Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - XIANGTIAN (USA) AIR POWER CO., LTD.Financial_Report.xls
EX-31.2 - CERTIFICATION - XIANGTIAN (USA) AIR POWER CO., LTD.v404248_ex31-2.htm
EX-32.2 - CERTIFICATION - XIANGTIAN (USA) AIR POWER CO., LTD.v404248_ex32-2.htm
EX-32.1 - CERTIFICATION - XIANGTIAN (USA) AIR POWER CO., LTD.v404248_ex32-1.htm
EX-31.1 - CERTIFICATION - XIANGTIAN (USA) AIR POWER CO., LTD.v404248_ex31-1.htm
EX-10.15 - EXHIBIT 10.15 - XIANGTIAN (USA) AIR POWER CO., LTD.v404248_ex10-15.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2015

 

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 333-161997

 

XIANGTIAN (USA) AIR POWER CO., LTD.

(Exact name of registrant as specified in its charter)

 

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

 

Unit 602 Causeway Bay CommBldg 1

Sugar Street, Causeway Bay

Hong Kong, People’s Republic of China

(Address of principal executive offices)

 

86 10 859 10 261

(Registrant’s telephone number)

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x

 

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

 

Indicate the number of outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: The registrant had 531,042,000 shares of common stock, $0.001 par value outstanding at March 16, 2015. The registrant has no other class of common equity.

 

 
 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
Consolidated Balance Sheets as of January 31, 2015 and July 31, 2014 3
Consolidated Statements of Operations for the Three Months and Six Months Ended January 31, 2015 and 2014 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2015 and 2014 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 22
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Mine Safety Disclosures 22
Item 5. Other Information 22
Item 6. Exhibits 23
Signatures 24

 

2
 

 

PART I. FINANCIAL INFORMATION 

 

Xiangtian (USA) Air Power Co., Ltd.

Consolidated Balance Sheets

(Stated in US Dollars)

 

   January 31, 
2015
   July 31, 
2014
 
   (Unaudited)   (Audited) 
         
Current assets          
Cash and cash equivalence  $420,917   $556,788 
Other receivables   1,637,096    23,791 
Advances to suppliers   9,573,042    7,490,564 
Inventory   10,913,849    9,645,526 
Deferred tax asset   267,509    111,844 
Other current asset   1,153,618    1,146,785 
Total current assets  $23,966,031   $18,975,298 
           
Non-current assets          
Property, plant and equipment, net  $7,836,151   $6,779,256 
Deposit for property, plant and equipment   90,247    1,590,581 
Total non-current assets   7,926,398    8,369,837 
           
Total assets  $31,892,429   $27,345,135 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
LIABILITIES          
Current liabilities          
Accounts payable and accrued liabilities  $489,785   $355,861 
Amount due to shareholders   18,834    18,934 
Capital lease interest payable to related parties   126,806    52,542 
Capital lease obligations - current   54,464    31,022 
Amount due to director   431,852    430,928 
Advances to related parties   667,643    3,027,605 
Advance billings on contracts   19,244,792    11,831,607 
Total current liabilities   21,034,176    15,748,499 
           
Non-current liabilities          
Capital lease obligations - non-current   2,687,509    2,718,106 
Total non-current liabilities   2,687,509    2,718,106 
           
Total liabilities  $23,721,685   $18,466,605 
           
Commitments and contingencies          
           
STOCKHOLDERS’ EQUITY          
Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued and outstanding        - 
Common stock: $0.001 par value, 1,000,000,000 shares authorized, 531,042,000 shares issued and outstanding, respectively   531,042    531,042 
Additional paid-in capital   9,204,675    9,201,675 
Deficit accumulated   (1,528,903)   (862,211)
Accumulated other comprehensive gain   (36,070)   8,024 
Total stockholders’ equity   8,170,744    8,878,530 
Total liabilities and stockholders’ equity  $31,892,429   $27,345,135 

 

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

 

3
 

 

Xiangtian (USA) Air Power Co., Ltd.

