations  2,048,656   3,244,749 
         
OTHER ASSETS:        
Property, plant and equipment, net  4,825,198   3,690,785 
Right-of use assets  1,907,860   - 
Intangible assets, net  25,489   - 
Prepaid expenses - non-current  92,781   34,311 
Total other assets of discontinued operations  6,851,328   3,725,096 
         
Total assets of the disposal group classified as discontinued operations $8,899,984  $6,969,845 
Carrying amounts of major classes of liabilities included as part of discontinued operations:        
CURRENT LIABILITIES:        
Accounts payable $348,415  $179,448 
Advance from customers  10,447,568   12,478,800 
Other payables and accrued liabilities  97,664   94,065 
Other payables - related parties and director  3,143   3,222 
Short-term loan - bank  425,104   - 
Lease liabilities - current  982,721   - 
Total current liabilities of discontinued operations  12,304,615   12,755,535 
         
Total liabilities of the disposal group classified as discontinued operations $12,304,615  $12,755,535 

31

Reconciliation of the amounts of major classes of income and losses from discontinued operations in the unaudited condensed consolidated statements of operations and comprehensive loss, including Jingshan Sanhe, for the three and nine months ended April 30, 2020 and 2019.

  For the
Three Months
Ended
April 30,		  For the
Three Months
Ended
April 30,		  For the
Nine Months
Ended
April 30,		  For the
Nine Months
Ended
April 30,		 
  2020  2019  2020  2019 
Revenue:            
Revenue-products $5,769  $4,577,054  $140,911  $11,906,856 
Total revenue  5,769   4,577,054   140,911   11,906,856 
                 
Cost of sales -products  572   2,936,650   157,502   7,402,719 
                 
Gross profit (loss)  5,197   1,640,404   (16,591)  4,504,137 
                 
OPERATING EXPENSES:                
Selling expenses  4,595   208,738   79,064   216,720 
General and administrative expenses  444,691   708,197   1,742,669   1,091,614 
Research and development expenses  8,178   959   47,536   1,189 
Total operating expenses  457,464   917,894   1,869,269   1,309,523 
                 
(Loss) Income from operations  (452,267)  722,510   (1,885,860)  3,194,614 
                 
OTHER INCOME (EXPENSES)                
Other income (expenses), net  6,486   108,484   7,876   (458)
Interest income  114   732   834   5,388 
Interest expense  (180)  -   (180)  - 
Total other income, net  6,420   109,216   8,530   4,930 
                 
(Loss) Income before income taxes  (445,847)  831,726   (1,877,330)  3,199,544 
                 
Income tax (expense) benefit  (29)  (287,210)  228,437   (923,934)
                 
Net (loss) income from discontinued operations attributable to XT Energy Group, Inc. $(445,876) $544,516  $(1,648,893) $2,275,610 

Hubei Jinli

On April 14, 2020, the Company’s Board of Directors (the “Board”), discussed a plan to pursue the potential sale of all its ownership interest in Hubei Jinli due to the coronavirus outbreak might affect the Company’s future business operations and desired to scale back its variety of businesses. The decision and action taken by the Company of disposing Hubei Jinli represent a major shift that will have a major effect on the Company’s operations and financial results, which trigger discontinued operations accounting in accordance with ASC 205-20-45.

32

On June 28, 2020, the Company entered into two equity transfer agreements with Xubin Zhang and Jian Zheng (the “Buyers”), which the Company agreed to sell its 100% ownership in Hubei Jinli to the Buyers for approximately $21.3 million (RMB 150.0 million), of which, 60% ownership are sold to Xubin Zhang, an unrelated third party, and 40% ownership are sold to Jian Zheng, an unrelated third party. The result of operations of Hubei Jinli was presented as discontinued operations for three and nine months ended April 30, 2020 and 2019 unaudited condensed consolidated financial statements.

Reconciliation of the carrying amounts of major classes of assets and liabilities from discontinued operations in the audited consolidated balance sheets, including Hubei Jinli as of April 30, 2020 and July 31, 2019. 

  April 30,
2020		  July 31,
2019		 
CURRENT ASSETS:      
Cash $429,063  $166,991 
Restricted cash  -   76,698 
Notes receivable  228,518   469,727 
Accounts receivable, net  2,496,806   2,537,450 
Inventories  1,245,371   645,083 
Advances to suppliers  229,773   207,696 
Other current assets  11,251   71,268 
Total current assets of discontinued operations  4,640,782   4,174,913 
         
OTHER ASSETS:        
Property, plant and equipment, net  6,469,847   6,615,547 
Intangible assets, net  6,566,359   7,086,590 
Goodwill  3,666,017   3,758,146 
Total other assets of discontinued operations  16,702,223   17,460,283 
         
Total assets of the disposal group classified as discontinued operations $21,343,005  $21,635,196 
Carrying amounts of major classes of liabilities included as part of discontinued operations:        
CURRENT LIABILITIES:        
Accounts payable $767,000  $408,410 
Accounts payable – related party  80,384   - 
Advance from customers  8,122   10,421 
Other payables and accrued liabilities  850,913   77,016 
Other payables - related parties and director  4,251   - 
Income taxes payable  364,052   300,652 
Total current liabilities of discontinued operations  2,074,722   796,499 
         
Total liabilities of the disposal group classified as discontinued operations $2,074,722  $796,499 

33

Reconciliation of the amounts of major classes of income (loss).and losses from discontinued operations in the unaudited condensed consolidated statements of operations and comprehensive loss, including Hubei Jinli, for the three and nine months ended April 30, 2020 and 2019.

  For the
Three Months
Ended
April 30,		  For the
Three Months
Ended
April 30,		  For the
Nine Months Ended
April 30,		  For the
Nine Months Ended
April 30,		 
  2020  2019  2020  2019 
Revenue:            
Revenue-products $1,759,322  $1,137,830  $4,836,660  $4,482,117 
Total revenue  1,759,322   1,137,830   4,836,660   4,482,117 
                 
Cost of sales -products  765,985   532,337   2,245,454   1,731,727 
                 
Gross profit  993,337   605,493   2,591,206   2,750,390 
                 
OPERATING EXPENSES:                
Selling expenses  13,655   33,403   600,286   98,317 
General and administrative expenses  227,686   278,847   1,028,549   971,311 
Research and development expenses  122,155   -   601,657   - 
Provision for doubtful accounts  59,959   40,128   93,353   134,836 
Total operating expenses  423,455   352,378   2,323,845   1,204,464 
                 
Income from operations  569,882   253,115   267,361   1,545,926 
                 
OTHER INCOME (EXPENSES)                
Other income (expenses), net  5,344   (6,791)  19,261   17,758 
Interest income  359   -   1,417   - 
Interest expense  (137)  -   (137)  - 
Total other income (expenses), net  5,566   (6,791)  20,541   17,758 
                 
Income before income taxes  575,448   246,324   287,902   1,563,684 
                 
Income tax expense  (71,114)  (72,691)  (71,114)  (411,672)
                 
Net income from discontinued operations attributable to XT Energy Group, Inc. $504,334  $173,633  $216,788  $1,152,012 

34

Note 45 – Accounts receivable, net

Accounts receivable, net, consist of the following:

 April 30,
2019		  July 31,
2018		  April 30,
2020		  July 31,
2019		 
          
Accounts receivable $7,085,411  $6,516,935  $4,719,388  $6,096,212 
Less: allowance for doubtful accounts  (1,358,468)  (1,374,155)  (2,075,245)  (1,695,469)
Accounts receivable, net $5,726,943  $5,142,780   2,644,143   4,400,743 
Less: accounts receivable – discontinued operations  (2,498,469)  (3,009,340)
Accounts receivable, net – continuing operations $145,674  $1,391,403 

For the three months ended April 30, 2019 and 2018, the Company recorded provision for doubtful accounts of $38,707 and recognized $6,380 in recoveryMovement of allowance for doubtful accounts respectively.is as follows: 

During the nine months ended April 30, 2019, the Company recognized a total of $65,221 of recovery of allowance for doubtful accounts. Addition of $32,514 was attributable to the acquisition of Wine Co. and Herbal Wine Co. Foreign currency translation effect amounted to $17,020. During the nine months ended April 30, 2018, the Company recognized $119,000 of recovery of allowance for doubtful accounts.


  Nine Months
Ended
April 30,
2020		  Year Ended
July 31,
2019		 
       
Beginning balance $1,695,469  $1,374,155 
Provision for doubtful accounts  476,565   422,684 
Wrote off  (21,575)  (118,684)
Allowance acquired from acquisition  -   32,478 
Exchange rate effect  (75,214)  (15,164)
Ending balance  2,075,245   1,695,469 
Less: balance – discontinued operations  (347,883)  (293,636)
Ending balance – continuing operations $1,727,362  $1,401,833 

Note 56 – Inventories, net

Inventories, net, consist of the following:

 

 April 30,
2019		  July 31,
2018		  April 30,
2020		  July 31,
2019		 
          
Raw materials and parts $1,738,731  $1,725,258  $1,444,435  $1,607,472 
Work in progress  221,416   124,507   407,396   258,634 
Semi-finished goods  443,589   -   -   392,772 
Finished goods  5,803,331   3,291,768   4,840,171   6,420,298 
Total  8,207,067   5,141,533   6,692,002   8,679,176 
Less: allowance for inventory reserve  -   -   (3,941,460)  (54,421)
Inventory, net $8,207,067  $5,141,533 
Inventories, net  2,750,542   8,624,755 
Less: inventories – discontinued operations  (2,071,185)  (2,810,884)
Inventories, net – continuing operations $679,357  $5,813,871 

35

 

Note 6 – Costs

For the three months ended April 30, 2020 and estimated earnings in excess2019, a provision for inventory reserve of billings$3,081,100 and $0, respectively, were recorded, and reflected as cost of sales on the accompanying statement of operations and comprehensive (loss) income.

Costs in excessFor the nine months ended April 30, 2020 and 2019, a provision for inventory reserve of billings related to certain contracts consist$4,747,539 and $0, respectively, were recorded, and reflected as cost of sales on the following:

  April 30,
2019		  July 31,
2018		 
Costs and estimated earnings incurred on uncompleted contracts $5,490,019  $5,025,892 
Billings to date  (5,490,019)  (2,142,484)
Costs and estimated earnings in excess of billings $-  $2,883,408 

Note 7 – Deposit for investment

On March 16, 2018, the Company entered into a letteraccompanying statement 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)operations 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 May 2019, the Company entered an extension agreement with the unrelated party to extend the deadline for refunding the remaining balance of approximately $0.3 million (RMB 2,190,000) in July 2019.comprehensive (loss) income.

Note 87 – Property, plant and equipment, net

Property, plant and equipment consist of the following:

 April 30,
2019		  July 31,
2018		  April 30,
2020		  July 31,
2019		 
          
Plant and buildings $11,345,391  $6,662,554  $7,947,700  $11,773,196 
Machinery equipment  9,116,804   6,711,556   4,049,247   9,040,901 
Computer and office equipment  468,098   251,965   912,404   668,741 
Vehicle  452,097   121,211 
Vehicles  331,169   468,486 
Plant improvement  739,041   729,766   1,458,382   1,146,692 
Construction in progress  1,215,373   256,503   25,888   1,650,429 
Subtotal  23,336,804   14,733,555   14,724,790   24,748,445 
Less: accumulated depreciation  (4,868,509)  (2,767,322)  (3,296,436)  (5,098,140)
Property, plant and equipment, net $18,468,295  $11,966,233   11,428,354   19,650,305 
Less: property, plant and equipment – discontinued operations  (11,295,044)  (14,894,781)
Property, plant and equipment, net – continuing operations $133,310  $4,755,524 

Depreciation expenses from continuing operations for the three months ended April 30, 2020 and 2019 were $9,681 and 2018 were $249,853 and $121,412,$46,226, respectively. For the three months ended April 30, 2020 and 2019, and 2018, depreciation from continuing operations included in cost of sales was $136,872were $3,303 and $44,$0 respectively. For the three months ended April 30, 2020 and 2019, and 2018, depreciation from continuing operations included in selling, general and administrative expenses was $112,981$6,378 and $121,368,$46,226, respectively.

Depreciation expenses from continuing operations for the nine months ended April 30, 2020 and 2019 were $179,584 and 2018 were $790,980 and $317,293,$251,346, respectively. For the nine months ended April 30, 2020 and 2019, and 2018, depreciation from continuing operations included in cost of sales was $464,425were $61,410 and $3,193,$106,024 respectively. For the nine months ended April 30, 2020 and 2019, and 2018, depreciation from continuing operations included in selling, general and administrative expenses was $326,555$118,174 and $314,100,$145,322, respectively.


Construction-in-progress consist ofDepreciation expenses from discontinued operations for the following as ofthree months ended April 30, 2019:2020 and 2019 were $272,895 and $203,627, respectively. For the three months ended April 30, 2020 and 2019, depreciation from discontinued operations included in cost of sales were $88,868 and $136,872, respectively. For the three months ended April 30, 2020 and 2019, depreciation expenses from discontinued operations included in general and administrative expenses was $184,027 and $66,755, respectively.

Depreciation expenses from discontinued operations for the nine months ended April 30, 2020 and 2019 was $797,709 and $539,634, respectively. For the nine months ended April 30, 2020 and 2019, depreciation from discontinued operations included in cost of sales were $387,035 and $358,401, respectively. For the nine months ended April 30, 2020, depreciation expenses from discontinued operations included in general and administrative expenses was $410,674 and $181,233, respectively.

36

 

Construction-in-progress description Value  Estimated
Completion date		 Estimated Additional Cost to Complete 
Synthetic fuel raw materials production line $505,810  June 2019 $163,331 
Employee housing  262,308  July 2019  296,965 
Factory plantation  224,074  July 2019  14,848 
Fire safety equipment installation  143,359  October 2019  - 
Piping  68,302  August 2019  59,393 
Other miscellaneous items  11,520  May 2019  - 
Total construction-in-progress $1,215,373    $534,537 

Note 98 – Intangible assets, net

Intangible assets, net, consist of the following:

 April 30,
2019		  July 31,
2018		  April 30,
2020		  July 31,
2019		 
          
Land use rights $7,497,327  $4,581,842  $4,560,008  $7,227,670 
Technology know-hows  1,852,319   1,829,072   1,797,133   1,812,147 
Patents, licenses and certifications  3,323,020   2,935,293   1,218,631   2,408,430 
Software  7,616   -   2,016   7,451 
Less: accumulated amortization  (715,467)  (85,564)  (985,184)  (715,376)
Subtotal  11,964,815   9,260,643 
In-process R&D  56,928   - 
Intangible assets, net $12,021,743  $9,260,643   6,592,604   10,740,322 
Less: intangible assets – discontinued operations  (6,591,848)  (10,036,932)
Intangible assets, net – continuing operations $756  $703,390 

Amortization expenses from continuing operations for the three months ended April 30, 20192020 and 20182019 amounted to $224,467$218 and $0,$70,162, respectively. Amortization expenses from continuing operations for the nine months ended April 30, 20192020 and 20182019 amounted to $620,369$42,907 and $0,$206,948, respectively.

Amortization expenses from discontinued operations for the nine months ended April 30, 2020 and 2019 amounted to $117,493 and $154,305, respectively. Amortization expenses from discontinued operations for the nine months ended April 30, 2020 and 2019 amounted to $404,867 and $413,421, respectively.

Based on the finite-lived intangible assets as of April 30, 2019,2020, the expected amortization expenses from continuing operations are estimated as follows:

Twelve Months Ending April 30, Estimated
Amortization Expense		  Estimated
Amortization Expense		 
      
2020 $896,789 
2021  896,061  $468,636 
2022  893,657   467,880 
2023  828,197   467,880 
2024  700,612   467,880 
2025  463,959 
Thereafter  7,749,499   4,256,369 
Total $11,964,815   6,592,604 
Less: intangible assets – discontinued operations  (6,591,848)
Total intangible assets, net – continuing operations $756 


Note 109 – Goodwill

The changes in the carrying amount of goodwill by reportable segment are as follows:  

  Hubei Jinli  Tianjin Jiabaili  Wine Co.
and Herbal
Wine Co.		  Total 
Balance as of July 31, 2018 $3,793,245  $339,898  $-  $4,133,143 
Goodwill acquired through acquisitions  -   -   1,976,878   1,976,878 
Goodwill impairment  -   (339,221)  -   (339,221)
Foreign currency translation adjustment  (35,100)  (677)  21,509   (14,268)
Balance as of July 31, 2019  3,758,145   -   1,998,387   5,756,532 
Disposal  -   -   (1,998,387)  

(1,998,387

)
Foreign currency translation adjustment  (92,128)  -   -   (92,128)
Balance as of April 30, 2020  3,666,017   -   -   3,666,017 
Less: goodwill – discontinued operations  (3,666,017)  -   -   (3,666,017)
Goodwill – continuing operations $-  $-  $-  $- 


Note 10 – Leases

  Hubei Jinli  Tianjin Jiabaili  Wine Co.
and Herbal
Wine Co.		  Total 
Balance as  of July 31, 2018 $3,793,245  $339,898  $-  $4,133,143 
Goodwill acquired in the Wine Co. and Herbal Wine Co. acquisition  -   -   1,709,680   1,709,680 
Foreign currency translation adjustment  48,213   4,320   23,278   75,811 
Balance as of April 30, 2019 $3,841,458  $344,218  $1,732,958  $5,918,634 

Note 11 – Debt

Short-term loan - bank

Outstanding balance of short-term loan - bank consistedThe Company determines if a contract contains a lease at inception. US GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the following:

Bank Name  Maturities  Interest rate  Collateral/Guarantee April 30,
2019		  July 31,
2018		 
               
Wuhan Rural Commercial Bank  May 2019

 (Repaid infull in May 2019)

   7.00% Guarantee by Sheng Zhou and Heping Zheng, former shareholders of Hubei Jinli, and three other companies related to Sheng Zhou $742,413  $733,095 

Current maturities of long-term loan

Outstanding balance of current maturities of long-term loan consistedrenewal option is reasonably certain and failure to exercise such option which result in an economic penalty. All of the following:Company’s real estate leases are classified as operating leases.

Bank Name  Maturities  Interest rate  Collateral/Guarantee April 30,
2019		  July 31,
2018		 
               
Xianning Rural Commercial Bank*  Repaid in April 2019   5.83% Land use rights, plant and equipment, inventories $-  $3,069,113 

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


Short-term loan – third party

Outstanding balanceThe Company has several production plant and equipment lease agreements, and factory and dormitory lease agreements with lease terms ranging from two to seven years. Upon adoption of short-term loan – third party consistedASU 2016-02, the Company recognized approximately $2.7 million right of use (“ROU”) assets and approximately $2.1 million lease liabilities based on the present value of the following:future minimum rental payments of leases, using incremental borrowing rate of 4.75% and 4.90% based on duration of lease terms. The weighted average remaining lease term is 2.68 years.

Lender Name  Maturities  Interest rate  Collateral/Guarantee April 30,
2019		  July 31,
2018		 
               
Xianning Zhongying New Energy Service Co. Ltd.  Repaid in October 2018   4.75% None $    -  $175,943 

Short-term loans – related partiesThe Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The leases generally do not contain options to extend at the time of expiration.

Name of Related Party Relationship Maturities Interest rate  Collateral/ Guarantee April 30,
2019		  July 31,
2018		 
                
Zhou Deng Hua Chief Executive Officer of the Company April 2019 & July 2019  None  None $       -  $5,864,759 
Jian Zhou Chairman of the Company May 2019  None  None  -   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  -   381,209 
Total           $-  $20,145,446 

InterestRent expense from continuing operations for the three months ended April 30, 2020 and 2019, rent expense amounted to $41,388, including $2,431 related parties interest expenses. Interest expense forapproximately $72,000 and $217,000, respectively. For the nine months ended April 30, 2020 and 2019, rent expense amounted to $495,794, including $342,584 related parties interest expenses. There was no interestapproximately $280,000 and $444,000, respectively.

Rent expense from discontinuing operations for the three months ended April 30, 2020 and 2019, rent expense amounted to approximately $234,000 and $51,000, respectively. For the nine months ended April 30, 2018.2020 and 2019, rent expense amounted to approximately $705,000 and $120,000, respectively.

The maturity of the Company’s lease obligations for the next five years and thereafter is presented below: 

Twelve Months Ending April 30, 

 

Continued Operating Lease Amount

  Discontinued Operating Lease Amount 
       
2021 $43,635  $834,192 
2022  19,696   404,861 
2023  19,696   404,861 
2024  425   - 
2025  425   - 
Thereafter  850   - 
Total lease payments  84,727   1,643,914 
Less: Interest  (4,444)  (81,337)
Total present value of lease liabilities  80,283   1,562,577 
Present value of lease liabilities – related party  (23,028)  - 
Present value of lease liabilities – third parties $57,255  $1,562,577 

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Note 1211 – 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 April 30, 2018, revenue of $72,228 and costs of sales of $46,530 were recognized related to these projects. During the nine months ended April 30, 2018, revenue of $127,026 and costs of sales of $93,964 were recognized related to these projects. There was no revenue for the three and nine months ended April 30, 2019.

Leases with related parties

Sanhe Xiangtian leases its principal office, factory and dormitory from LuckSky GroupHolding (Group) Co. Ltd. (“LuckSky Group”) in XianningSanhe City, HubeiHebei Province, PRC. LuckSky Group is owned by Zhou Deng Rong, the Company’s former Chief Executive Officer, and Zhou Jian, the Company’s Chairman. The space in the office, factory and dormitory being leased are 1296, 51601,296, 5,160 and 12001,200 square meters, respectively. The office and factory space are leased for a rent of $105,053$99,293 (RMB 697,248) per year and the dormitory is leased for a rent of $19,527$18,456 (RMB 129,600) per year. The leases expire on April 30,July 31, 2024 and are subject to renewal with a two-month advance written notice. This lease iswas terminated in April 2019. For the three months ended April 30, 20192020 and 2018,2019, rent expense for the lease with Lucksky Group was $30,710$0 and $32,711,$30,710, respectively. For the nine months ended April 30, 20192020 and 2018,2019, rent expense for the lease with Lucksky Group was $0 and $90,842, and $95,502, respectively.

During year ended July 31,In June 2018, Sanhe Xiangtian leased another office in Sanhe City from Sanhe Dong Yi Glass Machine Company Ltd (“Sanhe Dong Yi”) which is owned by Zhou Deng Rong with the lease term expiringexpired on June 14, 2019 for a rent of approximately $7,000 (RMB 48,000) per year. Sanhe Xiangtian intends to renewrenewed such lease for another year.under the same terms from June 15, 2019 to June 14, 2020. For the three months ended April 30, 2020 and 2019, rent expense for this lease with Sanhe Dong Yi was $1,746.$1,709 and $1,746 respectively. For the nine months ended April 30, 2020 and 2019, rent expense for this lease with Sanhe Dong Yi was $5,274.$5,126 and $5,274 respectively.


Related party balances

a.Short-term loansAccounts receivables – related parties (See Note 11)party:

Name of Related Party Relationship Nature April 30,
2020		  July 31,
2019		 
           
Xianning Lucksky Aerodynamic Electricity Liewu Shi, became executive director of Xiangtian Zhongdian in April 2020, is the executive director of the company Sales of PV Panels $17,196  $- 
Total     $17,196  $- 

b.Other receivablereceivables – related parties:

Name of Related Party Relationship Nature April 30,
2019		  July 31,
2018		 
           
Tianyu Ma General Manager of Tianjin Jiabaili Employee advances $10,622  $     - 
Lei Su Legal representative of Tianjin Jiabaili Employee advances  2,227   - 
Zhimin Feng Legal representative of Jingshan Sanhe Employee advances  5,505   - 
Heping Zhang General Manager of Hubei Jinli Employee advances  1,485   - 
Ping Yu General Manager of Jingshan Sanhe Employee advances  3,862   - 
Kairui Tong Legal representative and general Manager of Wine Co. and Herbal Wine Co. Employee advances  5,369   - 
       29,070   - 
Name of Related Party Relationship Nature April 30,
2020		  July 31,
2019		 
           
Lei Su Legal representative of Tianjin Jiabaili Employee advances $-  $2,905 
Tianyu Ma General manager of Tianjin Jiabaili Employee advances  10,140   - 
Kai Li Legal representative of Sanhe Loan receivable  646,490*  - 
Deng Hua Zhou Chairman Employee advances  -   3,632 
Total     $656,630  $6,537 

c.*The loan is due on January 13, 2021 with an annual interest rate of 4.75%.

39

c.Accounts payable – related parties:

Name of Related Party Relationship Nature April 30,
2020		  July 31,
2019		 
           
Xianning Baizhuang Tea
Industry Co., Ltd.		 Bin Zhou is the CEO of the company Purchase of materials $832  $9,554 
Xianning Lucksky Aerodynamic Electricity Liewu Shi, became executive director of Xiangtian Zhongdian in April 2020, is the executive director of the company Purchase of materials  182,420   - 
Total      183,252   9,554 
Less: account payables – related parties - discontinued operations      (80,384)  - 
Account payables – related parties – continuing operations     $102,868  $9,554 

d.Other payables – related parties:parties and director:

Name of Related Party Relationship Nature April 30,
2019		 July 31,
2018		  Relationship Nature April 30,
2020		  July 31,
2019		 
                  
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 $530,941 $-  Owned by Zhou Deng Rong, former Chief Executive Officer and director Payment for U.S. professional fee $688,441  $593,941 
Lucksky Group Owned by Zhou Deng Rong, former Chief Executive Officer and director, and Zhou Jian,  Chairman Lease payable 613,862 515,234  Owned by Zhou Deng Rong, former Chief Executive Officer and director, and Zhou Jian,  Chairman Lease payable  673,701   600,549 
Sanhe Dong Yi Owned by Zhou Deng Rong, former Chief Executive Officer and director Lease payable - 21,113  Owned by Zhou Deng Rong, former Chief Executive Officer and director Lease payable  5,951   872 
Hubei Henghao Real Estate Development Co., Ltd. Bin Zhou, son of Zhou Deng Hua, is the executive director and generate manager Interest payable 546,078 211,441  Bin Zhou, son of Zhou Deng Hua, is the executive director and general manager Interest payable  476,481   488,455 
Zhou Deng Rong Former Chief Executive Officer and director Advances for payment of U.S. professional fee 2,748,260 2,748,260  Former Chief Executive Officer and director Payment for U.S. professional fee  2,181,455   2,748,259 
Zhou Deng Hua Chief Executive Officer Advances for operational purpose 293,253 289,572 
Jian Zhou Chairman Advances for operational purpose 1,899,181 436,444  Principal shareholder of Xianning Xiangtian Advances for operational purpose  2,906,641   1,900,164 
Zhimin Feng Legal representative of Jingshan Sanhe Advances for operational purpose - 1,191  Legal representative of Jingshan Sanhe Advances for operational purpose  3,143   3,222 
Wei Gu General manager of Xiangtian Zhongdian Advances for operational purpose  -  6,863 
Heping Zhang General Manager of Hubei Jinli Payment for acquisition of Hubei Jinli  38,944   39,923 
Total     $6,631,575 $4,230,118       6,974,757   6,375,385 
Less: other payables – related parties - discontinued operations      (3,143)  (3,222)
Other payables – related parties – continuing operations     $6,971,614  $6,372,163 

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


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Note 1312 – 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 former 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.

AsOn April 13, 2020, Leiwu Shi, the executive director of Xianning Lucksky became the executive director of Xiangtian Zhongdian and the relationship of the company has changed to related party.

During the three and nine months ended April 30, 2020 and 2019, the Company entered into a series of sales contracts with Xianning Lucksky. These contracts represented approximately $17,338$0 and $0$17,338 of the Company’s revenue duringfrom continuing operations for the three months ended April 30, 20192020 and 2018,2019, respectively. These contracts represented approximately $1,842,032$11,000 and $0$1,842,032 of the Company’s revenue duringfrom continuing operations for the nine months ended April 30, 2020 and 2019, and 2018, 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 wouldwas scheduled to expire on July 31, 2018 but the Company terminated the lease early in February 2018 when the Company through Xiangtian Zhongdian signed another lease agreement which expired on February 5, 2019 with a rent of approximately $25,000 (RMB 168,922) per year. Xiangtian Zhongdian renewed such lease under the same terms from February 6, 2019 to February 5, 2021. DuringRent expense related to these leases were $6,012 and $6,250 for three months ended April 30, 2020 and 2019, respectively. Rent expense related to these leases were $18,040 and $18,750 for nine months ended April 30, 2020 and 2019, respectively.

On February 1, 2018, Xianning Xiangtian entered into a lease with Xianning Lucksky for 4,628 square meters in the factory in Xianning, Hubei province. The factory space is leased for a rent of approximately $25,000 (RMB 168,922) per year from February 1, 2018 to July 31, 2020 and is subject to renewal with a one-month advance written notice. Rent expense for this lease amounted to $6,012 and $6,250 for the three months ended April 30, 2020 and 2019, respectively. Rent expense for this lease amounted to $18,040 and 2018, rent expense related to these leases was $6,250 and $32,711, respectively. During$18,750 for the nine months ended April 30, 2020 and 2019, and 2018, rent expense related to these leases was $18,750 and $95,502, respectively.

On July 27, 2018, Xianning Xiangtian entered into a lease with Xianning Lucksky for a space of 3,128 square meters in the factory in Xianning, Hubei province. The factory space is leased for a rent of approximately $17,000 (RMB 114,172) per year from August 1, 2018 to July 31, 2020 and is subject to renewal with a one-month advance written notice. Rent expense for this lease amounted to $147,553$4,064 and $296,467$4,250 for the three months ended April 30, 2020 and 2019, respectively. Rent expense for this lease amounted to $12,193 and $12,750 for the nine months ended April 30, 2020 and 2019, respectively.

Note 1413 – Employee benefits government plan

The Company participates in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. PRC labor regulations require the Company to pay to the local labor bureau a monthly contribution calculated at a stated contribution rate based on the basic monthly compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations; the Company has no further commitments beyond its monthly contribution. As of April 30, 20192020 and July 31, 2018,2019, the outstanding amount due to the local labor bureau was $197,241$213,739 and $174,971,$199,500, respectively, and is included in Other Payables and Accrued Liabilities on the accompanying unaudited condensed consolidated balance sheets.

Note 1514 – Income taxes

Income tax

United States

 

On December 22, 2017,Under the provisions of 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% tois enacted at 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.

41

 


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 CompanyCompany’s PRC subsidiaries and VIEs and their controlled entities are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC, Chinese enterprises are subject to income tax at a rate of 25% after appropriate tax adjustments.

Significant components of the income tax (benefit) expense consisted of the following for the three and nine months ended April 30, 2019 and 2018: 30: 

 Three Months Ended
April 30,		  Nine Months Ended
April 30,		  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
 2019  2018  2019  2018  2020  2019  2020  2019 
Current $586,228  $4,347  $2,162,146  $8,190  $54,661  $586,228  $(259,252) $2,162,146 
Deferred  -   -   -   -   -   -   -   - 
Provision for income tax $586,228  $4,347  $2,162,146  $8,190 
Provision (benefit) for income tax  54,661   586,228   (259,252)  2,162,146 
Less: Provision (benefit) for income tax – discontinued operations  71,143   622,288   (254,754)  1,688,675 
(Income tax benefit) provision for income tax – continuing operations $(16,482) $(36,060) $(4,498) $473,471 

Significant components of the continuing operations of the Company’s deferred tax assets as of April 30, 20192020 and July 31, 20182019 are approximately as follows:

 

 April 30,
2019		  July 31,
2018		  April 30,
2020		  

July 31,

2019

 
Deferred tax assets:          
Net operating loss carry forwards $1,338,400  $911,400  $3,228,900  $1,738,300 
Accounts receivable allowance  339,600   343,500   431,800   350,500 
Inventory allowance  985,400   13,600 
Deposit for investment allowance  77,600   79,500 
Accrued liabilities  85,300   50,600   70,300   72,000 
Warranty and other  16,700   16,400   15,900   16,300 
Deferred tax assets before valuation allowance  1,780,000   1,321,900   4,809,900   2,270,200 
Less: valuation allowance  (1,780,000)  (1,321,900)  (4,809,900)  (2,270,200)
Net deferred tax assets $-  $-  $-  $- 

 


42

As of April 30, 2019,2020, the Company had U.S. federal NOLsNet Operating Losses (“NOLs”) of approximately $4,717,000$5,887,000 that expire beginning in 2029 to 2038 with deferred tax assets of approximately $991,000.$1,236,000. As of April 30, 2019,2020, the Company had approximately $1,406,000$30,000 of NOLs related to its Hong Kong holding companies that can be carried forward indefinitely with deferred tax assets of approximately $5,000. As of April 30, 2020, the Company had approximately $7,951,000 of NOLs related to its PRC subsidiaries and VIEs that expire in years 20192020 through 2023 with deferred tax assets of approximately $348,000.$1,988,000. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future generation for taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all the information available, management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance as of April 30, 2019.2020.

Significant components of the discontinued operations of the Company’s deferred tax assets as of April 30, 2020 and July 31, 2019 are approximately as follows:

  April 30,
2020		  

July 31,

2019

 
Deferred tax assets:      
Net operating loss carry forwards $348,500  $229,100 
Accounts receivable allowance  87,000   73,400 
Less: valuation allowance  (435,500)  (302,500)
Net deferred tax assets $-  $- 

The Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.

If applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other Income (Expense)” in the statement of operations. Penalties would be recognized as a component of “General and Administrative Expenses” in the statement of operations. The Company stayed current and filed its July 31, 2016 and 2017 corporation income tax return in November 2018.2019 before the deadline. No interest or penalty on unpaid tax in relation to the late filings was recorded during both the three and nine months ended April 30, 20192020 and 2018, respectively.2019. As of April 30, 20192020 and July 31, 2018, other than discussed above,2019, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next quarter.

Note 1615 – Commitments and contingencies

Operating leasesContingencies

The total future minimum lease payments under the non-cancellable operating leases as of April 30, 2019 are payable as follows:Contract dispute – Sanhe Xiangtian vs. Shandong Taidai

Twelve months ending April 30, Minimum Lease Payment 
2020 $1,171,457 
2021  1,083,066 
2022  763,052 
2023  447,526 
2024  445 
Thereafter  1,002 
Total minimum payments required $3,466,548 

Rental expense of the Company for the three months ended April 30, 2019 and 2018 were $325,922 and $72,266, respectively. Rental expense of the Company for the nine months ended April 30, 2019 and 2018 were $787,527 and $181,793, respectively.

38

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 and nine months ended April 30, 2019 and 2018, 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 and nine months ended April 30, 2019 and 2018, not canceling the 60,000,000 shares has an anti-dilutive effect.On January 29, 2019, the Company commenced an action against Global Select Advisors Ltd. (“Global Select”) in the First Judicial District Court of Nevada (the “Court”) to cancel 60 million shares of common stock of the Company that, without proper authorization, were issued to Roy Thomas Phillips, a former consultant and acting Chief Financial Officer of the Company, and subsequently transferred to Global Select.  On February 25, 2019, the Clerk of the Court entered a default against Global Select as a result of Global Select’s failure to respond to the Company’s complaint. The Company filed a motion for default judgment pursuant to which the Company sought an order authorizing the Company to cancel the 60 million shares. The Company’s motion for default judgement was granted and the shares were cancelled in April 2019.

Sanhe Xiangtian is involved in a litigation with Shandong Taidai Photovoltaic Technology Co., Ltd. (“Shandong Taidai”) for contractual dispute. Sanhe Xiangtian filed a complaint on January 24, 2018 with the Sanhe People’s Court and claimed for damages of RMB 1,000,000 (approximately $149,245) caused by Shandong Taidai as it provided the unqualified construction project. On May 22,June 5, 2019, a hearing was held by the court ruled that Shandong Taidai is required to pay for the damages of Sanhe Xiangtian in the amount RMB 15,826,000 (approximately $2.3 million) and other associated fees of RMB 23,000 (approximately $3,000). As of the final judgement will be issued at a later date.date of this report, the Company has not received any appeal notice from Shandong Taidai. The Company does not believe the litigation will have significant impact on theirits unaudited condensed consolidated financial statements.statements as the Company will record the gain contingency upon receiving the settlement payments.

43

 

Shandong Taidai filed a lawsuit against Sanhe Xiangtian with Dongying City Intermediate People’s Court of Shandong Province on November 29, 2018 regarding the same project and claimed unpaid work of RMB 4,089,150 (approximately $610,284) and liquidated damages of RMB 2,025,139 (approximately $302,242). As ofOn December 19, 2018, Sanhe Xiangtian has submitted an application objecting to the jurisdiction of Dongying City Intermediate People’s Court of but the application was rejected. On December 23, 2019, the Dongying City Intermediate People’s Court ruled in the favor of Shandong Taida of RMB 4,089,150 (approximately $610,284) and liquidated damages and legal fees of RMB 848,655 (approximately $126,657). On January 23, 2019, Sanhe Xiangtian appealed the ruling in the jurisdiction of Dongying City Intermediate People’s Court. Currently, the case is under review by the Dongying City Intermediate People’s Court. The Company does not believe the litigation will have a material impact on its current operations and financial statements.statements as the accounts payable amount has been properly accrued.

 

Contract dispute – Sanhe Futai vs. Sanhe Xiangtian

Sanhe Futai Environmental Technology Co. Ltd. (“Sanhe Futai”) filed a lawsuit against Sanhe Xiangtian with the Sanhe People’s Court regarding a project and claimed unpaid work of RMB 2,500,000 (approximately $0.4 million) caused by Sanhe Futai provided the unqualified construction project work. On December 7, 2019, the Sanhe People’s Court reached a verdict ruling Sanhe Xiangtian to pay the unpaid work balance plus interest and court fee. Sanhe Xiangtian filed an appeal with Langfang City Intermediate People’s Court of Hebei Province. On May 6, 2020, Langfang City Intermediate People’s Court of Hebei Province issued a ruling that the facts of the first verdict was unclear and required the case to be retrial. The Company does not believe the litigation will have a material impact on its current operations and financial statements as the accounts payable amount has been properly accrued.

Acquisition payment dispute – Sanhe Xiangtian vs. Wenhe Han and Guifen Wang

On March 19, 2019, Wenhe Han and Guifen Wang, former shareholders of Tianjin Jiabaili (collectively known as the “Plaintiffs”), filed a lawsuit against Xianning Xiangtian in People’s Court of Jizhou District, Tianjin City for a dispute over the equity transfer of Tianjin Jiabaili between Plaintiffs and Xianning Xiangtian. The Plaintiffs claimed a damage amounting to RMB 2,000,000 (approximately $0.3 million) for breach of contract and demanded immediate payment on the unpaid equity transfer balance of RMB 1,720,000 (approximately $0.3 million). A hearing was held on April 23, 2019 and the court approved the request of the Plaintiffs to freeze Xianning Xiangtian’s assets worth of RMB 3,720,000 (approximately $0.6 million) before a judgement is rendered. As of the date of this report, the freeze order has not been enforced and the Company has not received the list of assets subject to this order. On April 20, 2020, the People’s Court of Jizhou District, Tianjin City reached a verdict in favor of the Plaintiffs. Xianning Xiangtian filed an appeal and the case is under review. Management currently cannot estimate the outcome of the litigation. The Company does not believe the litigation will have a material impact on its current operations and financial statements as the acquisition payment amount has been properly accrued.

On April 15, 2019, Xianning Xiangtian filed a lawsuit against WenhanWenhe Han and Guifen Wang, former shareholders of Tianjin Jiabaili, for the same dispute over the equity transfer of Tianjin Jiabaili in the People’s Court of Jizhou District, Tianjin City. Xianning Xiangtian claimed a damage amounting to RMB 2,000,000 (approximately $0.3 million) and demanded immediate refund of RMB 5,080,000 (approximately $0.8 million) plus a 6%six percent (6%) annual interest starting from April 15, 2019 due to misrepresentation of the production facility of Tianjin Jiabaili from the former shareholders of Tianjin Jiabiali. A hearing is scheduled onwas held June 11, 2019. Currently,2019 and the court approved the request of the Company to freeze Wenhe Han and Guifen Wang’s personal assets worth of RMB 7,080,000 (approximately $1.0 million). On October 8, 2019, the People’s Court of Jizhou District, Tianjin City reached a verdict and rejected the Xianning Xiangtian’s claim. Xianning Xiangtian filed an appeal and the case is under review by the Dongying City Intermediate People’s Court.Court of Jizhou District, Tianjin City. Management currently cannot estimate the outcome of the litigation.

Other legal matters 

From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The majority of these claims and proceedings related to or arise from, being guarantor of a third party and employment contract dispute. The Company accrues costs related to these matters when they become probable and as a result the amount of loss can be reasonably estimated. In determining whether a loss from a claim is probable, and if it is possible to estimate the potential litigation losses, in those situations, the Company discloses an estimate of the probable losses or a range of possible losses, if such estimates can be made.