Consolidated Statement of Operations and Comprehensive Loss

(Stated in US Dollars)

(Unaudited)

 

   For the 
Three
Months
Ended 
January 31,
2015
   For the 
Three
Months
Ended 
January 31,
2014
   For the 
Six
Months
Ended 
January 31,
2015
   For the 
Six
Months
Ended 
January 31,
2014
 
Revenue   -    -    -    - 
                     
Cost of sales  $-   $-   $-   $- 
                     
Gross profit  $-   $-   $-   $- 
                     
Operating expenses:                    
Selling expenses   5,325    -    10,660    - 
General and administrative expenses   391,595    96,814    731,311    213,196 
Loss from operations   396,920    96,814    741,971    213,196 
                     
Other (expense) income                    
Interest expense   (44,926)   583    (82,791)   583 
Exchange loss   106    -    (503)   - 
Total other (expense) income, net   (44,820)   583    (83,294)   583 
                     
Net loss before taxes  $(441,740)   (96,231)  $(825,265)   (212,613)
                     
Income tax benefit   79,465    10,404    158,573    10,404 
                     
Net loss after taxes  $(362,275)   (85,827)  $(666,692)   (202,209)
                     
 Foreign currency translation adjustment   (208,249)   (9,012)   (44,094)   12,244 
                     
Comprehensive loss   (570,524)   (94,839)   (710,786)   (189,965)
                     
Net loss per common share – basic and diluted  $(0.00)  $(0.00)  $(0.00)  $(0.00)
                     
Weighted average number of common shares outstanding - basic and diluted   531,042,000    258,000,000    531,042,000    184,630,435 

 

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

 

4
 

 

Xiangtian (USA) Air Power Co., Ltd.

Consolidated Statements of Cash Flows

  (Stated in US Dollars)

(Unaudited) 

 

   For the 
Six Months Ended 
January 31, 
2015
   For the 
Six Months Ended 
January 31, 
2014
 
Cash flows from operating activities:          
Net loss  $(666,692)  $(202,209)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   206,933    - 
Deferred tax asset   (157,542)   (10,404)
Rent contributed by shareholders as paid-in capital   3,000    3,000 
Changes in operating assets and liabilities:          
Other receivables   (1,637,123)   (781,291)
Prepayment   (2,084,547)   (38,646)
Inventory   (1,250,042)   - 
Due from related party   -    (3,282)
Other current asset   (23,931)     
Accounts payable and accrued liabilities   196,524    (1,500)
Other payables and tax payables   261,476    672,819 
Advance billings on contracts   7,477,570    57,436 
Payroll payable   -    3,940 
Capital lease interest payable to related parties   75,163    - 
Net cash provided by (used in) operating activities   2,400,789    (300,137)
           
Cash flows from investing activities:          
Purchase of property and equipment   (47,790)   (2,593,965)
Net cash used in investing activities   (47,790)   (2,593,965)
           
Cash flows from financing activities:          
Repayment of advances from related parties   (2,358,234)   1,459,896 
Advances from director   1,151    13,181 
Advances from shareholders   -    11,093 
Net cash (used in)/provided by financing activities   (2,357,083)   1,484,170 
           
Effect of exchange rate change on cash   (131,787)   (1,175)
           
Net change in cash and cash equivalents   (135,871)   (1,411,107)
           
Cash and cash equivalents  - beginning of period   556,788    1,640,007 
           
Cash and cash equivalents  - end of period  $420,917   $228,900 

 

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

 

5
 

 

Xiangtian (USA) Air Power Co., Ltd.

Notes to Consolidated Financial Statements

(Unaudited) 

 

NOTE 1 - NATURE OF OPERATIONS

 

Xiangtian (USA) Air Power Co., Ltd. (the “Company”) was incorporated in the State of Delaware on September 2, 2008 as Goa Sweet Tours Ltd. The Company was originally formed to provide personalized concierge tour packages to tourists who visit the State of Goa, India.  On April 17,  2012, the Company entered into Share Purchase Agreements, by and among, Luck Sky International Investment Holdings Limited (“Luck Sky”), an entity owned and controlled by Zhou Deng Rong, and certain of our former stockholders who owned, in the aggregate, 7,200,000 shares of the Company’s common stock (90% of the at then outstanding shares).  Luck Sky purchased all 7,200,000 shares for an aggregate of $235,000.  The sale was completed on May 15, 2012.

 

On May 1, 2012, the Company sold its Indian subsidiary, Goa Excursion Private Limited (“Goa Excursion”), to IqbalBoga for a total value of $10. Both the purchaser and the seller fully release, discharge, waive, and hold harmless the subsidiary’s debts and liabilities, including related party’s debts.