As of April 30, 2020, the type of complaints and disputes and their potential claims that the Company does not accrue costs for potential litigation losses as the probability of repaying these claims are remote. These potential claims are summarized as follows:

Labor dispute – Qiao Lijuan vs. Tianjin JiaBaiLi

Regarding the labor dispute lawsuit between Qiao Lijuan and Tianjin JiaBaiLi Petroleum Products Co., Ltd. (Hereinafter referred to as “JiaBaiLi”), on July 23, 2019, Qiao Lijuan sued JiaBaiLi (Defendant A) and the 1st Sales Company of JiaBaiLi (Defendant B) before Jizhou Court claiming Defendant B to pay RMB 7,000 (approximately $1,000) for salary, Defendant A to bear the joint and several liability and both Defendant A and B to bear the litigation fees. On October 23, 2019, Jizhou Court reached a verdict that Defendant A must pay Qiao Lijuan salary of RMB 11,000 (approximately $1,600). The Company does not believe the litigation will have a material impact on its current operations and financial statements.

 


44

Negotiable instruments dispute – Kelin Environmental Protection Equipment, Inc.

Regarding the negotiable instruments dispute of Kelin Environmental Protection Equipment, Inc. (hereinafter referred to as “Kelin”), as Kelin had not paid the draft due and expired, it was pursued by the negotiable instruments holders. Xiangtian Zhongdian, as the one of the endorsers, are involved in 14 lawsuits currently and the amount is RMB 4.0 million (approximately $0.6 million). Xiangtian Zhongdian may be jointly and severally liable in the above cases, but it may recourse to the former endorsers for compensation of the unpaid negotiable instruments.

Dispute matter Claim amount 
1) Negotiable instruments $580,975 
2) Labor  992 
Total $581,967 

Shimen Government Inquiry

On June 10, 2019, Xianning Xiangtian received an inquiry from Shimen County Market Supervision Bureau (the “Bureau”) with respect to a formal investigation it initiated against Xianning Xiangtian on May 10, 2019.  The Bureau stated it is investigating that Xianning Xiangtian was selling its shares to the public in anticipation of a Nasdaq listing in the near future as part of a multi-level marketing scheme.  On June 14, 2019, Xianning Xiangtian issued a Letter of Statement in response to the inquiry and stated Xianning Xiangtian never issued any shares to the unspecified public since its incorporation and that all of the Company’s shares are registered with the Company’s Transfer Agent. Following Xianning Xiangtian’s delivery of its Letter of Statement, it has not received any further inquiries from the Bureau. After the Bureau’s investigation, it has reached an administrative penalty decision to another business entity with similar name and confirmed that Xianning Xiangtian has no relation with the penalized business entity.

Variable interest entity structure

In the opinion of management, (i) the corporate structure of the Company is in compliance with existing PRC laws and regulations; (ii) the New VIE Agreements are valid and binding, and do not result in any violation of PRC laws or regulations currently in effect; and (iii) the business operations of Xiangtian Shenzhen and the VIE are in compliance with existing PRC laws and regulations in all material respects.

However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to the foregoing opinion of its management. If the current corporate structure of the Company or the New VIE Agreements is found to be in violation of any existing or future PRC laws and regulations, the Company may be required to restructure its corporate structure and operations in the PRC to comply with changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Company’s current corporate structure or the New VIE Agreements is remote based on current facts and circumstances.

Note 17 – Stockholders’ equityCoronavirus (“COVID-19”)

In June 2017, the BoardDecember 2019, a novel strain of Directorscoronavirus, or COVID-19, surfaced and it has spread rapidly to many parts of China and other parts of the world, including the United States. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China and elsewhere. Substantially all of the Company’s revenue is concentrated in China. Consequently, the COVID-19 outbreak may materially adversely affect the Company’s business operations, financial condition and operating results for 2020, including but not limited to material negative impact on the Company’s total revenues, slower collection of accounts receivables and additional allowance for doubtful accounts, slower usage of inventories and additional allowance for inventories obsolescence. The Company adoptedhas resume its operation in April 2020. Because of the 2017 Stock Incentive Plan (the “Plan”) under which 30 million sharessignificant uncertainties surrounding the COVID-19 outbreak, the extent of common stock are available for issuances.

the business disruption and the related financial impact cannot be reasonably estimated at this time. As of the date of this report, the Company’s operation has been adversely affected which resulted in significant decrease in quarter ended April 30, 2019,2020 as well as May and June of 2020 compared with the Company did not grant any awards undersame periods of prior year. There is no guarantee that the Plan.Company’s revenues will grow or remain at a similar level year over year in the remainder of 2020.

45

 

During

Note 16 – Concentrations

Customer concentration risk

For the ninethree months ended April 30, 2019, Mr. Jian Zhou,2020, no customers accounted for 10% or more of the Company’s Chairman and principal stockholder as well as a shareholder of Xianning Xiangtian, and Zhou Deng Rong, the Company’s former Chief Executive Officer and director, contributed $30,820,127 of additional paid in capital in Xianning Xiangtian.

As discussed in Note 16, the Company cancelled 60 million shares in April 2019.

Note 18 – Concentrations

Customer concentration risk

total revenues. For the three months ended April 30, 2019, one customer accounted for 67.3%10.7% of the Company’s total revenues. For the three months ended April 30, 2018, no customer accounted over 10% of the Company’s total revenues.

For the nine months ended April 30, 2019, two2020, three customers accounted for 38.1%31.2%, 25.9% and 25.9%15.3% of the Company’s total revenues. For the nine months ended April 30, 2018,2019, one customer accounted for 38.0%59.9% of the Company’s total revenues.

As of April 30, 2019, four2020, three customers accounted for 26.4%49,9%, 15.8%, 13.9%,13.0% and 11.5%10.5% of the total balance of accounts receivable, respectively.receivable. As of July 31, 2018, three2019, two customers accounted for 32.0%, 15.0%35.5% and 12.3%34.6% of the total balance of accounts receivable, respectively.receivable.

Vendor concentration risk

For the three months ended April 30, 2020, no vendor accounted for 10.0% or more of the Company’s total purchases. For the three months ended April 30, 2019, two vendors accounted for 39.3%51.8% and 14.5%19.2% of the Company’s total purchases.

For the threenine months ended April 30, 2018, no2020, two vendor accounted over 10%for 23.4% and 11.7% of the Company’s total purchases.

For the nine months ended April 30, 2019, two vendors accounted for 35.8%45.2% and 20.2%25.6% of the Company’s total purchases. For the nine months ended April 30, 2018, no vendors accounted over 10% of the Company’s total purchases.

As of April 30, 2019,2020, three vendors accounted for 41.7%62.6%, 10.9%,17.1% and 11.5%14.3% of the total balance of accounts payable, respectively.payable. As of July 31, 2018, four2019, three vendors accounted for 29.8%61.4%, 15.7%, 14.0%16.9% and 11.7%14.1% of the total balance of accounts payable, respectively.payable.

40

Note 1917 – Segment reporting

Starting in April 2018, theThe Company began to evaluateevaluates performance and to determinedetermines resource allocations based on a number of factors, the primary measurement being income from operations of the Company’s nine reportable divisions in the PRC: Sanhe Xiangtian, Xianning Xiangtian, Xiangtian Zhongdian, Jingshan Sanhe, Hubei Jinli, Tianjin Jiabaili, Xiangtian Trade, Wine Co., and Herbal Wine Co. Tianjin Jiabaili did not have any operations as of April 30, 2019. Prior period numbers are broken down for purposes of comparison.2020.

These reportable divisions are consistent with the way the Company manages its business and each division operates under separate management groups and produces discrete financial information. The accounting principles applied at the operating division level in determining income (loss) from operations is generally the same as those applied at the unaudited condensed consolidated financial statement level.

The following represents results of division operations for the three and nine months ended April 30, 20192020 and 2018:2019:

  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
  2020  2019  2020  2019 
Revenues (sales returns):                
Sanhe Xiangtian $-  $80,497  $1,523  $2,977,448 
Xianning Xiangtian  230,459   350,924   1,306,385   7,918,122 
Jingshan Sanhe  5,769   4,577,063   140,911   11,906,856 
Xiangtian Zhongdian  -   837,354   1,847,096   21,094,266 
Hubei Jinli  1,759,322   1,137,823   4,836,660   4,482,117 
Xiangtian Trade  -   6,493   1,478   11,831 
Wine Co.  -   1,395,848   6,598   1,795,709 
Herbal Wine Co.  -   41,065   (132,838)  142,647 
Consolidated revenues  1,995,550   8,427,067   8,007,813   50,328,996 
Less: revenues – discontinued operations  (1,765,091)  (7,151,799)  (4,851,331)  (18,327,329)
Revenues – continuing operations $230,459  $1,275,268  $3,156,482  $32,001,667 

46

 

  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
  2019  2018  2019  2018 
Revenues:            
Sanhe Xiangtian $80,497  $423,396  $2,977,448  $993,030 
Xianning Xiangtian  350,924   248   7,918,122   18,051 
Jingshan Sanhe  4,577,063   -   11,906,856   - 
Xiangtian Zhongdian  837,354   -   21,094,266   - 
Hubei Jinli  1,137,823   -   4,482,117   - 
Xiangtian Trade  6,493   -   11,831   - 
Wine Co.  1,395,848   -   1,795,709   - 
Herbal Wine Co.  41,065   -   142,647   - 
Consolidated revenues $8,427,067  $423,644  $50,328,996  $1,011,081 

  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
  2020  2019  2020  2019 
Gross profit (loss):            
Sanhe Xiangtian $-  $8,523  $1,523  $1,167,819 
Xianning Xiangtian  (2,686,941)  36,164   (3,500,515)  1,399,376 
Jingshan Sanhe  5,197   1,641,188   (16,591)  4,613,712 
Xiangtian Zhongdian  (444,883)  66,204   (1,089,530)  2,101,364 
Hubei Jinli  993,337   604,710   2,591,206   2,640,814 
Xiangtian Trade  -   6,493   26   11,831 
Wine Co.  -   1,248,592   (12,390)  1,608,653 
Herbal Wine Co.  -   36,667   (111,581)  122,632 
Consolidated gross (loss) profit  (2,133,290)  3,648,541   (2,137,852)  13,666,201 
Less: gross profit – discontinued operations  (998,534)  (3,531,156)  (2,450,644)  (8,985,811)
Gross (loss) profit – continuing operations $(3,131,824) $117,385  $(4,588,496) $4,680,390 

  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
  2020  2019  2020  2019 
Income (loss) from operations:            
Sanhe Xiangtian $(90,581) $(195,549) $(3,646,653) $644,287 
Xianning Xiangtian  (2,856,925)  53,637   (4,616,434)  640,757 
Jingshan Sanhe  (452,267)  723,291   (1,885,860)  3,304,188 
Xiangtian Zhongdian  (458,905)  (58,945)  (4,516,467)  1,216,867 
Hubei Jinli  569,882   252,333   267,361   1,436,349 
Tianjin Jiabaili  (25,825)  (93,343)  (74,570)  (391,034)
Xiangtian Trade  (10,861)  (36,190)  (41,666)  (31,797)
Wine Co.  -   1,135,425   (395,833)  1,436,229 
Herbal Wine Co.  -   9,070   (200,011)  75,173 
All four holding entities  (216,266)  (472,144)  (802,289)  (1,575,108)
Consolidated (loss) income from operations  (3,541,748)  1,317,585   (15,912,422)  6,755,911 
Less: income (loss) from operations – discontinued operations  (117,615)  (2,120,119)  2,214,343   (6,251,939)
(Loss) income from operations – continuing operations $(3,659,363) $(802,534) $(13,698,079) $503,972 

 

 Three Months Ended
April 30,		  Nine Months Ended
April 30,		  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
 2019  2018  2019  2018  2020  2019  2020  2019 
Gross profit:         
Net income (loss) attributable to controlling interest:         
Sanhe Xiangtian $8,523  $97,461  $1,167,819  $190,879  $(66,580) $(106,989) $(3,632,545) $636,226 
Xianning Xiangtian  36,164   17,428   1,399,376   18,362   (1,469,128)  (454,060)  (3,816,762)  (432,501)
Jingshan Sanhe  1,641,188   -   4,613,712   -   (445,876)  435,720   (1,648,893)  2,275,609 
Xiangtian Zhongdian  66,204   -   2,101,364   -   (1,756,139)  (42,897)  (4,591,321)  628,884 
Hubei Jinli  604,710   -   2,640,814   -   504,334   172,852   216,788   1,042,435 
Tianjin Jiabaili  (25,750)  (93,193)  (74,475)  (392,384)
Xiangtian Trade  6,493   -   11,831   -   (4,657)  (34,932)  (35,088)  (31,668)
Wine Co.  1,248,592   -   1,608,653   -   -   759,374   (284,640)  953,669 
Herbal Wine Co.  36,667   -   122,632   -   -   (74,284)  (181,987)  (24,853)
Consolidated gross profit $3,648,541  $114,889  $13,666,201  $209,241 
All four holding entities  (229,851)  (469,803)  (812,423)  (1,570,363)
Consolidated net (loss) income attributable to controlling interest  (3,493,647)  91,788   (14,861,346)  3,085,054 
Less: net (loss) income attributable to controlling interest – discontinued operations  (58,454)  (1,293,662)  1,898,733   (4,246,860)
Net (loss) income attributable to controlling interest – continuing operations $(3,552,101) $(1,201,874) $(12,962,613) $(1,161,806)

47

 

  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
  2019  2018  2019  2018 
Income (loss) from operations:            
Sanhe Xiangtian $(195,549) $(445,705) $644,287  $(1,474,153)
Xianning Xiangtian  (239,339)  (236,548)  347,781   (725,388)
Jingshan Sanhe  1,016,267   -   3,597,164   - 
Xiangtian Zhongdian  (58,945)  -   1,216,867   - 
Hubei Jinli  252,333   -   1,436,349   - 
Tianjin Jiabaili  (93,343)  -   (391,034)  - 
Xiangtian Trade  (36,190)  -   (31,797)  - 
Wine Co.  1,135,425   -   1,436,229   - 
Herbal Wine Co.  9,070   -   75,173   - 
All four holding entities (472,144) -   (1,575,108)  - 
Consolidated income (loss) from operations $1,317,585  $(682,253) $6,755,911  $(2,199,541)

  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
  2020  2019  2020  2019 
Depreciation and amortization expenses:            
Sanhe Xiangtian $2,956  $47,244  $65,308  $134,666 
Xianning Xiangtian  890   172   2,270   366 
Jingshan Sanhe  115,201   26,786   283,946   50,010 
Xiangtian Zhongdian  601   23,960   138,304   169,117 
Hubei Jinli  275,107   230,928   755,702   744,665 
Tianjin Jiabaili  5,240   48,322   15,725   153,843 
Xiangtian Trade  295   302   884   302 
Wine Co.  -   81,248   138,165   132,904 
Herbal Wine Co.  -   15,358   24,766   25,476 
Consolidated depreciation and amortization expenses  400,290   474,320   1,425,070   1,411,349 
Less: depreciation and amortization expenses – discontinued operations  (390,308)  (354,320)  (1,202,579)  (953,055)
Depreciation and amortization expenses – continuing operations $9,982  $120,000  $222,491  $458,294 

  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
  2020  2019  2020  2019 
Interest expense:            
Sanhe Xiangtian $-  $41  $-  $5,875 
Xianning Xiangtian  -   131,847   35,853   715,341 
Hubei Jinli  -   38,957   -   153,210 
Consolidated interest expense  -   170,845   35,853   874,426 
Less: interest expense – discontinued operations  -   (38,957)  -   (153,210)
Interest expense – continuing operations $-  $131,888  $35,853  $721,216 

48

 


 Three Months Ended
April 30,		  Nine Months Ended
April 30,		  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
 2019  2018  2019  2018  2020  2019  2020  2019 
Net income (loss) attributable to controlling interest:         
Capital expenditures:         
Sanhe Xiangtian $(106,989) $(302,204) $636,226  $(825,031) $-  $59,892  $-  $106,941 
Xianning Xiangtian  (747,036)  (219,317)  (725,477)  (708,081)  -   3,268   4,773   5,103 
Jingshan Sanhe  728,696   (16,598)  2,568,585   (16,598)  160,223   1,086,843   1,533,983   1,977,419 
Xiangtian Zhongdian  (42,897)  (7,564)  628,884   (7,564)  -   58   -   8,153 
Hubei Jinli  172,852   -   1,042,435   -   26,967   72,699   424,067   456,980 
Tianjin Jiabaili  (93,193)  -   (392,384)  -   -   16,496   -   35,151 
Xiangtian Trade  (34,932)  -   (31,668)  -   -   2,083   -   2,083 
Wine Co.  759,374   -   953,669   -   -   157,218   -   230,865 
Herbal Wine Co.  (74,284)  -   (24,853)  - 
All four holding entities  (469,803)  (136,074)  (1,570,363)  (649,008)  -   18,500   -   18,500 
Consolidated net income (loss) attributable to controlling interest $91,788  $(681,757) $3,085,054  $(2,206,282)
Consolidated capital expenditures  187,190   1,417,057   1,962,823   2,841,195 
Less: capital expenditures – discontinued operations  (187,190)  (1,316,760)  (1,958,050)  (2,682,438)
Capital expenditures – continuing operations $-  $100,297  $4,773  $158,757 

  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
  2019  2018  2019  2018 
Depreciation and amortization expenses:            
Sanhe Xiangtian $47,244  $69,713  $134,666  $196,705 
Xianning Xiangtian  172   51,699   366   120,588 
Jingshan Sanhe  26,786   -   50,010   - 
Xiangtian Zhongdian  23,960   -   169,117   - 
Hubei Jinli  230,928   -   744,665   - 
Tianjin Jiabaili  48,322   -   153,843   - 
Xiangtian Trade  302       302     
Wine Co.  81,248   -   132,904   - 
Herbal Wine Co.  15,358   -   25,476   - 
Consolidated depreciation and amortization expenses $474,320  $121,412  $1,411,349  $317,293 

  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
  2019  2018  2019  2018 
Interest expense:            
Sanhe Xiangtian $41  $      -  $5,875  $    - 
Xianning Xiangtian  131,847   -   715,341   - 
Hubei Jinli  38,957   -   153,210   - 
Consolidated interest expense $170,845  $-  $874,426  $- 


  Three Months Ended
April 30,		  Nine Months Ended
April 30,		 
  2019  2018  2019  2018 
Capital expenditures:            
Sanhe Xiangtian $59,892  $-  $106,941  $- 
Xianning Xiangtian  3,268   -   5,103   - 
Jingshan Sanhe  1,086,843   37,055   1,977,419   37,055 
Xiangtian Zhongdian  58   61,587   8,153   61,587 
Hubei Jinli  72,699   -   456,980   - 
Tianjin Jiabaili  16,496   -   35,151   - 
Wine Co.  159,302   -   232,948   - 
All four holding entities  18,500   -   18,500   - 
Consolidated capital expenditures $1,417,058  $98,642  $2,841,195  $98,642 

Total assets of each division as of April 30, 20192020 and July 31, 20182019 consisted of the following:

  April 30,
2019		  July 31,
2018		 
Total assets:      
Sanhe Xiangtian $7,261,061  $11,355,619 
Xianning Xiangtian  16,382,707   4,689,100 
Jingshan Sanhe  5,474,546   3,513,449 
Xiangtian Zhongdian  7,079,587   12,620,210 
Hubei Jinli  21,910,876   22,489,702 
Tianjin Jiabaili  1,388,602   4,111,706 
Xiangtian Trade  482,479   - 
Wine Co.  9,530,931   - 
Herbal Wine Co.  2,534,400   - 
All four holding entities  724,083   248,164 
Consolidated assets $72,769,272  $59,027,950 

 

  April 30,
2020		  July 31,
2019		 
Total assets:      
Sanhe Xiangtian $924,005  $4,889,875 
Xianning Xiangtian  11,002,527   7,969,624 
Jingshan Sanhe  8,899,985   6,969,849 
Xiangtian Zhongdian  2,628,802   7,731,512 
Hubei Jinli  21,343,005   21,635,194 
Tianjin Jiabaili  276,610   302,518 
Xiangtian Trade  180,016   483,168 
Wine Co.  -   11,005,886 
Herbal Wine Co.  -   2,973,064 
All four holding entities  508,261   416,098 
Consolidated assets  45,763,211   64,376,788 
Less: assets – discontinued operations  (30,242,989)  (42,583,992)
Total assets – continuing operations $15,520,222  $21,792,796 

Note 2018 – Subsequent eventevents

On May 24, 2019,1, 2020, the Company acquired the remaining 30% ownership held by Nanjing Zhongdian Photovoltaic Co. Ltd. in Xiangtian Zhongdian at RMB 1 due to Xiangtian Zhongdian was at a net deficit position and Xiangtian Zhongdian became the Company’s board of directors discussedwholly owned subsidiary.