 

On May 25, 2012, the Company formed a corporation under the laws of the State of Delaware called Xiangtian (USA) Air Power Co., Ltd. ("Merger Sub") and on the same day, acquired one hundred shares of Merger Sub's common stock for cash. As such, Merger Sub became a wholly-owned subsidiary of the Company.

 

Effective as of May 29, 2012, Merger Sub was merged with and into the Company. As a result of the merger, the Company’s name was changed to “Xiangtian (USA) Air Power Co., Ltd.”. Prior to the merger, Merger Sub had no liabilities and nominal assets and, as a result of the merger, the separate existence of the Merger Sub ceased. The Company was the surviving corporation in the merger and, except for the name change provided for in the Agreement and Plan of Merger, there was no change in the directors, officers, capital structure or business of the Company.

 

The Company entered into a business combination by means of merger of LuckSky (Hong Kong) Shares Limited (“HK Shares”), a Hong Kong corporation, for 250,000,000 shares of common stock of the Company. Prior to the merger, HK shares had no liabilities and nominal assets. On September 23, 2013, the Company issued 250,000,000 shares of common stock to the shareholders of HK shares. Effectively on September 24, 2013, the shareholders of HK shares accepted the shares from the Company and surrendered its control of HK shares to the Company in exchange of 250,000,000 shares of HK shares to be issued to its shareholders. On October 16, 2013, HK shares completed the issuance of its 250,000,000 shares accordingly. As of January 31, 2015, the management has submitted the application form for canceling the HK shares and expects to finish such cancellation before July 2015.

 

On July 25, 2014, Luck Sky (Shen Zhen) Aerodynamic Electricity Limited (“Luck Sky Shen Zhen”), a corporation incorporated under the laws of the People Republic of China (“PRC”), an indirect wholly-owned subsidiary; Sanhe City Lucksky Electrical Engineering Co., Ltd. (“Sanhe”), a corporation incorporated under the laws of the PRC; and Mr. Zhou Jian and Mr. Zhou Deng Rong, the owners of 97% and 3%, respectively, of Sanhe; entered into a series of agreements known as variable interest agreements (the “VIE Agreements”) pursuant to which Sanhe became Luck Sky Shen Zhen’s contractually controlled affiliate. The purpose and effect of the VIE Agreements is to provide Luck Sky Shen Zhen (our indirect wholly-owned subsidiary) with all of the management, control and net profits of Sanhe.

 

Simultaneously, the Company entered into a common stock purchase agreement with Zhou Jian and Zhou Deng Rong, the owners of 97% and 3%, respectively, of Sanhe, in consideration for the execution of the VIE Agreements and the acquisition of Sanhe. Pursuant to the Stock Purchase Agreement, the Company issued Zhou Jian and Zhou Deng Rong 264,850,740 and 8,191,260 shares, respectively, of our common stock, representing 51.4% of the our issued and outstanding shares of common stock.

 

6
 

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America. This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred. The Company’s consolidated financial statements are expressed in U.S. dollars.

 

Use of Estimates and Assumptions

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

 

Interim Financial Statements

 

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) applicable to interim financial information and the requirements of Form 10-Q and Rule 8-03 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosure required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

 

These interim financial statements should be read in conjunction with the audited financial statements for the year ended July 31, 2014, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited financial statements for the year ended July 31, 2014.

 

Reclassification

 

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported net income or losses.

 

Principle of Consolidation

 

The consolidated financial statements include the accounts of the Company, its subsidiaries and VIE for which it is deemed the primary beneficiary. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

The Company evaluates the need to consolidate its VIE in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.

 

The VIE agreement was not consummated until July 25, 2014, however, the purpose and design of the establishment of VIE, Sanhe, was to be consolidated under the Company through common control. ASC 810-10-25-38F states that a reporting entity’s involvement in the design of a VIE may indicate that the reporting entity had the opportunity and the incentive to establish arrangements that result in the reporting entity being the variable interest holder with the power to direct the activities that most significantly impact the VIE’s economic performance. As both the Company and the acquired VIE, Sanhe, are under the common control of Zhou Dengrong and Zhou Jian immediately before and after the acquisition, this transaction was accounted for as a merger under common control, using merger accounting as if the merger had been consummated at the beginning of the earliest period presented, and no gain or loss was recognized. All the assets and liabilities of the VIE, Sanhe, are recorded at carrying value. Hence, Sanhe was consolidated under the Company since its inception due to the purpose and design of its establishment.