On June 28, 2020, the planCompany entered into two equity transfer agreements with Xubin Zhang and Jian Zheng (the “Buyers”), which the Company agreed to sell its 100% ownership in Hubei Jinli to the Wine Co.Buyers for approximately $21.3 million (RMB 150.0 million), of which, 60% ownership are sold to Xubin Zhang, an unrelated third party, and Herbal Wine Co. However, no action has been taken in connection with such plan40% ownership are sold to Jian Zheng, an unrelated third party. The result of operations of Hubei Jinli was presented as of the date of this report.discontinued operations for three and nine months ended April 30, 2020 unaudited condensed consolidated financial statements.

On June 3, 2019,29, 2020, the Company’s boardCompany entered into two equity transfer agreements with Xue Wang and Chao Feng (the “Buyers”), which the Company agreed to sell its 100% ownership in Jingshan Sanhe to the Buyers for approximately $4.3 million (RMB 30.0 million), of directors approved the transfer of 3% equity interest of Xianning Xiangtian held by Zhou Deng Rong, the Company’s former Chief Executive Officer and director,which, 60% ownership are sold to FeiXue Wang, an employee of Xianning Xiangtain. As aunrelated third party, and 40% ownership are sold to Chao Feng, an unrelated third party. The result of the transfer, Xianning Xiangtianoperations of Jingshan Sanhe was presented as discontinued operations for three and its shareholders, Zhou Jian and Fei Wang, executed a new set of equity pledge agreement, exclusive option agreement and power of attorney on June 10, 2019 and all the terms remained substantially the same as the New VIE Agreements discussed in Note 2 - Variable interest entities.nine months ended April 30, 2020 unaudited condensed consolidated financial statements.


49

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

The following discussion and analysis of our results of operations and financial condition should be read together with our unaudited condensed consolidated financial statements and the notes thereto, which are included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended July 31, 20182019 (the “Annual Report”) filed with SEC. Our financial statements have been prepared in accordance with U.S. GAAP. In addition, our financial statements and the financial information included in this report reflect our organizational transactions and have been prepared as if our current corporate structure had been in place throughout the relevant periods.

Overview

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 (“Luck 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”), 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.

We are engaged in a variety of energy-related businesses through itsour subsidiaries and controlled entities in China. One of the businesses is in the field of Compressed Air Energy Storagecompressed air energy storage in China and produces electricity generation systems that combine its compressed air storage technology with photovoltaic (“PV”) panels to achieve a continuous supply of power under weather conditions that are unfavorable to the generation of electricity from PV panels alone. The sales and installation of power generation systems and PV systems and the sales of PV panels, air compression equipment and heat pump products have been carried out through the Company’s variable interest entities (“VIEs”), formerly Sanhe Luck Sky Electrical Engineering Co., Ltd. (“Sanhe Xiangtian”) and currently Xianning Xiangtian Energy Holding Group Co. Ltd. (“Xianning Xiangtian”), formerly known as Xianning Sanhe Power Equipment Manufacturing Co. Ltd.

In March 2018, Xianning Xiangtian formed Xiangtian Zhongdian (Hubei) New Energy Co. Ltd. (“Xiangtian Zhongdian”), a joint venture in China, in which Xianning Xiangtian holds a 70% ownership interest with the remaining 30% ownership held by Nanjing Zhongdian Photovoltaic Co. Ltd. Xiangtian Zhongdian is in the business of manufacturing and sales of PV panels.

In April 2018, Xianning Xiangtian formed a wholly owned subsidiary, Jingshan Sanhe Xiangtian New Energy Technology Co. Ltd. (“Jingshan Sanhe”), which is engaged in the business of researching, manufacturing and sales of high-grade synthetic fuel products.

In June 2018, Xianning Xiangtian acquired Hubei Jinli Hydraulic Co., Ltd. (“Hubei Jinli”), which is engaged in the business of manufacturing and sales of hydraulic parts and electronic components, and acquired Tianjin Jiabaili Petroleum Products Co. Ltd. (“Tianjin Jiabaili”), which is engaged in the business of manufacturing and sales of petroleum products (Note 3 – Business combinations).


In August 2018, Xianning Xiangtian formed a wholly owned subsidiary, Xianning Xiangtian Trade Co. Ltd. (“Xiangtian Trade”), which is expected to engageengaged in trading chemical raw materials for the purpose of providing a stable supply for fuel products operation.general merchandise.

In September and October 2018, January 2019 and March 2019, Mr. Jian Zhou, the Company’s Chairman and principal shareholder as well as a shareholder of Xianning Xiangtian, and Zhou Deng Rong, the Company’s former Chief Executive Officer and director, injected an aggregate of Renminbi (“RMB”) 209,260,000 (approximately $30.8 million) as capital contribution to Xianning Xiangtian.

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

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

However,In September and October 2018, January 2019 and March 2019, Mr. Jian Zhou, our former Chairman and current principal shareholder as well as a shareholder of Xianning Xiangtian, and Zhou Deng Rong, the Company’s former Chief Executive Officer and director, injected an aggregate of RMB 209,260,000 (approximately $30.8 million) as capital contribution to Xianning Xiangtian.

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

On May 24, 2019, our Board of Directors (the “Board”), discussed a plan to pursue the potential sale of all its ownership interest in Herbal Wine Co. and Wine Co. in order to shift its business focus on its energy related business.

On December 16, 2019, the Company’s core businesses, our board of directors of Xiangtian Zhongdian made a decision to suspend its current operations temporally and will further make determination on its future sales plan of PV Panels in Xiangtian Zhongdian. In May, 2020, we acquired the remaining 30% ownership held by Nanjing Zhongdian Photovoltaic Co. Ltd. in Xiangtian Zhongdian and Xiangtian Zhongdian became our wholly owned subsidiary. However, our sales from PV panels are expected to decrease as compared to the prior period due to the non-controlling shareholder in Xiangtian Zhongdian having retained their marketing team and left Xiangtian Zhongdian. We are starting to develop our own PV panels market with our internal marketing sources. Our PV panels operations is consideringexpected to resume back to the spinoffnormal level once we developed our own PV panels market.


On January 6, 2020, we entered into an equity transfer agreement with Kairui Tong and Hao Huang (the “Buyers”), which we agreed to sell its 90% ownership in Wine Co. and Herbal Wine Co. to the Buyers for approximately $9.6 million (RMB 67.5 million), of which, 54% ownership are sold to Kairui Tong, the legal representative and general manager of Wine Co. and Herbal Wine Co, and 36% ownership are sold to Hao Huang, an unrelated third party. The result of operations of Rongentang was presented as discontinued operations for the nine months ended April 30, 2020 and for the three and nine months ended April 30, 2019 unaudited condensed consolidated financial statements.

On May 1, 2020, we acquired the remaining 30% ownership held by Nanjing Zhongdian Photovoltaic Co. Ltd. in Xiangtian Zhongdian and Xiangtian Zhongdian became our wholly owned subsidiary.

On June 28, 2020, we entered into two wine companies.equity transfer agreements with Xubin Zhang and Jian Zheng (the “Buyers”), which we agreed to sell its 100% ownership in Hubei Jinli to the Buyers for approximately $21.3 million (RMB 150.0 million), of which, 60% ownership are sold to Xubin Zhang, an unrelated third party, and 40% ownership are sold to Jian Zheng, an unrelated third party. The result of operations of Hubei Jinli was presented as discontinued operations for three and nine months ended April 30, 2020 and 2019 unaudited condensed consolidated financial statements.

On June 29, 2020, we entered into two equity transfer agreements with Xue Wang and Chao Feng (the “Buyers”), which we agreed to sell its 100% ownership in Jingshan Sanhe to the Buyers for approximately $4.3 million (RMB 30.0 million), of which, 60% ownership are sold to Xue Wang, an unrelated third party, and 40% ownership are sold to Chao Feng, an unrelated third party. The result of operations of Jingshan Sanhe was presented as discontinued operations for three and nine months ended April 30, 2020 and 2019 unaudited condensed consolidated financial statements.

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

SubsidiaryPrincipal BusinessLocation
Sanhe  XiangtianSales of PV panels, air compression equipment and heat pump products  and sale and installation of power generation systems and PV systemsHebei Province
Xiangtian ZhongdianManufacture and sales of PV panelsHubei Province
Jingshan Sanhe**Manufacturing and sales of Synthetic fuel productsHubei Province
Hubei Jinli**Manufacture and sales of hydraulic parts and electronic componentsHubei Province
Tianjin JiabailiSynthetic fuel productionTianjin
Xianning XiangtianManufacturing and sales of air compression equipment and heat pump productsHubei Province
Xiangtian TradeSale of synthetic fuel productsHubei Province
Rongentang Wine*Wine productionHubei Province
Rongentang Herbal Wine*Herbal Wine productionHubei Province

*     Disposed in January 2020

**   Disposed in June 2020

51

 

Reorganization

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.

The New VIE Agreements include the following:

●Framework Agreement on Business Cooperation, entered between Xiangtian Shenzhen and Xianning Xiangtian.

●Agreement of Exclusive Management, Consulting and Training and Technical Service, entered between Xiangtian Shenzhen and Xianning Xiangtian,.

●Exclusive Option Agreement, entered among Xiangtian HK, Xiangtian Shenzhen, Fei Wang, Zhou Jian and Xianning Xiangtian,

●Equity Pledge Agreement, entered among Xiangtian Shenzhen, Fei Wang, Zhou Jian, and Xianning Xiangtian,.

●Know-How Sub-License Agreement, entered between Xiangtian Shenzhen and Xianning Xiangtian, pursuant to which Xiangtian Shenzhen; and

●Powers of Attorney of the Xianning Xiangtian stockholders.

●Spousal Consent Letters of each of the spouses of the Xianning Xiangtian Shareholders

 

52

As a result of the New VIE Agreements, we have become the primary beneficiary of Xianning Xiangtian, and it treats Xianning Xiangtian as its variable interest entity under U.S. GAAP. We will continue to consolidate the financial results of Xianning Xiangtian in our unaudited condensed consolidated financial statements in accordance with U.S. GAAP. The above reorganization has no effect toon 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 (including wine products) through third-party distributors in China and through employees for direct sales. The distributors sell our products and receive commissions based on the value of the contracts. We utilize three classes of distributors based on the size of their territory – province, city and town. The distributors target factories and power plants, as well as local governments which may encourage local industry to utilize alternatealternative energy sources, for our power generation products. The distributors also target wine retailers, supermarkets for our wine products and target gas stations and automobile repair shops for our synthetic fuel products. Our revenue growth will be affected by our ability to effectively execute our marketing strategies to build our brand and to expand our sales distribution channel through other sources other than through our distributors.

PRC economy

Although the PRC economy has grown in recent years, the pace of growth has slowed, and growth rates may continue to decline. According to the PRC National Bureau of Statistics of China, the annual rate of growth in the PRC declined from 7.6% in 2014, to 7.0% in 2015, 6.8% in 2016, 6.9% in 2017, and 6.8% in 2018.2018 and 6.3% in 2019. A further slowdown in overall economic growth, an economic downturn, a recession or other adverse economic development in the PRC may materially reduce the purchasing power of Chinese consumers and thus lead to a decrease in the demand for our products. Such a decrease in demand may have a materially adverse effect on our business.

Seasonality

Our financial results for quarters ended January 31 and April 30 in each year might fluctuate, depending upon the date of the Chinese New Year in the period of which it will fall into as the Chinese New Year normally would fall in between January and February. Immediately before the Chinese New Year, our operating results and revenues tend to be higher as our customercustomers might push us to deliver our products before the Chinese New Year holiday and our operating results and revenues tend to be lower during the month after the Chinese New Year.

In addition, our operating results and revenues in our heat pump product line tend to be higher during the fall and winter seasons and lower during the spring and summer seasons.

Natural disaster or health epidemics

In December 2019, a novel strain of coronavirus, or COVID-19, surfaced and it has spread rapidly to many parts of China and other parts of the world, including the United States. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China and elsewhere. Substantially all of our revenue is concentrated in China. Consequently, the COVID-19 outbreak may materially adversely affect our business operations, financial condition and operating results for 2020. In March 2020, the temporary closure of stores and facilities, or the ‘shelter in place’ order, in China was lifted and many businesses have resumed normal operations. We believe the epidemic may have a short-term negative effect on our business as our revenues has decreased in our three and nine months Ended April 30, 2020 as compared to the same period in 2019. However, because of the significant uncertainties surrounding the COVID-19 outbreak, the extent of the business disruption and the related financial impact cannot be reasonably estimated at this time in the long run. There is no guarantee that our total revenues will grow or remain at a similar level in the second half of calendar year of 2020 as compared to 2019.


PRC governmental regulations

We are subject to a variety of governmental regulations related to the storage, use and disposal of hazardous materials. The major environmental regulations applicable to us include the Environmental Protection Law of the PRC, the Law of the PRC on the Prevention and Control of Water Pollution and its implementation rules, the Law of the PRC on the Prevention and Control of Air Pollution and its implementation rules, the Law of PRC on the Prevention and Control of Solid Waste Pollution and the Law of the PRC on the Prevention and Control of Noise Pollution and the PRC Law on Appraising Environment Impacts. In addition, under the Environmental Protection Law of the PRC, the Ministry of Environmental Protection sets national pollutant emission standards. However, provincial governments may set stricter local standards, which are required to be registered at the State Administration for Environmental Protection. Enterprises are required to comply with the stricter of the two standards. Unfavorable changes could affect the delivery timing of our services and products that we provide and could materially and adversely affect the results of operations.

In addition, we are subject to a variety of licenses and permits, laws and regulations in the People’s Republic of China related to the wine and herbal wineour operations.

●FoodSafety Production License, according to Regulation on Work Safety Permits (2014), the state applies a work safety licensing system to enterprises engaged in mining, construction, and the production of dangerous chemicals, fireworks and crackers, and civil explosives.

●Hazardous Chemicals Business License, according to Food ManagementMeasures for the Administration of Dangerous Chemicals Business License Management Measures (2015)(2012), within the territorystate implements a licensing system for the operation of hazardous chemicals. Enterprises which operate dangerous chemical shall obtain a hazardous chemicals business license. It is prohibited to operate hazardous chemicals without obtaining such business license.

●Industrial Product Production License, according to Regulation of the People’s Republic of China anyone who engages in food saleson the Production License of Industrial Products (2005), the State implements a production license system for enterprises that produce the industrial products that affect production safety and catering services shall obtain a food business license in accordance with the law. Where engaging in food business activitiespublic safety such as hazardous chemicals. It is prohibited to produce such products listed without obtaining food business license, the local food and drug supervision and administration department may impose punishment in accordance with the provisions of Article 122 of the Food Safety Law of the People’s Republic of China.such license.


●Food Production License, according to Food Production License Management Measures (2015), within the territory of the People’s Republic of China, food production activities shall be subject to food production license in accordance with the law. Where engaging in food production activities without obtaining food production license, the local food and drug supervision and administration department may impose punishment in accordance with the provisions of Article 122 of the Food Safety Law of the People’s Republic of China.  
●Pharmaceutical Manufacturing Permit, a pharmaceutical manufacturer must obtain a pharmaceutical manufacturing permit from the relevant provincial branch of China Food and Drug Administration (“CFDA”).

●Good Manufacturing Practice (“GMP”) Certificate. A pharmaceutical manufacturer must meet the GMPGood Manufacturing Practice standards for each of its production facilities in China in respect of each form of pharmaceutical product it produces. GMP standards include staff qualifications, production premises and facilities, equipment, raw materials, environmental hygiene, production management, quality control and customer complaint administration. If a manufacturer meets the GMP standards, the CFDA will issue to the manufacturer a GMP certificate with a five-year validity period.

●Product Quality LawSecrecy Qualification, according to Circular 8 issued by the National Defense Science and related technical guidelines. Technology Bureau of PRC, entities engaged in the research and production of classified weapons and equipment are required to implement a confidentiality qualification examination and certification system and obtain the corresponding Secrecy Qualification.

●Pursuant to the Product Quality Law of China promulgated by the National People’s Congress Standing Committee in 1993 and amended in 2000 and 2009 respectively,2018, a seller must establish and practice a check-for-acceptance system for replenishment of such seller’s inventory, and examine the quality certificates and other marks and must also adopt measures to keep the products for sale in good quality. Pursuant to the Product Quality Law of China, where a defective product causes physical injury to a person or damage to such person’s property, the victim may claim for damages against the manufacturer or the seller of the product. If the seller pays the damages and it is the manufacturer that should bear the liability, the seller has a right of recourse against the manufacturer. Similarly, if the manufacturer pays damages and it is the seller that should bear the liability, the manufacturer has a right of recourse against the seller. Violations of the Product Quality Law of China could result in various penalties, including the imposition of fines, suspension of business operations, revocation of business licenses and criminal liabilities.

●Tort Liability Law. Pursuant to the Tort Liability Law of China, which was promulgated by the National People’s Congress Standing Committee on December 30, 2009 and became effective on July 1, 2010, producers are liable for damages caused by defects in their products and sellers are liable for damages attributable to their fault. If the defects are caused by the fault of third parties such as the transporter or storekeeper, producers and sellers have the right to claim for compensation from these third parties after paying for the damages. The producers and sellers are obligated to take remedial measures such as issuing warnings or recalling the products in a timely manner if defects are found in products that are in circulation. If a party knowingly manufactured and sold defective products that cause death or severe personal injuries, the injured person has the right to claim punitive damages.

●Drug Administration Law and Advertising law. Herbal wine is considered as a type of drug. Drug advertisements shall be approved by the drug regulatory department before it is published and a drug advertisement approval number would be issued. The drug advertisement shall not be released if the approval number is not obtained. Besides, advertising for non-pharmaceutical products may not be publicized with therapeutic effects.

54

 


Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statement of the Company for the three and nine months ended April 30, 2020 and 2019 and related notes thereto.

The Three Months Ended April 30, 20192020 Compared to the Three Months Ended April 30, 20182019

  

For the
Three Months
Ended

April 30,
2020

  

For the
Three Months
Ended

April 30,
2019

  Change  Change (%) 
             
Revenue $230,459  $1,275,268  $(1,044,809)  (81.9)%
Cost of revenue  3,362,283   1,157,883   2,204,400   190.4%
Gross (loss) profit  (3,131,824)  117,385   (3,249,209)  (2,768.0)%
Operating expenses  527,539   919,919   (392,380)  (42.7)%
Loss from operations  (3,659,363)  (802,534)  2,856,829   356.0%
Other expenses, net  (71,535)  (563,359)  (491,824)  (87.3)%
Loss before income taxes  (3,730,898)  (1,365,893)  2,365,005   173.1%
Income tax benefit  16,482   36,060   (19,578)  (54.3)%
Loss from continuing operations  (3,714,416)  (1,329,833)  2,384,583   179.3%
Income from discontinued operations, net of applicable income taxes  58,454   1,479,358   (1,420,904)  (96.0)%
Net (loss) income  (3,655,962)  149,525   (3,805,487)  (2,545.1)%
Less: Net loss attributable to non-controlling interest from continuing operations  (162,315)  (18,384)  143,931   782.9%
Less: Net income attributable to non-controlling interests from discontinued operations  -   76,121   (76,121)  (100.0)%
Net (loss) income attributable to common stockholders $(3,493,647) $91,788  $(3,585,435)  (3,906.2)%
Net (loss) income per share attributable to common stockholders                
Basic and diluted loss per share – Continuing operations $(0.01) $(0.00) $0.01   100.0%
Basic and diluted earnings per share – Discontinued operations $0.00  $0.00  $0.00   0.0%

55

 

  For the Three
Months Ended
April 30,
2019		  For the Three
Months Ended
April 30,
2018		  Change  Change (%) 
             
Revenue $8,427,067  $423,644  $8,003,423   1,889.2%
Cost of revenue  4,778,526   308,755   4,469,771   1,447.7%
Gross profit  3,648,541   114,889   3,533,652   3,075.7%
Operating expenses  2,330,956   797,142   1,533,814   192.4%
Income (loss) from operations  1,317,585   (682,253)  1,999,838   293.1%
Other (expenses) income, net  (581,832)  1,482   (583,314)  (39,359.9)%
Income (loss) before income taxes  735,753   (680,771)  1,416,524   208.1%
Income tax expense  (586,228)  (4,347)  581,881   13,385.8%
Net income (loss)  149,525   (685,118)  834,643   121.8%
Less: Net income (loss) attributable to non-controlling interest  57,737   (3,361)  61,098   1,817.9%
Net income (loss) attributable to common stockholders  91,788   (681,757)  773,545   113.5%
Net income (loss) per share attributable to common stockholders                
Basic and diluted earnings per share $0.00  $(0.00) $-   - 

Continuing Operations

Revenue

Our revenue consisted ofwas derived from the sales of PV panels and others, air compression equipment and other components, heat pump products high-grade synthetic fuel products, hydraulic parts and electronic components, wine and herbal wine for the three months ended April 30, 2019.2020.