 

The following financial statement amounts and balances of the VIE, which was established on August 6, 2014, were included in the accompanying consolidated financial statements as of January 31, 2015 and July 31,2014 and for the six months ended January 31, 2015 and 2014, respectively:

 

   January 31, 2015   July 31, 2014 
Total assets  $31,859,499   $27,312,036 
Total liabilities   22,695,168    17,618,765 

   

    For the six
months
   

For the six

months

 
    Ended     Ended  
    January 31,2015     January 31,2014  
                 
Net loss   $ 484,679     $ 33,462  

 

7
 

 

Fair Value Measurements

 

The Company applies the provisions of ASC Subtopic 820-10, “Fair Value Measurements”, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements.  ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements. 

 

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

 

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

 

¨        Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

¨        Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

¨        Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

There were no assets or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of January 31, 2015 and July 31, 2014.

  

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

 

 

Inventory

 

Inventory is stated at the lower of cost or market. Cost is principally determined using the weighted average basis. Construction costs incurred on contracts are included in inventories which consist of raw materials, accessory parts, and contracts work in progress.

 

Property and equipment

 

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in operating income (loss). Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed as incurred.

 

Depreciation and amortization are 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
Machinery equipment     5-10 years
Computer and office equipment   3 years
Vehicle   5 years
Property under capital lease   20 years

 

8
 

 

Revenue Recognition

 

Sales of power generation system in conjunction of system installation are recognized under accounting for construction-type contracts, using the completed contract method. Accordingly, revenue is recognized upon the completion of the construction, provided persuasive evidence of an arrangement exists, title and risk of loss has transferred, the fee is fixed and determinable, and collection is reasonably assured. We provide for any loss that we expect to incur on these contracts when that loss is probable.

 

Warranty and Returns 

 

The Company generally provides limited warranties for work performed under its contracts. The warranty periods typically extend for a limited duration following substantial completion of the Company's work on a project. At the time a sale is recognized, we record estimated future warranty costs. Such estimated costs for warranties are included in the individual project cost estimates for purposes of accounting for long-term contracts. Generally, the estimated claim rates of warranty are based on actual warranty experience or Company’s best estimate.

 

No right of return exists on sales of equipment. Replacement part returns are estimable and accrued at the time a sale is recognized.

 

Value added taxes

 

The Company is subject to VAT at a rate of 17% on proceeds received from customers, and are entitled to a refund for VAT already paid or borne on the goods purchased by it that have generated the gross sales proceeds. The VAT balance is recorded in other payables on the balance sheets.

 

Income Taxes

 

The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

 

Under ASC 740, a 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 evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigations based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. No significant penalties or interest relating to income taxes have been incurred for the six months ended January 31, 2015. US GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

 

Comprehensive Loss

 

The Company follows the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 220 “Reporting Comprehensive Income”, and establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements.

 

9
 

 

Foreign Currency Translation

 

The Company’s functional currency is Chinese Renminbi (“RMB”) as substantially all of the Company’s PRC subsidiaries’ operations use this denomination. The consolidated financial statements are presented in U.S. dollars.  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 US$ at the exchange rate on the balance sheet date, which is 6.2495 and 6.2164 as of January 31, 2015 and July 31, 2014, respectively; stockholder’s 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 6.1582 and 6.0938 for the six months ended January 31, 2015and January 31, 2014. The resulting translation adjustments are reported under accumulated other comprehensive income in the stockholder’s equity section of the balance sheets.

 

For the purpose of presenting these financial statements of subsidiaries in Hong Kong, PRC, the Company’s assets and liabilities are expressed in US$ at the exchange rate on the balance sheet date, which is 7.7529 and 7.7497 as of January 31, 2015 and July 31, 2014, respectively; stockholder’s 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 7.7536 and 7.7545the six months ended January 31, 2015 and January 31, 2014, respectively. The resulting translation adjustments are reported under accumulated other comprehensive income in the stockholder’s equity section of the balance sheets.