Total revenues increaseddecreased by $8,003,423$1,044,809 or 1,889.2%81.9%, to $8,427,067$230,459 for the three months ended April 30, 20192020 as compared to $423,644$1,275,268 for the three months ended April 30, 2018.same period in 2019. The overall increasedecrease was primarily attributable to the increasedecrease of revenue generated from sales of PV panels and other products and heat pumps, high-grade synthetic fuel, hydraulic parts and electronic components, andpump products. See the sales generated fromtable below for a detailed analysis of the recently acquired wine and herbal wine businesses.decrease in our revenue.

Our revenue from our revenue categories is summarized as follows:

 For the Three
Months Ended
April 30,
2019		  For the Three
Months Ended
April 30,
2018		  Change  Change (%)  For the 
Three Months
Ended
April 30,
2020		  For the
Three Months
Ended
April 30,
2019		  Change  Change (%) 
                  
Revenue                  
Installation of power generation systems $-  $78,701  $(78,701)  (100.0)%
PV panels and others  849,720   344,943   504,777   146.3%  -   849,720   (849,720)  (100.0)%
Heat pumps  417,146   -   417,146   100.0%  230,459   417,146   (186,687)  (44.8)%
High-grade synthetic fuel  4,585,464   -   4,585,464   100.0%  -   8,402   (8,402)  (100.0)%
Hydraulic parts and electronic components  1,137,823   -   1,137,823   100.0%
Wine and herbal wine  1,436,914   -   1,436,914   100.0%
Total revenue $8,427,067  $423,644  $8,003,423   1,889.2% $230,459  $1,275,268  $(1,044,809)  (81.9)%


InstallationSales of power generation systems revenuePV panels and others products were $849,720 during the three months ended April 30, 2019, but we did not sell any PV panels and others products during the same period in 2020. The decrease in sales of PV panels and others due to the fact that we did not generate any sales from our PV panels business in Xiangtian Zhongdian. We were operating under certain disagreements with our non-controlling shareholder in Xiangtian Zhongdian, which led to Xiangtian Zhongdian to put the PV panels sales orders on hold. As a result, we did not sell any PV panels and others products during the three months ended April 30, 2020. In May, 2020, we acquired the remaining 30% ownership held by Nanjing Zhongdian Photovoltaic Co. Ltd. in Xiangtian Zhongdian and Xiangtian Zhongdian became our wholly owned subsidiary. However, our sales from PV panels are expected to decrease as compared to the prior period due to the non-controlling shareholder in Xiangtian Zhongdian having retained their marketing team and left Xiangtian Zhongdian. We will start developing our own PV panels market with our internal marketing sources. Our PV panels operations is expected to resume back to the normal level once we developed our own PV panels market.

Sales of heat pumps decreased by $78,701$186,687 or 100.0% from $78,70144.8% for the three months ended April 30, 20182020 as compared to $0 forthe same period in 2019. The decrease was attributable to the temporary closure of our and our customers’ operations under the influence of COVID-19 during the three months ended April 30, 2019 because we did not have any new installation projects. We will keep searching for large installation projects2020 which resulted in much lesser sales orders in the current period as compared to increase our revenue. Sales of PV panels and others increased by $504,777 or 146.3% from $344,943 for the three months ended April 30, 2018 to $849,720 for the same period in 2019. The increase in salesdecrease was also due to the decrease of PV panels and others was mainly attributable to Xiangtian Zhongdian, established in March 2018, which isselling prices. There were more competitions in the businessmarket while we recently did not put a lot of manufacturingresearch and salesdevelopment activities to keep up with the latest technology of PV panels. our heat pumps product to stay competitive, for which we need to lower our selling price to stay competitive.

Sales of heat pumps increasedhigh-grade synthetic fuel decreased by $417,146$8,402 or 100.0% for the three months ended April 30, 2019, as compared to the same period in 2018. Heat pumps are parts of the installation of power generation systems, which wereand we did not sold separately during the three months ended April 30, 2018 while we sold them as separate components as a result of our marketing effortssell any high-grade synthetic fuel products during the three months ended April 30, 2019 which resultedmainly due to significant decrease in sales from Sanhe Xiangtian. Prior to the increaseestablishment of Jingshan Sanhe, we sold our high-grade synthetic fuel products in Sanhe Xiangtian. We expected there will be no sales revenues.

Sales of high-grade synthetic fuel products as our continuing operation because we are no longer expected to sell high-grade synthetic fuel products in Sanhe Xiangtian going forward.

56

Cost of Revenue

Total cost of revenue increased by $4,585,464$2,204,400, or 100.0%190.4%, to $3,362,283 for the three months ended April 30, 20192020 as compared to the same period in 2018 was mainly 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 to continue to increase significantly as we expand our product offering to include synthetic fuel for diesel vehicles, which has already passed the testing production.

Sales of hydraulic parts and electronic components increased by $1,137,823 or 100.0% for the three months ended April 30, 2019 as compared to the same period in 2018 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.

Sales of wine and herbal wine increased by $1,436,914 or 100.0% for the three months ended April 30, 2019 as compared to the same period in 2018 due to our acquisition of Wine Co. and Herbal Wine Co. in December 2018.

Cost of Revenue

Total cost of revenue increased by $4,469,771, or 1,447.7%, to $4,778,526 for the three months ended April 30, 2019 as compared to $308,755$1,157,883 for the same period in 2018.2019. The increase in cost of revenue was in line withmainly due to the increaseprovision of revenue.inventories allowance for aged inventories of PV panels and heat pumps.

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

  For the Three
Months Ended
April 30,
2019		  For the Three
Months Ended
April 30,
2018		  Change  Change (%) 
             
Cost of revenue            
Installation of power generation systems $-  $59,019  $(59,019)  (100.0)%
PV panels and others  781,943   249,736   532,207   213.1%
Heat pumps  373,066   -   373,066   100.0%
High-grade synthetic fuel  2,938,749   -   2,938,749   100.0%
Hydraulic parts and electronic components  533,113   -   533,113   100.0%
Wine and herbal wine  151,655   -   151,655   100.0%
Total cost of revenue $4,778,526  $308,755  $4,469,771   1,447.7%

 

49

  For the
Three Months
Ended
April 30,
2020		  For the
Three Months
Ended
April 30,
2019		  Change  Change (%) 
             
Cost of revenue            
PV panels and others  444,883   781,943   (337,060)  (43.1)%
Heat pumps  2,917,400   373,066   2,544,334   682.0%
High-grade synthetic fuel  -   2,874   (2,874)  (100.0)%
Total cost of revenue $3,362,283  $1,157,883  $2,204,400   190.4%

 

Cost of revenue of PV panels and others decreased by $337,060 or 43.1% for the three months ended April 30, 2020 as compared to the same period in 2019 mainly due to no sales of our PV panels for the period and offset by the increase of provision allowance for aged inventories due to slow moving of our inventories and lack of sales.

Cost of revenue of heat pumps increased by $2,544,334 or 682.0% for the three months ended April 30, 2020 as compared to the same period in 2019 mainly due to the increase of the cost per unit of our heat pump parts and the allowance for aged inventories due to slow moving of our inventories and lack of sales.

 

Gross Profit

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

  For the Three
Months Ended
April 30,
2019		  For the Three
Months Ended
April 30,
2018		  Change  Change (%) 
             
Installation of power generation systems            
Gross profit $-  $19,682  $(19,682)  (100)%
Gross margin  -%  25.0%  (25.0)%    
                 
PV panels and others                
Gross profit $67,777  $95,207  $(27,430)  (28.8)%
Gross margin  8.0%  27.6%  (19.6)%    
                 
Heat pumps                
Gross profit $44,080  $-  $44,080   100.0%
Gross margin  10.6%  -%  10.6%    
                 
High-grade synthetic fuel                
Gross profit $1,646,715  $-  $1,646,715   100.0%
Gross margin  35.9%  -%  35.9%    
                 
Hydraulic parts and electronic components                
Gross profit $604,710  $-  $604,710   100.0%
Gross margin  53.1%  -%  53.1%    
                 
Wine and herbal wine                
Gross profit $1,285,259  $-  $1,285,259   100.0%
Gross margin  89.4%  -%  89.4%    
                 
Total                
Gross profit $3,648,541  $114,889  $3,533,652   3,075.7%
Gross margin  43.3%  27.1%  16.2%    
  

For the
Three Months
Ended

April 30,
2020

  

For the
Three Months
Ended

April 30,
2019

  Change  Change (%) 
             
PV panels and others            
Gross profit margin $(444,883) $67,777  $(512,660)  (756.4)%
Gross profit percentage  (100.0)%  8.0%  (108.0)%    
                 
Heat pumps                
Gross (loss) profit margin $(2,686,941) $44,080  $(2,731,021)  (6,195.6)%
Gross profit percentage  (1,165.9)%  10.6%  (1,176.5)%    
                 
High-grade synthetic fuel                
Gross (loss) profit margin $-  $5,528   (5,528)  (100.0)%
Gross profit percentage  -%  65.8%  (65.8)%    
                 
Total                
Gross (loss) profit margin $(3,131,824) $117,385  $(3,249,209)  (2,768.0)%
Gross profit percentage  (1,359.0)%  9.2%  (1,368.2)%    

 

Our gross profit increased(loss) decreased by $3,533,652,$3,249,209, or 3,075.7%2,768.0%, to $3,648,541$(3,131,824) during the three months ended April 30, 20192020 from $114,889$117,385 for the same period in 2018.2019. The increasedecrease in gross profit was primarily due to the significant increase in revenues contributed by Jingshan Sanhe, established in April 2018, Hubei Jinli, acquired in June 2018, and Wine Co. and Herbal Wine Co., acquired in December 2018.cost of revenue as we provided allowance for aged inventories which attributed to gross loss.

 

For the three months ended April 30, 20192020 and 2018,2019, our overall gross (loss) profit percentage was 43.3%(1,359.0%) and 27.1%9.2%, respectively. The increase in gross profit percentagedecrease of 1,368.2% was primarily due to the increase in cost of revenue as we provided more allowance for aging inventories due to slow moving of our inventories and the increase of cost of revenue of our heat pump components products. 

Gross (loss) profit percentage for our PV panels and others revenue was (100.0)% and 8.0% for the three months ended April 30, 2020 and 2019, respectively. We did not sell any PV panels and others products during the three months ended April 30, 2020 and provided more allowance for aging inventories due to slow moving of our inventories which resulted to the decrease of gross profit percentage.


Gross (loss) profit percentage for heat pumps revenue was (1,165.9%) and 10.6% for the three months ended April 30, 2020 and 2019, respectively. The decrease was mainly due to we provided significant allowance for aged inventories due to slow moving of our inventories and lack of sales as discussed above. In addition, the decrease of gross profit percentage also due to the decrease of selling prices. There were more competitions in the market while we recently did not put a lot of research and development activities to keep up with the latest technology of our heat pumps product to stay competitive, for which we need to lower our selling price to stay competitive.

Gross profit percentage for our high-grade synthetic fuel revenue was 65.8% for the three months ended April 30, 2019. We did not sold any high-grade synthetic fuel products during the three months ended April 30, 2020.

Operating Expenses

Total operating expenses decreased by $392,380 or 42.7% from $919,919 during the three months ended April 30, 2019 to $527,539 during the same period in 2020. The decrease in operating expenses was mainly attributable to (i) the decrease in selling expenses of $89,410 and (ii) the decrease in general and administrative expenses of $481,573. This decrease was offset by (i) the decrease in recovery for doubtful accounts of $1,421 and (ii) the change in estimated contingent liabilities of $177,182 as we incurred a gain of contingent estimated payment during the three months ended April 30, 2019 and we did not have such contingent payment during the three months ended April 30, 2020.

The decrease in selling expenses of approximately $89,000 was mainly attributable to the decrease in salaries, social insurance and commission expenses of approximately $63,000 to our sales representatives, the decrease in shipping expenses of approximately $16,000 resulted from decreased in sales, and the decrease in travel expenses of approximately $5,000 due to COVID-19 travel restriction.

The decrease in general and administrative expenses of approximately $482,000 was mainly attributable to (i) the decrease in salaries, social insurance expenses, and benefits expenses of approximately $109,000 mainly due to the COVID-19 restriction as our operations and offices were closed with limited operations during the quarter ended April 30, 2020, (ii) the decrease in depreciation and amortization expenses of approximately $111,000 due to the impairment of long-lived assets adjustments that we provided in prior quarters, which we resulted in lesser depreciation and amortization expenses as there were no depreciation and amortization expenses on the impaired assets in the current quarter, (iii) the decrease in other general and administrative expenses including office expenses, supplies and travel and transportation expenses of approximately $83,000 due to the COVID-19 restriction as our operations and offices were closed with limited operations during the quarter ended April 30, 2020, and (iv) approximately $326,000 decrease in professional fees including legal fees, audit fees and consulting fees, as we incurred significant professional fees in relation to the acquisition of Rongentang as well as incurring more up-listing cost during the three months ended April 30, 2019 and we did not incur such professional fees in the same period in 2020 as we currently put our up-listing plan on hold. The decrease was offset by the increase in rent, utilities and property management expenses of approximately $148,000 mainly due to the allocation of our leased factories and related cost into general and administrative expense as we have no production in Xiangtian Zhongdian.

Other Income (Expenses), Net

Total other expenses decreased by $491,824 or 87.3% from $563,359 during the three months ended April 30, 2019 to $71,535 during the same period in 2020. The decrease in total other expenses was mainly attributable to the decrease in other expense as we only incurred approximately $80,000 court fees from our prior legal cases during the three months ended April 30, 2020. This decrease in other expense was also due to approximately $393,000 of one-time finance expenses incurred in the three months ended April 30, 2019 resulted from the early acquisition payment of Hubei Jinli prior to the original due date and approximately $132,000 decrease in interest expense as we did not obtained any new related party loan during the three months ended April 30, 2020.

Income Tax Benefit

Our current income tax benefit was $16,482 and $36,060 for the three months ended April 30, 2020 and 2019, respectively. The decrease of income tax benefit was resulted from lesser taxable losses resulted from the utilization of prior periods net operating losses from our VIEs and controlled entities for the three months ended April 30, 2020 as compared to the same period in 2019. We have also provided 100% allowance on net operating losses for our VIEs and controlled entities which incurred losses that has no prior periods of net operating losses for utilization in the three months ended April 30, 2020 and 2019.

58

Loss from Continuing Operations

Our net loss from continuing operations decreased by $2,384,583, or 179.3%, to net loss of $3,714,416 for the three months ended April 30, 2020, from a net loss of $1,329,833 for the same period in 2019. Such change was the result of the combination of the changes discussed above.

Discontinued Operations

Net Income from Discontinued Operations

Our net income from discontinued operations decreased by $1,420,904, or 96.0%, to net income of $58,454 for the three months ended April 30, 2020, from a net income of $1,479,358 for the three months ended April 30, 2019. The decrease in income from discontinued operations was predominantly due to the COVID-19 restriction as our operations and offices were closed with limited operations during the quarter ended April 30, 2020 for Jingshan Sanhe and Hubei Jinli. In addition, we disposed Wine Co. and Herbal Wine Co. in January 2020 which also attributable to the decrease of income from discontinued operations. We were generating higher income from the Jingshan Sanhe, Hubei Jinli, Wine Co. and Herbal Wine Co. in the same period in 2019 as there were no COVID-19 restriction and Wine Co. and Herbal Wine Co. were part of our consolidated group. See Note 4 – Discontinued operations.

Net (Loss) Income

Our net loss increased by $3,805,487, or 2,545.1%, to net loss of $3,655,962 for the three months ended April 30, 2020 from a net income of $149,525 for the three months ended April 30, 2019. Such change was the result of the combination of the changes discussed above.

The Nine Months Ended April 30, 2020 Compared to the Nine Months Ended April 30, 2019

  

For the
Nine Months
Ended

April 30,
2020

  

For the
Nine Months
Ended

April 30,
2019

  Change  Change (%) 
             
Revenue $3,156,482  $32,001,667  $(28,845,185)  (90.1)%
Cost of revenue  7,744,978   27,321,277   (19,576,299)  (71.7)%
Gross (loss) profit  (4,588,496)  4,680,390   (9,268,886)  (198.0)%
Operating expenses  9,109,583   4,176,418   4,933,165   118.1%
(Loss) income from operations  (13,698,079)  503,972   (14,202,051)  (2,818.0)%
Other expenses, net  (192,358)  (1,032,359)  (840,001)  (81.4)%
Loss before income taxes  (13,890,437)  (528,387)  13,362,050   2,528.8%
Income tax benefit (expense)  4,498   (473,471)  (477,969)  (101.0)%
Loss from continuing operations  (13,885,939)  (1,001,858)  12,884,081   1,286.0%
 (Loss) income from discontinued operations, net of applicable income taxes  (1,950,581)  4,459,636   (6,410,217)  (143.7)%
Loss on sale of discontinued operations, net of applicable income taxes  (454,067)  -   (454,067)  (100.0)%
Net (loss) income  (16,290,587)  3,457,778   (19,748,365)  (571.1)%
Less: Net (loss) income attributable to non-controlling interest from continuing operations  (1,377,393)  269,522   (1,646,915)  (611.1)%
Less: Net (loss) income attributable to non-controlling interests from discontinued operations  (51,848)  103,202   (155,050)  (150.2)%
Net (loss) income attributable to common stockholders $(14,861,346) $3,085,054  $(17,946,400)  (581.7)%
Net (loss) income per share attributable to common stockholders                
Basic and diluted loss per share – Continuing operations $(0.02) $(0.00) $0.02   100.0%
Basic and diluted (loss) earnings per share – Discontinued operations $(0.00) $0.01  $(0.01)  (100.0)%

59

Continuing Operations

Revenue

Our revenue was derived from the sales of PV panels and others products and heat pump products for the nine months ended April 30, 2020.

Total revenues decreased by $28,845,185 or 90.1%, to $3,156,482 for the nine months ended April 30, 2020 as compared to $32,001,667 for the same period in 2019. The overall decrease was primarily attributable to the decrease of revenue generated from sales of all products. See the table below for a detailed analysis of the decrease in our revenue.

Our revenue from our revenue categories is summarized as follows:

  

For the
Nine Months
Ended

April 30,
2020

  

For the
Nine Months
Ended

April 30,
2019

  Change  Change (%) 
             
Revenue            
Installation of power generation systems $-  $392,267  $(392,267)  (100.0)%
PV panels and others  1,850,097   21,259,425   (19,409,328)  (91.3)%
Air compression equipment and other components  -   1,391,714   (1,391,714)  (100.0)%
Heat pumps  1,306,385   7,999,582   (6,693,197)  (83.7)%
High-grade synthetic fuel  -   958,679   (958,679)  (100.0)%
Total revenue $3,156,482  $32,001,667  $(28,845,185)  (90.1)%

Installation of power generation systems revenue decreased by $392,267 or 100.0% from $392,267 for the nine months ended April 30, 2019 to $0 for the same period in 2020 because we did not have any new installation projects performed during the nine months ended April 30, 2020 as we have not been focusing on our power generation systems business. We are no longer focusing on the installation of power generation systems but to sell the PV panels separately. As a result, we do not expect our installation of power generation systems will be generating any significant revenues.

Sales of PV panels and others decreased by $19,409,328 or 91.3% from $21,259,425 for the nine months ended April 30, 2019 to $1,850,097 for the same period in 2020. The decrease in sales of PV panels and others was primarily due to significant decrease in sales from Xiangtian Zhongdian. We were operating under certain disagreements with our non-controlling shareholder in Xiangtian Zhongdian, which led to Xiangtian Zhongdian to put the PV panels sales orders on hold. As a result, our sales of PV panels decreased during the nine months ended April 30, 2020 as compared to the same period in 2019. In May, 2020, we acquired the remaining 30% ownership held by Nanjing Zhongdian Photovoltaic Co. Ltd. in Xiangtian Zhongdian and Xiangtian Zhongdian became our wholly owned subsidiary. However, our sales from PV panels are expected to decrease as compared to the prior period due to the non-controlling shareholder in Xiangtian Zhongdian having retained their marketing team and left Xiangtian Zhongdian. We will start developing our own PV panels market with our internal marketing sources. Our PV panels operations is expected to resume back to the normal level once we developed our own PV panels market.

60

Sales of air compression equipment and other components decreased by $1,391,714 or 100.0% and the sales of heat pumps decreased by $6,693,197 or 83.7% for the nine months ended April 30, 2020 as compared to the same period in 2019. The decrease was attributable to significant decrease in sales orders as we lost some large air compression equipment and heat pump customers and temporary closure of our and our customer’s operations under the influence of COVID-19 during the nine months ended April 30, 2020 which resulted in lesser sales orders in the current period as compared to the same period in 2019. Our sales from air compression equipment and heat pumps are expected to be decreased as compared to the prior period going forward as we recently did not put a lot of research and development activities to keep up with the latest technology of the air compression and heat pumps products. We anticipate a decrease in future sales of heat pumps and air compression, and as a result our competitors will, in all likelihood gain a greater market share in this industry.

Sales of high-grade synthetic fuel decreased by $958,679 or 100.0% for the nine months ended April 30, 2020, and we did not sell any high-grade synthetic fuel products during the nine months ended April 30, 2020 mainly due to significant decrease in sales from Sanhe Xiangtian. Prior to the establishment of Jingshan Sanhe, we sold our high-grade synthetic fuel products hydraulic parts and electronic components, and wine and herbal wine which generally have a higherin Sanhe Xiangtian. We expected there will be no sales of high-grade synthetic fuel products as our continuing operation because we are no longer expected to sell high-grade synthetic fuel products in Sanhe Xiangtian going forward.

Cost of Revenue

Total cost of revenue decreased by $19,576,299, or 71.7%, to $7,744,978 for the nine months ended April 30, 2020 as compared to $27,321,277 for the same period in 2019. The decrease in cost of revenue was in line with the decrease in revenue.

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

  

For the
Nine Months
Ended

April 30,
2020

  

For the
Nine Months
Ended

April 30,
2019

  Change  Change (%) 
             
Cost of revenue            
Installation of power generation systems $-  $360,264  $(360,264)  (100.0)%
PV panels and others  2,939,627   19,123,888   (16,184,261)  (84.6)%
Air compression equipment and other components  -   911,679   (911,679)  (100.0)%
Heat pumps  4,805,351   6,575,806   (1,770,455)  (26.9)%
High-grade synthetic fuel  -   349,640   (349,640)  (100.0)%
Total cost of revenue $7,744,978  $27,321,277  $(19,576,299)  (71.7)%

61

Gross Profit

Our gross profit percentage.from our major revenue categories is summarized as follows:

  

For the
Nine Months
Ended

April 30,
2020

  

For the
Nine Months
Ended

April 30,
2019

  Change  Change (%) 
             
Installation of power generation systems            
Gross profit margin $-  $32,003  $(32,003)  (100.0)%
Gross profit percentage  -%  8.2%  (8.2)%    
                 
PV panels and others                
Gross (loss) profit margin $(1,089,530) $2,135,537  $(3,225,067)  (151.0)%
Gross profit percentage  (58.9)%  10.0%  (68.9)%    
                 
Air compression equipment and other components                
Gross profit margin $-  $480,035  $(480,035)  (100.0)%
Gross profit percentage  -%  34.5%  (34.5)%    
                 
Heat pumps                
Gross (loss) profit margin $(3,498,966) $1,423,776  $(4,922,742)  (345.8)%
Gross profit percentage  (267.8)%  17.8%  (285.6)%    
                 
High-grade synthetic fuel                
Gross profit margin $-  $609,039  $(609,039)  (100.0)%
Gross profit percentage  -%  63.5%  (63.5)%    
                 
Total                
Gross (loss) profit margin $(4,588,496) $4,680,390  $(9,268,886)  (198.0)%
Gross profit percentage  (145.4)%  14.6%  (160.0)%    

Our gross (loss) profit decreased by $9,268,886, or 198.0%, to (4,588,496) during the nine months ended April 30, 2020 from $4,680,390 for the same period in 2019. The decrease in gross profit was primarily due to the significant decrease in revenues from sales of PV panels and other products, air compression equipment, heat pumps, and high-grade synthetic fuel products as discussed above and the increase in cost of revenue as we provided allowance for aged inventories which attributed to gross loss.

 

For the nine months ended April 30, 2020 and 2019, our overall gross (loss) profit percentage was (145.4%) and 14.6%, respectively. The decrease of 160.0% was primarily due to increase in cost of revenue as we provided allowance for aged inventories.

Gross profit percentage for our installation of power generation systems revenue was 0% and 25.0%8.2% for the threenine months ended April 30, 2019 and 2018, respectively. The decrease in gross profit percentage is consistent with the decrease in sales as we2019. We did not have any new projects forinstallation project performed during the threenine months ended April 30, 2019.2020.

Gross (loss) profit percentage for PV panels and others revenue was 8.0%(58.9%) and 27.6%10.0% for the threenine months ended April 30, 20192020 and 2018,2019, respectively. The decrease of gross profit percentage was due to the increase in sales volumecost of revenue as we expandedprovided allowance for aged inventories due to slow moving of our business by lowering price to attract moreinventories and lack of sales volume, which results in lower grossas discussed above.

Gross profit percentage for air compression equipment and other components revenue was 34.5% for the nine months ended April 30, 2019. We did not sell any air compression equipment and other components during the nine months ended April 30, 2020.

Gross (loss) profit percentage for heat pumps revenue was (267.8%) and 17.8% for the nine months ended April 30, 2020 and 2019, respectively. The significant decrease was mainly due to increase in cost of revenue as we provided allowance for aged inventories due to slow moving of our inventories.

Gross profit percentage for high-grade synthetic fuel revenue was 63.5% for the current period.nine months ended April 30, 2019. We did not sold any high-grade synthetic fuel products during the nine months ended April 30, 2020.

  

5062

 

 

Operating Expenses

 

Total operating expenses increased by $1,533,814$4,933,165 or 192.4%118.1% from $797,142$4,176,418 during the threenine months ended April 30, 20182019 to $2,330,956$9,109,583 during the same period in 2019.2020. The increase in operating expenses was mainly attributable to (i) the increase in provision for doubtful accounts of $854,559 as we have more aged receivables, (ii) the increase in impairment of advances to suppliers of $538,809 and (iii) the increase in impairment loss of long-lived assets of $4,999,504. The increase in operating expenses was offset by (iv) the decrease in selling expenses of $243,325,$602,561 and (v) the increasedecrease in general and administrative (“G&A”) expenses of $1,467,671 and changes in estimated contingent liabilities of $177,182.$878,584.

The increasedecrease in selling expenses of $243,325approximately $603,000 was mainly attributable to the increasedecrease in salaries and benefits and commission expenses of approximately $564,000 to our sales representatives as we determined adding sales representatives is not an effective way to promote our products and the decrease of shipping costsexpenses of $238,079. The increaseapproximately $35,000 resulted from decreased in shipping costs 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.sales.

The increasedecrease in G&Ageneral and administrative expenses of $1,467,671approximately $879,000 was mainly attributable to the increase in salaries, social insurance expenses and benefits of $414,130, the increase in depreciation and amortization expense of $122,360, the increase in vehicle repair and maintenance expenses of $71,900, the increase in research and development of $70,638, the increase in rent of $197,301 and the increase(i) approximately $968,000 decrease in professional feefees including legal fees, audit fees and consulting fees, of $58,683. 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, Tianjin Jiabaili acquired in June 2018, and Wine Co. and Herbal Wine Co., acquired in December 2018.

Other (Expenses) Income, Net

Total other expenses increased by $583,314 or 39,359.9% from other income of $1,482 during the three months ended April 30, 2018 to other expenses of $581,832 during the same period in 2019. The increase in total other expenses was mainly attributable to the increase in interest expense and financial expense. We obtained third party loans in 2018 to pay for the initial paymentsas we incurred significant professional fees in relation to the acquisition of Hubei Jinli, Wine Co. and Tianjin Jiabaili in June 2018. As a result, we incurred approximately $41,000 interest expense forHerbal Wine Co. as well as incurring more up-listing cost during the threenine months ended April 30, 2019 as compared to $0 forand we did not incur such professional fees in the same period in 2018. Furthermore,2020 as we currently put our up-listing plan on hold, (ii) the acquisitiondecrease in depreciation and amortization expenses of Hubei Jinli also includes three installment payments eachapproximately $193,000 due on June 20to the impairment of long-lived assets adjustments that we provided in the year ended July 31, 2019, 2020 and 2021, respectively, which we resulted in lesser depreciation and amortization expenses as there were no depreciation and amortization expenses on the impaired assets in the current period and (iii) the decrease in other general and administrative expenses including office expenses, meals and entertainment, training and supply expenses of debt discountapproximately $123,000 mainly due to the COVID-19 restriction as our operations and offices were closed with limited operations during the quarter ended April 30, 2020. The decrease was offset by the increase in rent, utilities and property management expenses of approximately $405,000 mainly due to the allocation of our investment payableleased factories and related cost into general and administrative expense as we have no production in Xiangtian Zhongdian.

The increase of impairment of advances to suppliers of approximately $130,000 for$539,000 was mainly due to Xiangtian Zhongdian lacked of productions, we provided impairments on advances to suppliers.

The increase of impairment loss of long-lived assets of approximately $5,000,000 was mainly due to Sanhe Xiangtian and Xiangtian Zhongdian lacked of productions, we provided impairments on production equipment and relevant patents.

Other (Expenses) Income, Net

Total other expenses decreased by $840,001 or 81.4% from total other expenses of $1,032,359 during the threenine months ended April 30, 2019 as compared to $0 for$192,358 during the same period in 2018. Furthermore,2020. The decrease in total other expenses was mainly attributable approximately $685,000 decrease in interest expense as we madedid not obtained any new related party loan during the nine months ended April 30, 2020. This decrease was also due to the decrease in other expense of approximately $160,000. During the nine months ended April 30, 2019, we incurred approximately $393,000 of one-time finance expenses resulted from the early acquisition payment for acquisition of Hubei Jinli prior to the original due date. As a result,date and we recognized a one-time finance expensesdid not incur such costs during the same period in 2020. During the nine months ended April 30, 2020, we made approximately $285,000 donation to the Red Cross Society of Hubei province and Xianning City for helping current COVID-19 patients and we also incurred approximately $80,000 court fees offset by the increase in other income of approximately $0.4 million at the time$176,000, as we received more government grants for which the discount portion of the paymenttechnological transformation.

Income Tax Benefit (Expense)

Our current income tax benefit (expense) was $4,498 and $(473,471) for the originalnine months ended April 30, 2020 and 2019, respectively. The increase of income tax benefit is due date were prepaidto the fact that we utilized the income tax benefit from our VIEs and controlled entities which we incurred losses in current period while incurring income tax expenses in prior periods for the threenine months ended April 30, 2020. We have also provided 100% allowance on net operating losses for our VIEs and controlled entities which incurred losses in the nine months ended April 30, 2020. In the nine months ended April 30, 2019, as compared to $0 for the same period in 2018.

Income Tax Expense

Our income tax expense was $586,228 and $4,347 for the three months ended April 30, 2019 and 2018, respectively. Ourour income tax expense was incurred by our profitable VIEs and controlled entities in both periods and we have provided 100% allowance on net operating losses for our VIEs and controlled entities which incurred losses.

63

 

Net Income (Loss)

Loss from Continuing Operations

Our net incomeloss from continuing operations increased by $834,643,$12,884,081, or 121.8%1,286.0%, to net incomeloss of $149,525$13,885,939 for the threenine months ended April 30, 2019,2020, from a net loss of $685,118$1,001,858 for the same period in 2018.2019. Such change was the result of the combination of the changes discussed above.

The Nine Months Ended April 30, 2019 Compared to the Nine Months Ended April 30, 2018Discontinued Operations

 

  For the Nine
Months Ended
April 30,
2019		  For the Nine
Months Ended
April 30,
2018		  Change  Change (%) 
             
Revenue $50,328,996  $1,011,081  $49,317,915   4,877.7%
Cost of revenue  36,662,795   801,840   35,860,955   4,472.3%
Gross profit  13,666,201   209,241   13,456,960   6,431.3%
Operating expenses  6,910,290   2,408,782   4,501,508   186.9%
Income (loss) from operations  6,755,911   (2,199,541)  8,955,452   407.2%
Other expenses, net  (1,135,987)  (1,912)  1,134,075   59,313.5%
Income (loss) before income taxes  5,619,924   (2,201,453)  7,821,377   355.3%
Income tax expense  (2,162,146)  (8,190)  2,153,956   26,299.8%
Net income (loss)  3,457,778   (2,209,643)  5,667,421   256.5%
Less: Net income (loss) attributable to non-controlling interest  372,724   (3,361)  376,085   11,189.7%
Net income (loss) attributable to common stockholders  3,085,054   (2,206,282)  5,291,336   239.8%
Net income (loss) per share attributable to common stockholders                
Basic and diluted earnings per share $0.01  $(0.00) $0.01   100.0%

Net Loss from Discontinued Operations

51

Revenue

Our revenue consistednet loss from discontinued operations increased by $6,410,217 or 143.7%, to net loss of fees from 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, wine and herbal wine$1,950,581 for the nine months ended April 30, 2019.

Total revenues increased by $49,317,915, or 4,877.7%, to $50,328,9962020, from a net income of $4,459,636 for the nine months ended April 30, 2019 as compared to $1,011,081 for the nine months ended April 30, 2018. The overall increase was primarily attributable to the increase of revenue generated from sales of PV panels and other products, air compression equipment and other components, heat pumps, high-grade synthetic fuel, hydraulic parts and electronic components, and wine and herbal wine.

Our revenue from our revenue categories is summarized as follows:

  For the Nine
Months Ended
April 30,
2019		  For the Nine
Months Ended
April 30,
2018		  Change  Change (%) 
             
Revenue            
Installation of power generation systems $392,267  $184,677  $207,590   112.4%
PV panels and others  21,259,433   826,404   20,433,029   2,472.5%
Air compression equipment and other components  1,391,714   -   1,391,714   100.0%
Heat pumps  7,999,582   -   7,999,582   100.0%
High-grade synthetic fuel  12,865,526   -   12,865,526   100.0%
Hydraulic parts and electronic components  4,482,117   -   4,482,117   100.0%
Wine and herbal wine  1,938,357   -   1,938,357   100.0%
Total revenue $50,328,996  $1,011,081  $49,317,915   4,877.7%

Revenue from installation of power generation systems increased by $207,590 or 112.4% from $184,677 for the nine months ended April 30, 2018 to $392,267 for the nine months ended April 30, 2019 due to the increase in installation project size. We only had one major installation project during the nine months ended April 30, 2019 as compared to a few significantly smaller projects during the nine months ended April 30, 2018. 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 $20,433,029 or 2,472.5% from $826,404 for the nine months ended April 30, 2018 to $21,259,433 for the same period in 2019. The increase in sales of PV panels and others was mainly attributable to 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 $1,391,714 or 100.0% and the sales of heat pumps increased by $7,999,582 or 100.0% for the nine months ended April 30, 2019 as compared to the same period in 2018. 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 nine months ended April 30, 2018 while we sold them as separate components as a result of our marketing efforts during the nine months ended April 30, 2019, which resulted in the increase of sales revenues.


Sales of high-grade synthetic fuel increased by $12,865,526 or 100.0% for the nine months ended April 30, 2019 as compared to the same period in 2018 was mainly 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 has already passed the testing production.

Sales of hydraulic parts and electronic components increased by $4,482,117 or 100.0% for the nine months ended April 30, 2019 as compared to the same period in 2018 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.

Sales of wine and herbal wine increased by $1,938,357 or 100.0% for the nine months ended April 30, 2019 as compared to the same period in 2018 due to our acquisition of Wine Co. and Herbal Wine Co. in December 2018.

Cost of Revenue

Total cost of revenue increased by $35,860,955, or 4,472.3%, to $36,662,795 for the nine months ended April 30, 2019 as compared to $801,840 for the same period in 2018. The increase in cost of revenue was in line with the increase of revenue.

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

  For the Nine
Months Ended
April 30,
2019		  For the Nine
Months Ended
April 30,
2018		  Change  Change (%) 
             
Cost of revenue            
Installation of power generation systems $360,264  $150,124  $210,140   140.0%
PV panels and others  19,123,888   651,716   18,472,172   2,834.4%
Air compression equipment and other components  911,679   -   911,679   100.0%
Heat pumps  6,575,806   -   6,575,806   100.0%
High-grade synthetic fuel  7,642,784   -   7,642,784   100.0%
Hydraulic parts and electronic components  1,841,303   -   1,841,303   100.0%
Wine and herbal wine  207,071   -   207,071   100.0%
Total cost of revenue $36,662,795  $801,840  $35,860,955   4,472.3%

53

Gross Profit

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

  For the Nine
Months Ended
April 30,
2019		  For the Nine
Months Ended
April 30,
2018		  Change  Change (%) 
             
Installation of power generation systems            
Gross profit $32,003  $34,553  $(2,550)  (7.4)%
Gross margin  8.2%  18.7%  (10.5)%    
                 
PV panels and others                
Gross profit $2,135,545  $174,688  $1,960,857   1,122.5%
Gross margin  10.0%  21.1%  (11.1)%    
                 
Air compression equipment and other components                
Gross profit $480,035  $-  $480,035   100.0%
Gross margin  34.5%  -%  34.5%    
                 
Heat pumps                
Gross profit $1,423,776  $-  $1,423,776   100.0%
Gross margin  17.8%  -%  17.8%    
                 
High-grade synthetic fuel                
Gross profit $5,222,742  $-  $5,222,742   100.0%
Gross margin  40.6%  -%  40.6%    
                 
Hydraulic parts and electronic components                
Gross profit $2,640,814  $-  $2,640,814   100.0%
Gross margin  58.9%  -%  58.9%    
                 
Wine and herbal wine                
Gross profit $1,731,286  $-  $1,731,286   100.0%
Gross margin  89.3%  -%  89.3%    
                 
Total                
Gross profit $13,666,201  $209,241  $13,456,960   6,431.3%
Gross margin  27.2%  20.7%  6.5%    

Our gross profit increased by $13,456,960, or 6,431.3%, to $13,666,201 during the nine months ended April 30, 2019 from $209,241 for the same period in 2018. 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, Wine Co. and Herbal Wine Co., acquired in December 2018.

For the nine months ended April 30, 2019 and 2018, our overall gross profit percentage was 27.2% and 20.7%, respectively. The increase in gross profit percentage was primarily due to the increase in sales of our air compression equipment and other components, high-grade synthetic fuel products, hydraulic parts and electronic components and wine and herbal wine, which generally have a higher gross profit percentage.

Gross profit percentage for our installation of power generation systems revenue was 8.2% and 18.7% for the nine months ended April 30, 2019 and 2018, 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 nine months ended April 30, 2019.


Gross profit percentage for PV panels and others revenue was 10.0% and 21.1% for the nine months ended April 30, 2019 and 2018, respectively. The decrease of gross profit percentage was due to the increase in sales volume as we expanded our business by lowing selling price to attract more sales, which result in lower gross profit percentage in the current year.

Operating Expenses

Total operating expenses increased by $4,501,508 or 186.9% from $2,408,782 during the nine months ended April 30, 2018 to $6,910,290 during the same period in 2019. The increase in operating expenses was mainly attributable to the increase in selling expenses of $984,320 and the increase in general and administrative expenses of $3,538,626 for the nine months ended April 30, 2019 as compared to the same period in 2018.

The increase in selling expenses of $984,320 was mainly attributable to the increase in salaries of $175,604, and the increase in commission of $478,214 due to the increased number of sales representatives and the increase in shipping expense of $295,305. 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 expenses of $3,538,626 was mainly attributable to the increase in salaries, social insurance expenses, benefits, and travel expenses of $780,195, the increase in meals and entertainment of $124,664, the increase in depreciation and amortization expense of $352,458, the increase in rent expense of $384,016, the increase in vehicle repair and maintenance expenses of $127,155, the increase in research and development expense of $149,581 and the increase in professional fees including legal fees, audit fees and consulting fees of $877,506. 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, and Wine Co. and Herbal Wine Co., acquired in December 2018.

Other Expenses, Net

Total other expenses increased by $1,134,075 or 59,313.5% from $1,912 during the nine months ended April 30, 2018 to $1,135,987 during the nine months ended April 30, 2019. The increase in total other expensesloss from discontinued operations was mainly attributablepredominantly due to the expenses generated by Jingshan Sanhe and Hubei Jinli, which considered as discontinued operations. We were generating income from Jingshan Sanhe and Hubei Jinli in the same period in 2019. The increase in interest expenseloss from discontinued operations was also due to the expenses generated by Herbal Wine Co. and Wine Co. which also considered as a resultdiscontinued operations. We were generating income from the Wine Co. and Herbal Wine Co. in the same period in 2019. See Note 4 – Discontinued operations.

Net loss on Sale of the third party loans that we obtained in 2018 to payDiscontinued Operations

Our net loss from discontinued operations was $454,067 for the initial payments in relationnine months ended April 30, 2020, which was due to the acquisition of Hubei Jinli and Tianjin Jiabaili in June 2018. In addition, Hubei Jinli has existing bank loans prior to our acquisition. We also obtained a new related party loan in January 2019 for the payments in relation to the acquisitionsales of Wine Co. and Herbal Wine Co. As a result,as we incurredentered into an equity transfer agreement with Kairui Tong and Hao Huang (the “Buyers”) on January 6, 2020, which we agreed to sell its 90% ownership in Wine Co. and Herbal Wine Co. to the Buyers for approximately $496,000 interest expense$9.6 million (RMB 67.5 million), of which, 54% ownership are sold to Kairui Tong, the legal representative and general manager of Wine Co. and Herbal Wine Co, and 36% ownership are sold to Hao Huang, an unrelated third party. We did not sell any operations during the nine months ended April 30, 2019.

Net (Loss) Income

Our net loss increased by $19,748,365, or 571.1%, to net loss of $16,290,587 for the nine months ended April 30, 2019 as compared to $0 for the same period in 2018. Furthermore, the acquisition of Hubei Jinli also includes three installment payments each due on June 20 of 2019, 2020 and 2021, respectively, which resulted in amortization of debt discount of our investment payable of approximately $379,000 for the nine months ended April 30, 2019 as compared to $0 for the same period in 2018. Furthermore, we made the payment for acquisition of Hubei Jinli prior to the original due date, asfrom a result, we recognized a one-time finance expenses of approximately $0.4 million at the time for which the discount portion of the payment for the original due date were prepaid for the nine months ended April 30, 2019 as compared to $0 for the same period in 2018.

Income Tax Expense

Our current income tax expense was $2,162,146 and $8,190 for the nine months ended April 30, 2019 and 2018, respectively. Our income tax expense was incurred by our profitable VIEs and controlled entities in both periods and we have provided 100% allowance on net operating losses for our VIEs and controlled entities which incurred losses.

Net Income (Loss)

Our net income increased by $5,667,421, or 256.5%, to net income of $3,457,778 for the nine months ended April 30, 2019, from a net loss of $2,209,643 for the same period in 2018.2019. Such change was the result of the combination of the changes discussed above.


Liquidity and Capital Resources

Capital Resources

 

In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. Debt financing in the form of loans includingfrom related party loans haveparties has been utilized to finance ourthe working capital requirements.requirements of the Company and acquisitions of businesses. As of April 30, 2019,2020, the Company’s working capitaldeficit was approximately $2.6$7.4 million and the Company had cash and restricted cash of approximately $14.6$1.5 million. Excluding other payable to related parties and director of approximately $7.0 million, the Company’s working deficit was approximately $0.4 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 expectOur management has considered whether there is a going concern issue due to realize the balance of our current assets within the normal operating cycle ofrecurring losses from operations. Management has determined there is substantial doubt about our ability to continue as a twelve month period.going concern. If we are unable to realizegenerate significant revenue, we may be required to cease or curtail our current assets withinoperations. Our management is trying to alleviate the normal operating cycle of a twelve month period, we plan to supplement our available sources of fundsgoing concern risk through the following sources:

 

●we will continuously seek equity financing (including a proposed underwritten public offering pursuant to a registration statement on Form S-1 on February 1, 2019) to support itsour working capital;

 

●other available sources of financing from PRC banks and other financial institutions;

 

●financial support and credit guarantee commitments from the Company’sour 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.

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We also expect to raise additional capital through public offerings with the proceeds to be used for 1) leasing additional production facilities for synthetic fuel and related products, 2) adding a new packaging line for our synthetic fuel and related products in Jingshan Sanhe, and 3) general corporate purpose.

The following summarizes the key components of our cash flows for the nine months ended April 30, 20192020 and 2018.2019.

  For the Nine Months
Ended April 30,		 
  2020  2019 
Net cash provided by (used in) operating activities from continuing operations $309,145  $(4,189,838)
Net cash (used in) provided by operating activities from discontinued operations  (1,347,934)  9,590,640 
Net cash used in investing activities from continuing operations  (616,819)  (8,174,433)
Net cash used in investing activities from discontinued operations  (1,962,850)  (2,682,438)
Net cash provided by financing activities from continuing operations  616,861   10,607,221 
Net cash provided by (used in) financing activities from discontinued operations  431,440   (4,749,636)
Effect of exchange rate change on cash and restricted cash  (106,051)  20,799 
Net change in cash and restricted cash $(2,676,208) $422,315 

  For the Nine Months Ended
April 30,		 
  2019  2018 
Net cash provided by (used in) operating activities $5,400,802  $(2,527,012)
Net cash used in investing activities  (10,856,871)  (572,389)
Net cash provided by financing activities  5,857,585   4,482,425 
Effect of exchange rate change on cash  20,799   505,475 
Net change in cash $422,315  $1,769,800 

As of April 30, 20192020 and July 31, 2018,2019, we had a cash and restricted cash balance of $14,668,098$1,517,952 and $14,245,783, respectively.$2,279,173, respectively, from continuing operations.

Operating Activities

Net cash provided by operating activities from continuing operations was approximately $5.4$0.3 million for the nine months ended April 30, 20192020, which was mainly due to non-cash effects of depreciation and amortization expense of approximately $0.2 million, bad debt allowance of approximately $0.7 million, impairment of inventories of approximately $4.7 million, impairment of advances to suppliers of approximately $0.5 million, impairment loss of long-lived assets of approximately $5.0 million, the decrease in notes receivable of approximately $1.1 million, the decrease in accounts receivable as comparedwe collected approximately $0.5 million, the decrease in inventories of approximately $0.3 million, the decrease in advances to suppliers of approximately $1.4 million, the decrease in prepaid expenses of approximately $0.2 million, and the decrease in other receivables as we collected approximately $0.3 million. The net cash provided by operating activities was partially offset by net loss from continuing operations of approximately $13.9 million, the decrease in advance from customers of approximately $0.2 million and the decrease in other payables and accrued liabilities of approximately $0.5 million.

Net cash used in operating activities offrom continuing operations was approximately $2.5$4.2 million for the same period in 2018.


Net cash provided by operating activities for the nine months ended April 30, 2019 was mainly comprised of net incomeloss from continuing operations of approximately $3.5$1.0 million, depreciation and amortization expenserecovery of doubtful accounts of approximately $1.4 million, changes in costs and estimated earnings in excess of billings of approximately $2.9 million, the increase of advance from customers of approximately $8.0 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 partially offset by the increase in inventories of approximately $1.8 million, the increase in advances to suppliers of approximately $2.6 million as we prepaid for more purchase in anticipation of productions, the decrease in accounts payable of approximately $1.5 million and the decrease in other payables and accrued liabilities of approximately $5.4 million.

Net cash used in operating activities for the nine months ended April 30, 2018 was mainly comprised of net loss of approximately $2.2 million, the decrease in accounts payable of approximately $1.2$0.2 million, the increase in inventories of approximately $0.8 million, the increase inof advance to suppliers of approximately $1.4$2.0 million, the increase in other receivablesprepaid expenses of approximately $0.9$0.3 million, the decrease in accounts payable as we paid off approximately $2.0 million to our vendors as the payments became due and the decrease of advances from customers of approximately $3.5 million. The net cash used in operating activities from continuing operations was partially offset by to non-cash effects of depreciation and amortization expense of approximately $0.5 million, amortization of debt discount of approximately $0.4 million, the collectiondecrease in notes receivable as we collected bank notes of approximately $0.8 million, the decrease of accounts receivable of approximately $1.3$0.5 million, the decrease of contract assets of approximately $2.9 million, and the increase of advance from customersin other payables and accrued liabilities of approximately $2.4$0.7 million.

Investing Activities

Net cash used in investing activities from continuing operations was approximately $10.9$0.6 million for the nine months ended April 30, 2019 as compared2020, which was mainly comprised of the partial investment payments of approximately $0.4 million that we made in relation to netthe acquisition of Hubei Jinli, and loan to a related party of approximately $0.6 million with an annual interest rate of 4.75% offset by the refund of short-term investment of approximately $0.4 million.

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Net cash used in investing activities offrom continuing operations was approximately $0.6$8.2 million for the same period in 2018.

Net cash used in investing activities for the nine months ended April 30, 2019 was mainly comprised of the partial investment payments of approximately $9.4 million that we made in relation to the acquisition of Hubei Jinli and Tianjin Jiabaili, the purchase of property and equipment of approximately $2.8$0.2 million for our business expansion and the purchase of short-term investment of approximately $0.5$0.4 million partially offset by the refund of loan-term investment of approximately $0.1 million and the collection of loan receivable of approximately $1.8 million.

Net cash used in investing activities for the nine months ended April 30, 2018 was comprised of the purchase of property and equipment of approximately $99,000 and the deposit made to investment of approximately $0.5 million.

Financing Activities

Net cash provided by financing activities from continuing operations was approximately $5.9$0.6 million for the nine months ended April 30, 2019 as compared2020, which was due to netborrowings from related parties.

Net cash provided by financing activities offrom continuing operations was approximately $4.5$10.6 million for the same period in 2018.

Net cash provided by financing activities for the nine months ended April 30, 2019 was comprised of capital contribution from shareholdersone shareholder of approximately $30.8 million, borrowings from related parties of approximately $1.8 million, and proceeds from related party loans of approximately $15.2 million partially offset by the payments of short-term bankthird party loan and related party loansloan of approximately $3.1$1.9 million and $35.4 million, respectively and the repayments to related parties of approximately $2.0 million.respectively.

Net cash provided by financing activities for the nine months ended April 30, 2018 was comprised of the borrowings from related parties of approximately $1.8 million, the proceeds from related party loans of approximately $0.5 million and the proceeds from note payable of approximately $2.2 million.

Commitments and Contingencies

In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450-20, “Loss Contingencies”, we will record accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.


Contractual Obligations

As of April 30, 2019,2020, the future minimum payments under certain of our contractual obligations were as follows:

     Payments Due In 
Contractual obligations Total  Less than
1 year		  1 – 3 years  3 – 5 years  Thereafter 
Operating leases obligations $3,466,548  $1,171,457  $1,846,118  $447,971  $1,002 
Long-term debt obligations*  878,981   462,502   416,479   -   - 
Loans obligations  742,413   742,413   -   -   - 
Due to related parties and third party  6,631,575   6,631,575   -   -   - 
Total $11,719,517  $9,007,947  $2,262,597  $447,971  $1,002 
     Payments Due In 
Contractual obligations Total  Less than
1 year		  1 – 3
years		  3 – 5
years		  Thereafter 
Operating leases liabilities $1,728,641  $877,827  $849,114  $850  $850 
Long-term debt obligations  243,726   243,726   -   -   - 
Due to related parties  6,971,614   6,971,614   -   -   - 
Total $8,943,981  $8,093,167  $849,114  $850  $850 

*Represent future value of acquisition payments in relation to our acquisitions of Hubei Jinli, Tianjin Jiabaili, Wine Co. and Herbal Wine Co.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.

Critical Accounting Policies and Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. While our significant accounting policies are more fully described in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this report, we believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our unaudited condensed consolidated financial statements.

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Use of Estimates and Assumptions

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in ourthe Company’s unaudited condensed consolidated financial statements include the estimated cost used to calculate the percentage of completion recognized in ourthe Company’s revenues, the useful lives of property, plant and equipment, impairment of long-lived assets, right-of-use assets, lease classification and liabilities, allowance for accounts receivable doubtful accounts, allowance for other accounts receivable doubtful accounts, allowance for inventory obsolescence reserve, allowance for advance to suppliers doubtful accounts, allowance for deferred tax assets, fair value of the assets and the liabilities of the entityentities acquired through ourits business combination, valuation of warranty reserves, contingent consideration liabilities, and the accrual of potential liabilities. Actual results could differ from these estimates.

Revenue Recognition

On August 1, 2018, wethe 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 ourthe 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 wethe Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which we expectthe Company expects to be entitled in such exchange. This will require usthe 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. OurThe Company’s revenue streams are recognized over time for ourthe Company’s sale and installation of power generation systems and are recognized at a point in time for ourthe 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 us tothat 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) we satisfythe 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 we record ourthe Company records its revenue. Upon adoption, wethe Company evaluated ourits 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.

Gross versus Net Revenue Reporting

 

In the normal course of the Company’s trading business, the Company orders products directly from its suppliers and drop ships the products directly to its customers. In these situations, the Company generally collects the sales proceeds directly from its customers and pays for the inventory purchases to its suppliers separately. The determination of whether revenues should be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the transaction. In determining whether the Company is the principal or an agent, the Company follows the accounting guidance for principal-agent considerations. Because the Company is not the primary obligor and is not responsible for (i) fulfilling the resale products delivery, (ii) establishing the selling prices for delivery of the resale products, (iii) performing all billing and collection activities including retaining credit risk and (iv) baring the back-end risk of inventory loss with respect to any product return from its customer, the Company has concluded that it is the agent in these arrangements, and therefore report revenues and cost of revenues on a net basis.

Sale and installation of power generation systems

Sales of power generation systemsystems in conjunction of system installation are generally recognized based on ourthe Company’s efforts or inputs to the satisfaction of a performance obligation using an input measure method, which was essentially the same as the percentage of completion method prior to August 1, 2018 for its installation project. Therefore, take into account the costs, estimated earnings and revenue to date on contracts not yet completed. Revenue recognized is that percentage of the total contract price that costs expended to date bear to anticipated final total costs, based on current estimates of costs to complete. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor and supplies. Adjustments to the original estimates of the total contract revenue, total contract costs, or the extent of progress toward completion are often required as work progresses. Such changes and refinements in estimation are reflected in reported results of operations as they occur; if material, the effects of changes in estimates are disclosed in the notes to the unaudited condensed consolidated financial statements.

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The key assumptions used in the estimate of costs to complete relate to the unit material cost, the quantity of materials to be used, the installation cost and those indirect costs related to contract performance. The estimate of unit material cost is reviewed and updated on a quarterly basis, based on the updated information available in the supply markets. The estimate of material quantity to be used for completion and the installation cost is also reviewed and updated on a quarterly basis, based on the updated information on the progress of project execution. If the supply market conditions or the progress of project execution were different, it is likely that materially different amounts of contract costs would be used in the percentage of completioninput method of accounting. Thus the uncertainty associated with those estimates may impact ourthe 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.


TheIf the sales of equipment is combined within the contract of the installation of power generation system with the Company performing significant service of integrating the equipment into the power generation system, the installation revenues and sales of equipment and system component are combined and considered as one performance obligation. The promises to transfer the equipment and system component and installation are not separately identifiable, which is evidencing by the fact that we providethe Company provides a significant servicesservice of integrating the goods and services into a power generation system for which the customer has contracted. WeThe Company currently dodoes not have any modification of contract and the contract currently does not have any variable consideration.

The Company did not generate any installation of power generation systems revenue for the three months ended April 30, 2020 and 2019. The Company’s sale and installation of power generation systems revenue for the nine months ended April 30, 2020 and 2019 were $0 and $392,267, respectively.

Sales of products

We continueSales of products includes sales of PV panels, air compression equipment and other components, heat pumps, high-grate synthetic fuel, hydraulic parts and electronic components, wine and herbal wine. When these products are not being integrated into a service contract and being sold individually, the Company continues to derive ourits revenues from sales contracts with its customers with revenues being recognized upon delivery of products. Persuasive evidence of an arrangement is demonstrated via sales contract and invoice; and the sales price to the customer is fixed upon acceptance of the sales contract and there is no separate sales rebate, discount, or other incentive. Such revenues are recognized at a point in time after all performance obligations are satisfied and based on when control of goods transfer to a customer, which is generally similar to when its delivery has occurred prior to August 1, 2018.

Gross versus Net Revenue Reporting

The Company’s trading segment, Xiangtian Trade, engages in trading of general merchandise, primarily consisting of tealeaves. The determination of whether revenues should be reported on a gross or net basis is based on its assessment of whether it is the principal or an agent in the transaction in accordance with ASC 606-10-55 and depends on whether the promise to the customer is to provide the products or to facilitate a sale by a third party. The nature of the promise depends on whether the Company controls the products prior to transferring it. When the Company controls the product, the promise is to provide and deliver the products and revenue is presented gross. When the Company does not control the products, the promise is to facilitate the sale and revenue is presented net.

To distinguish a promise to provide products from a promise to facilitate the sale from a third party, the Company considers the guidance of control in ASC 606-10-55-37A and the indicators in 606-10-55-39. We consider this guidance in conjunction with the terms in our arrangements with both suppliers and customers.

In general, the Company does not have the responsibility of fulfilling the promise to provide the products as the products can be returned to its suppliers if its customers do not accept the products. Furthermore, the Company does not control the products as it has no obligation to (i) fulfill the resale products delivery, and (ii) bear any inventory risk. In addition, when establishing the selling prices for delivery of the resale products, the Company has such discretion of establishing price to ensure it would generate profit for the services of the products delivery arrangements. The Company believes that all these factors indicate that the Company is acting as an agent in this transaction. As a result, revenue from the trading segment is presented on a net basis.

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Warranty

We generally provide limited warranties for work performed under our contracts. 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, we record estimated future warranty costs under ASC 460. Such estimated costs for warranties are estimated at completion and these warrants are not service warranties separately sold by us. Generally, the estimated claim rates of warranty are based on actual warranty experience or our best estimate.

Recent Accounting Pronouncements

See Note 2 of our notes to unaudited condensed consolidated financial statements for a discussion of recently issued accounting standards.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Interest Rate Risk

We are exposed to interest rate risk while we have short-term bank loans outstanding. Although interest rates for our short-term loans are typically fixed forAs a smaller reporting company, as defined by §229.10(f)(1), the terms of the loans, the terms are typically twelve months and interest rates are subject to change upon renewal.

Credit Risk

Credit riskCompany is controlled by the application of credit approvals, limits and monitoring procedures. We manage credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. We identify credit risk collectively based on industry, geography and customer type. In measuring the credit risk of our sales to our customers, we mainly reflect the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development.

Liquidity Risk

We are also exposed to liquidity risk which is risk that it is unablenot required to provide sufficient capital resources and liquidity to meet our commitments and business needs. Liquidity risk is controlledthe information required by the application of financial position analysis and monitoring procedures. When necessary, we will turn to other financial institutions and related parties to obtain short-term funding to avoid the liquidity shortage.this Item.

Foreign Exchange Risk

While our reporting currency is the US dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for some cash and cash equivalents and accounts receivables. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between US dollar and RMB. If the RMB depreciates against the US dollar, the value of our RMB revenues, earnings and assets as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

Inflation

Inflationary factors such as increases in the costs of our products and overhead costs may adversely affect our operating results. Inflation in China has recently increased substantially. Based on publicly available sources, the inflation rate in China was reported at 2.48% for 2018.

These factors have led to the adoption by the Chinese government, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. Price inflation can affect our ability to maintain current levels of gross margin and selling and distribution, general and administrative expenses as a percentage of net revenues if we are unable to pass along raw material price increases to customers. Accordingly, inflation in China may weaken our competitiveness domestically.


Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of April 30, 2019.2020.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer identified material weaknesses in our internal control over financial reporting, which is an integral component of our disclosure controls and procedures and concluded that our disclosure controls and procedures as of April 30, 20192020 were not effective.

Management’s assessment identified the following material weaknesses in our internal control over financial reporting:

●Ineffective control environment. We did not maintain an effective control environment, which is the foundation necessary for effective internal control over financial reporting. Specifically, we (i) had an insufficient number of personnel appropriately qualified to perform control design, execution and monitoring activities; (ii) had an insufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience; (iii)did not establish the authorization approval matrix; and (iv)(iv) did not implement a budget system, which makes management and other personnel unable to carry out their internal control responsibilities including the lack of budget-to-actual analyses, balance sheet variation analysis, pro forma financial statements, and the usage of key spreadsheets for monitoring.

●

Ineffective controls over our financial statement close and reporting process. We did not maintain effective controls over our financial statement close and reporting process. Specifically, we did not have effective controls over the completeness, existence and accuracy of related party disclosures.

●Inadequate controls over production plan. Our manufacturing department did not maintain effective controls over the accuracy of raw materials. The amount of raw materials mentioned in the production plan is inconsistent with the actual amount of raw materials delivered (Jingshan Sanhe).

●Inadequate controls over information technology. We had inadequate controls over information technology. Specifically,  (i) the system permissions on approval process of account opening and ERP system were not one-to-one matched; and (ii) a formal test environment wasn’t established.


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Remediation Plans

Our management have taken and are implementing the following measures to address the material weaknesses in internal control over financing reporting, include:

(i)

We are setting up a key monitoring mechanism including independent directors, an audit compliance committee, a risk management committee and a strategic planning committee to oversee and monitor our risk management, business strategies and financial reporting procedure.

a.

We plan to formulate delegation of authorities and job description to clarify authorities and responsibilities of each position.

b.

We are in the process of formalizing policies and controls, such as financial management regulations, budget management system, narrative and risk control management, to enable management and other personnel to understand their internal control responsibilities including budget-to-actual analyses, balance sheet variation analysis, pro forma financial statements, and the usage of key spreadsheets for monitoring.

(ii)

We are in the process of designing employees’ key performance indicators to monitor and assess employees’ performance.

(iii)We have engaged Ernest & Young (China) Advisory Limited to assist us with our compliance under Section 404 of the Sarbanes-Oxley Act of 2002. Since January 2019, they started to work with us to help us establish and maintain an effective control environment, enhance our process and internal control related to sales, account receivables and inventory and establish comprehensive accounting policies and procedures.


(iv)

We have prepared a list of interest expenses and established a documented process to accrue interest.

(v)(iv)

We are in the process of updating the production policy, especially focusing on production plan and usages of raw materials.

(vi)(v)We have set up a key strategies mechanism including an investment decision committee to oversee business acquisitions and investments. We have established a formal policy and procedures on business acquisitions and investments.

(vii)(vi)We have kept the price comparison records of purchasing battery slices.

 

(viii)(vii)We have engaged  tax consultants to prepare and file our US tax returns since October 2018.January 2019.

(ix)(viii)We have established formal policy regarding user management and system backup strategy in the information system safety management regulations to regulate approval process of account opening, periodic account review on financial system, access rule of administrator account, operation log review on financial system and password policy.

(x)(ix)We plan to establish a formal test environment and test before system changes come online.

Our management believes that the measures described above and others to be implemented will remediate the material weaknesses identified and will strengthen our internal control over financial reporting. Management is committed to continuous improvement of our internal control processes and will continue to diligently review our financial reporting controls and procedures. The remediation efforts set out above are largely dependent upon our generating more revenue to cover the costs of implementing the changes required. 

Changes in Internal Control over Financial Reporting

Except as discussed above, there were no changes in the Company’s internal control over financial reporting during the three months period ended April 30, 20192020 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.


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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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 and nine months ended April 30, 2019 and 2018, 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 and nine months ended April 30, 2019 and 2018, not canceling the 60,000,000 shares has an anti-dilutive effect.On January 29, 2019, the Company commenced an action against Global Select Advisors Ltd. (“Global Select”) in the First Judicial District Court of Nevada (the “Court”) to cancel 60 million shares of common stock of the Company that, without proper authorization, were issued to Roy Thomas Phillips, a former consultant and acting Chief Financial Officer of the Company, and subsequently transferred to Global Select.  On February 25, 2019, the Clerk of the Court entered a default against Global Select as a result of Global Select’s failure to respond to the Company’s complaint. The Company filed a motion for default judgment pursuant to which the Company sought an order authorizing the Company to cancel the 60 million shares. The Company’s motion for default judgement was granted and the shares were cancelled in April 2019.Contract dispute – Sanhe Xiangtian vs. Shandong Taidai

Sanhe Xiangtian is involved in a litigation with Shandong Taidai Photovoltaic Technology Co., Ltd. (“Shandong Taidai”) for contractual dispute. Sanhe Xiangtian filed a complaint on January 24, 2018 with the Sanhe People’s Court and claimed for damages of RMB 1,000,000 (approximately $149,245) caused by Shandong Taidai as it provided the unqualified construction project. On May 22,June 5, 2019, a hearing was held by the court ruled that Shandong Taidai is required to pay for the damages of Sanhe Xiangtian in the amount RMB 15,826,000 (approximately $2.3 million) and other associated fees of RMB 23,000 (approximately $3,000). As of the final judgements will be issued at a later date.date of this report, the Company has not received any appeal notice from Shandong Taidai. The Company does not believe the litigation will have significant impact on theirits unaudited condensed consolidated financial statements.statements as the Company will record the gain contingency upon receiving the settlement payments.

Shandong Taidai filed a lawsuit against Sanhe Xiangtian with Dongying City Intermediate People’s Court of Shandong Province on November 29, 2018 regarding the same project and claimed unpaid work of RMB 4,089,150 (approximately $610,284) and liquidated damages of RMB 2,025,139 (approximately $302,242). As ofOn December 19, 2018, Sanhe Xiangtian has submitted an application objecting to the jurisdiction of Dongying City Intermediate People’s Court of but the application was rejected. On December 23, 2019, the Dongying City Intermediate People’s Court ruled in the favor of Shandong Taida of RMB 4,089,150 (approximately $610,284) and liquidated damages and legal fees of RMB 848,655 (approximately $126,657). On January 23, 2019, Sanhe Xiangtian appealed the ruling in the jurisdiction of Dongying City Intermediate People’s Court. Currently, the case is under review by the Dongying City Intermediate People’s Court. The Company does not believe the litigation will have a material impact on its current operations and financial statements.statements as the accounts payable amount has been properly accrued.

Contract dispute – Sanhe Futai vs. Sanhe Xiangtian

 

Sanhe Futai Environmental Technology Co. Ltd. (“Sanhe Futai”) filed a lawsuit against Sanhe Xiangtian with the Sanhe People’s Court regarding a project and claimed unpaid work of RMB 2,500,000 (approximately $0.4 million) caused by Sanhe Futai provided the unqualified construction project work. On December 7, 2019, the Sanhe People’s Court reached a verdict ruling Sanhe Xiangtian to pay the unpaid work balance plus interest and court fee. Sanhe Xiangtian filed an appeal with Langfang City Intermediate People’s Court of Hebei Province. On May 6, 2020, Langfang City Intermediate People’s Court of Hebei Province issued a ruling that the facts of the first verdict was unclear and required the case to be retrial. The Company does not believe the litigation will have a material impact on its current operations and financial statements as the accounts payable amount has been properly accrued.

Acquisition payment dispute – Sanhe Xiangtian vs. Wenhe Han and Guifen Wang

On March 19, 2019, Wen HeWenhe Han and Gui FenGuifen Wang, former shareholders of Tianjin Jiabaili (collectively known as the “Plaintiffs”), filed a lawsuit against Xianning Xiangtian in People’s Court of Jizhou District, Tianjin City for a dispute over the equity transfer of Tianjin Jiabaili between Plaintiffs and Xianning Xiangtian. Wen He Han and Gui Fen WangThe Plaintiffs claimed a damage amountedamounting to RMB 2,000,000 (approximately $0.3 million) for breach of contract and demanded immediate payment on the unpaid equity transfer balance of RMB 1,720,000 (approximately $0.3 million). A hearing was held on April 23, 2019 and the court ruled in favorapproved the request of the Plaintiffs to freeze Xianning Xiangtian’s assets worth of RMB 3,720,000 (approximately $0.6 million) before a judgement is rendered. As of the date of this report, the freeze order washas not executedbeen enforced and the Company has not received the specified list on whichof assets were being frozen.subject to this order. On April 20, 2020, the People’s Court of Jizhou District, Tianjin City reached a verdict in favor of the Plaintiffs. Xianning Xiangtian filed an appeal and the case is under review. Management currently cannot estimate the outcome of the litigation. The Company does not believe the litigation will have a material impact on its current operations and financial statements as the acquisition payment amount has been properly accrued.

On April 15, 2019, Xianning Xiangtian filed a lawsuit against Wen HeWenhe Han and Gui FenGuifen Wang, former shareholders of Tianjin Jiabaili, for the same dispute over the equity transfer betweenof Tianjin Jiabaili and Xianning Xiantian on April 15, 2019 within the People’s Court of Jizhou District, Tianjin City. Xianning Xiangtian claimed a damage amountedamounting to RMB 2,000,000 (approximately $0.3 million) and demanded immediate refund of RMB 5,080,000 (approximately $0.8 million) plus a 6%six percent (6%) annual interest starting from April 15, 2019 due to misrepresentation of the production facility of Tianjin Jiabaili from the former shareholders of Tianjin Jiabiali. A hearing is scheduled onwas held June 11, 2019. Currently,2019 and the court approved the request of the Company to freeze Wenhe Han and Guifen Wang’s personal assets worth of RMB 7,080,000 (approximately $1.0 million). On October 8, 2019, the People’s Court of Jizhou District, Tianjin City reached a verdict and rejected the Xianning Xiangtian’s claim. Xianning Xiangtian filed an appeal and the case is under review by the Dongying City Intermediate People’s Court.Court of Jizhou District, Tianjin City. Management currently cannot estimate the outcome of the litigation.

Other legal matters

From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The majority of these claims and proceedings related to or arise from, being guarantor of a third party and employment contract dispute. These potential claims are summarized as follows:

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Labor dispute – Qiao Lijuan vs. Tianjin JiaBaiLi

Regarding the labor dispute lawsuit between Qiao Lijuan and Tianjin JiaBaiLi Petroleum Products Co., Ltd. (Hereinafter referred to as “JiaBaiLi”), on July 23, 2019, Qiao Lijuan sued JiaBaiLi (Defendant A) and the 1st Sales Company of JiaBaiLi (Defendant B) before Jizhou Court claiming Defendant B to pay RMB 7,000 (approximately $1,000) for salary, Defendant A to bear the joint and several liability and both Defendant A and B to bear the litigation fees. On October 23, 2019, Jizhou Court reached a verdict that Defendant A must pay Qiao Lijuan salary of RMB 11,000 (approximately $1,600). The Company does not believe the litigation will have a material impact on its current operations and financial statements.

Negotiable instruments dispute – Kelin Environmental Protection Equipment, Inc.

Regarding the negotiable instruments dispute of Kelin Environmental Protection Equipment, Inc. (hereinafter referred to as “Kelin”), as Kelin had not paid the draft due and expired, it was pursued by the negotiable instruments holders. Xiangtian Zhongdian, as the one of the endorsers, are involved in 14 lawsuits currently and the amount is RMB 4.0 million (approximately $0.6 million). Xiangtian Zhongdian may be jointly and severally liable in the above cases, but it may recourse to the former endorsers for compensation of the unpaid negotiable instruments.

Dispute matter Claim amount 
1) Negotiable instruments $580,975 
2) Labor  992 
Total $581,967 

Shimen Government Inquiry

On June 10, 2019, Xianning Xiangtian received an inquiry from Shimen County Market Supervision Bureau (the “Bureau”) with respect to a formal investigation it initiated against Xianning Xiangtian on May 10, 2019.  The Bureau stated it is investigating that Xianning Xiangtian was selling its shares to the public in anticipation of a Nasdaq listing in the near future as part of a multi-level marketing scheme.  On June 14, 2019, Xianning Xiangtian issued a Letter of Statement in response to the inquiry and stated Xianning Xiangtian never issued any shares to the unspecified public since its incorporation and that all of the Company’s shares are registered with the Company’s Transfer Agent. Following Xianning Xiangtian’s delivery of its Letter of Statement, it has not received any further inquiries from the Bureau. After the Bureau’s investigation, it has reached an administrative penalty decision to another business entity with similar name and confirmed that Xianning Xiangtian has no relation with the penalized business entity.

Item 1A. Risk Factors.

The risk factors set forth below contain material changesPlease refer to the risk factors previously disclosed and included in our Annualnote on forward-looking statements on page ii of this Quarterly Report on Form 10-K for the fiscal year ended July 31, 2018. When evaluating our business and our prospects, you should consider the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended July 31, 2018,10-Q, which we filed with the SEC on October 30, 2018, as updated inis incorporated into this Item 1A. You should also referitem by reference.

In addition to the other information set forth in this Quarterly Report andreport, you should carefully consider the risk factors discussed in our 2019 Annual Report. The risks described in such 2019 Annual Report on Form 10-K for the fiscal year ended July 31, 2018, including our financial statements and the related notes. These risks and uncertainties are not the only onesrisks we face. Additional risks and uncertainties not presentlycurrently known to us or that we currently consider immaterial may also impair our business operations. If any of the risks or uncertainties actually occurs, our business and financial results could be harmed. In that case, the market price of our common stock could decline.


Risks Related to Our Business

We have been relying on a limited number of customers to generate a significant portion of our revenue. The loss of our major customers could reduce our revenues and our profitability.

We have been relying on a limited number of major customers for a significant portion of our revenue and anticipate that such reliance will remain unchanged in the near future. For the three months ended April 30, 2019, one customer accounted for 67.3% of the Company’s total revenues. There can be no assurance that we will maintain or improve the relationships with our major customers, or that we will be able to continue to supply our major customers at current levels or at all. Any failure to pay by these customers could have a material negative effect on our company’s business. In addition, having a relatively small number of customers may cause our semiannual resultsdeem to be inconsistent, depending upon when these customers pay for outstanding invoices. If we cannot maintain long-term relationships with these major customers, the loss of our sales to them or the cancellation of any business from them could have an adverse effect on our business, financial condition and results of operations.

The loss of one or more of our suppliers could cause production delays. Any interruption in our relationship with our suppliers couldimmaterial also may materially and adversely affect our growth and financial condition.

Although we believe that the principal components and raw materials for our products are readily available from alternate sources, an interruption in the supply of these components or a substantial increase in the price of any of these components could have a material adverse effect on our business and our results of operations. 

We currently rely on a few key suppliers to provide a significant percentage of components to our products. For the three months ended April 30, 2019, two vendors accounted for 39.3% and 14.5% of our total purchases. An interruption in our business relationship or termination of our relationships with our key suppliers could materially and adversely affect our operations and financial condition and we may not be able to find a substitute in a short period of time, which would have an adverse effect on our results of operations.

Risks Related to Our Wine Business

A reduction in the supply of fundamental herbs in traditional Chinese medicine and base alcohol available to us from the independent herb growers and base alcohol suppliers could reduce our annual production of wine.

We rely on growers to purchase substantially all the fundamental herbs in traditional Chinese medicine used in our herbal wine production. These ingredients include rehmannia glutinosa, Chinese yam, lycium chinense, velvet antler, cyathula officinalis, angelica sinensis, dwarf lilyturf, etc. We believe that the fundamental herbs we use in our herbal wines are readily available in China and that the supply of these herb and the edible base alcohol are stable. However, if the supply of fundamental herbs and base alcohol available to us from the independent herb growers and base alcohol suppliers reduce, it could negatively impact our wine business. 

We face inventory risk, and if we fail to predict accurately demand for products and market and sell our products diligently, we may face write-downs or other charges.

We are exposed to inventory risks that may adversely affect operating results as a result of changes in sales channels, product pricing, consumer demand, and other factors. As of March 5, 2019, we had a bottled wine inventory of more than 37,000 bottles and an un-bottled inventory of approximately 330 tons. We endeavor to predict accurately, based on information from distributors and reasonable assumptions, the expected demand for their products in order to avoid overproduction. We plan to sell the products through our sales channels, including stores, gas stations and direct sales. Demand for products, however, can change significantly between the time of production and the date of sale. It may be more difficult to make accurate predictions regarding new products. In part, we depend on the marketing initiatives and efforts of distributors in promoting products and creating consumer demand and we have limited or no control regarding their promotional initiatives or the success of their efforts. If we fail to predict accurately demand for products and market and sell our products diligently, we may face write-downs or other charges on inventories.

We face significant competition which could adversely affect profitability.

The wine and herbal wine industries are intensely competitive and highly fragmented in China. Our wines compete in several wine market segments with many other domestic wines and herbal wines. Our wines also compete with other alcoholic and, to a lesser degree, non-alcoholic beverages, for shelf space in retail stores and for marketing focus by independent distributors, many of which carry extensive brand portfolios. As a result of this intense competition there has been and may continue to be upward pressure on selling and promotional expenses. In addition, the wine industry has experienced significant consolidation. Many competitors have greater financial, technical, marketing and public relations resources. Our sales may be harmed to the extent we are not able to compete successfully against such wine or alternative beverage producers’ costs. There can be no assurance that in the future we will be able to successfully compete with current competitors or that we will not face greater competition from other wineries and beverage manufacturers.


If we experience problems with our product quality, customer satisfaction with respect to pricing of our products or the timely delivery of our products, we could lose our customers and market acceptance which will affect our sales and have an adverse effect on our business, financial condition, operating results and results of operations.stock price.

Our growth and sales primarily depend on our maintenance of quality control, customer satisfaction with respect to pricing and the punctual availability and delivery of our products. If we fail to deliver the same quality of our products with the same punctuality and pricing which our customers have grown accustomed to, or in accordance with the terms of our sales agreements, we could damage our customer relations and market acceptance which will affect sales and our business in general. For example, we have to maintain food production license and GMP certificate for pharmaceutical products as an indication of the quality of our products. If we experience deterioration in the performance or quality of any of our products, whether due to problems internally or externally, it could result in delays in delivery, cancellations of orders or customer complaints, loss of goodwill, diversion of the attention of our senior personnel and harm to our brand and reputation. Any and all of these results would have an adverse effect on our business, financial condition and results of operations.

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We are subject to a series of food and drug supervision and management regulations of our wine business. If we are unable to comply with relevant regulations, we may face penalties or our licenses may be revoked.

To conduct our wine and herbal wine business, we have obtained Food Business License, Food Production License, Pharmaceutical Manufacturing Permit and GMP Certificate. Besides, we are required to comply with a series of food and drug regulations and national standards, such as the technical standards and advertising regulations regarding the drug products. If we fail to comply with relevant regulations or national standards, we may face penalties or our licenses may be revoked.

The price of raw materials of our wine and herbal wine is controlled by government. If there is a significant increase in the market price of raw materials as a result of such governmental efforts, it might increase our cost and has a material adverse effect on our business, financial condition and results of operations.

The PRC government has the power to intervene in the price of important types of grain under certain circumstances, such as when a material change occurs to the market supply and demand and/or the grain price fluctuates significantly, in order to protect the interests of farmers. Although such pricing guidance has not had a material impact on our business in the past, we cannot guarantee you the market price of our raw materials would always be kept in the current level. If there is a significant increase in the market price of raw materials as a result of such governmental efforts would increase our cost of sales, and we may not be able to pass those increased costs on to our customers. Such increased costs could have a material adverse effect on our business, financial condition and results of operations.

The liquor industry might be heavily influenced by national and local policies. Given the current unclear situation of local and national regulations and policies, we cannot predict the impact of future policy changes on the industry.

Local policies and national policies regarding the liquor industry are inconsistent to some degree. From the national level, wine business is in a restricted industry. According to the “Industrial Structure Adjustment Guidance Catalogue” promulgated by the National Development and Reform Commission in 2011 and revised in 2013, wine business is in the restricted industry category. However, Hubei Province, where our liquor business is located, issued a notice on “Strengthening the Hubei Liquor Industry Action Plan” in 2016, encouraging further expansion into the liquor industry and comprehensively improving the strength and competitiveness of the liquor industry. As the liquor industry might be heavily influenced by national and local regulations and policies, we cannot predict the impact of the inconsistency between national and local polities and any future change in policy on the industry. If the national or the local government further adjusts the current liquor industry policy, such as restrictions on liquor production and consumption through regulations on taxation, bank loan, land supply, advertising, price and other aspects, it might have an adverse impact on the company’s production and operation.


Risks Related to Doing Business in the PRC

Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

We are required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. We have not made adequate employee benefit payments. As of April 30, 2019 and July 31, 2018, the outstanding employee benefits payments due to the local labor bureau were $197,241 and $174,971, respectively. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

On June 3, 2019, our board of directors approved the transfer of 3% equity interest of Xianning Xiangtian held by Zhou Deng Rong, our former Chief Executive Officer and director, to Fei Wang, an employee of Xianning Xiangtain. As a result of the transfer, Xianning Xiangtian and its shareholders, Zhou Jian and Fei Wang, executed a new set of equity pledge agreement, exclusive option agreement and power of attorney on June 10, 2019 and all the terms remained substantially the same as the New VIE Agreements described in Note 2 - Variable interest entities to the financial statements. Copies of the equity pledge agreement, exclusive option agreement and power of attorney are filed hereto as ExhibitsNone.

10.1,10.2 and10.3, respectively and are incorporated herein by reference. The foregoing description of such agreements are qualified in their entirety by reference thereto.

Item 6. Exhibits.

NumberDescription
31.1*
10.1*English Translation of Equity Pledge Agreement, dated as of June 10, 2019, by and among Xiangtian Shenzhen, Zhou Jian, Fei Wang and Xianning Xiangtian
10.2*English Translation of Exclusive Option Agreement, dated as of June 10, 2019, by and among Xiangtian Shenzhen, Xiangtian HK, Zhou Jian, Fei Wang and Xianning Xiangtian
10.3*English Translation of Power of Attorney, dated as of June 10, 2019, by Fei Wang
31.1*Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*XBRL Instance Document
101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document

**Filed herewith.
**Furnished herewith.

**Furnished herewith.

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SIGNATURES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

XT Energy Group, Inc.
Dated: JuneJuly 17, 20192020By:/s/ /s/ Zhou Deng Hua
Name: Zhou Deng Hua
Title: Chief Executive Officer

(Principal Executive Officer)

Dated: JuneJuly 17, 20192020By:/s/ Yanhong Xue /s/ Jianzheng Cao
Name: Yanhong XueJianzheng Cao
Title: Chief Financial Officer

(Principal Financial and Accounting Officer)

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0001472468 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-04-30