 

Earnings (Loss) per Share

 

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted earnings 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. Earnings per share excludes all potential dilutive shares of common stock if their effect is anti-dilutive. There were no potential dilutive securities at January 31, 2015 or January 31, 2014.

 

Recent Accounting Pronouncements

 

In August 2014, the Financial Accounting Standards Board issued ASU No. 2014-15, Presentation of Financial Statements— Going Concern (Subtopic 205-40). This standard is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments contained in this ASU apply to all companies and not-for-profit organizations. The amendments are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The Company is currently assessing this ASU’s impact on the Company’s consolidated results of operations and financial condition.

 

In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in this Update remove the definition of a development stage entity from the Master Glossary of the Accounting Standards Codification, thereby removing the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. For public business entities, those amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued (public business entities) or made available for issuance (other entities). Upon adoption, entities will no longer present or disclose any information required by Topic 915. The Company adopted this ASU as early application for the financial statements of the period from July 8, 2013 (inception) to December 31, 2013.

 

10
 

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle the ASU includes provisions within a five step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) an entity satisfies a performance obligation. The standard also specifies the accounting for some costs to obtain or fulfill a contract with a customer and requires expanded disclosures about revenue recognition. The standard provides for either full retrospective adoption or a modified retrospective adoption by which it is applied only to the most current period presented. This ASU is effective January 1, 2017. The Company is currently assessing this ASU’s impact on the Company’s consolidated results of operations and financial condition.

 

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under this standard, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. For the Company, this ASU is effective beginning January 1, 2013, and interim periods within those annual periods. The adoption of this standard is not expected to have an impact on the Company’s financial results or disclosures.

 

In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This standard provides additional guidance with respect to the reclassification into income of the cumulative translation adjustment (CTA) recorded in accumulated other comprehensive income associated with a foreign entity of a parent company. The ASU differentiates between transactions occurring within a foreign entity and transactions/events affecting an investment in a foreign entity. For transactions within a foreign entity, the full CTA associated with the foreign entity would be reclassified into income only when the sale of a subsidiary or group of net assets within the foreign entity represents the substantially complete liquidation of that foreign entity. For transactions/events affecting an investment in a foreign entity (for example, control or ownership of shares in a foreign entity), the full CTA associated with the foreign entity would be reclassified into income only if the parent no longer has a controlling interest in that foreign entity as a result of the transaction/event. In addition, acquisitions of a foreign entity completed in stages will trigger release of the CTA associated with an equity method investment in that entity at the point a controlling interest in the foreign entity is obtained. For the Company, this ASU is effective prospectively beginning January 1, 2014, with early adoption permitted. This ASU would impact the Company’s consolidated results of operations and financial condition only in the instance of an event/transaction as described above.

 

The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.

 

NOTE 3 - GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred losses since its inception resulting in an accumulated deficit of $1,528,903 as of January 31, 2015 and further losses are anticipated in the development of its business raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

11
 

 

The Company expects to finance operations primarily through cash flow from revenue and capital contributions from principal shareholders. In the event that we require additional funding to finance the growth of the Company’s current and expected future operations as well as to achieve our strategic objectives, our principal shareholders have indicated the intent and ability to provide additional equity financing.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on our ability to meet obligations as they become due and to obtain additional equity or alternative financing required to fund operations until sufficient sources of recurring revenues can be generated. There can be no assurance that the Company will be successful in its plans described above or in attracting equity or alternative financing on acceptable terms, or if at all. The financial statements do not include any adjustments that might result from the outcome of this- uncertainty.

 

NOTE 4 – INVENTORIES

 

Inventories consist of the following:

 

   January 31,   July 31, 
   2015   2014 
Raw materials  $300,522   $115,839 
Accessory parts   892,388    635,708 
Contracts work in progress   9,720,939    8,893,979 
Total  $10,913,849   $9,645,526 

 

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

   January 31,   July 31, 
   2015   2014 
Machinery equipment  $5,240,556   $3,997,506 
Computer and office equipment   56,198    59,316 
Vehicle   73,639    38,558 
Property under capital lease   2,741,973    2,756,573 
Total property, plant and equipment   8,112,366    6,851,953 
Less: accumulated depreciation   (276,215)   (72,697)
Total  $7,836,151   $6,779,256 

 

Total depreciation expenses for the six months ended January 31, 2015 and 2014 were $206,933 and $0, respectively. Depreciation relating to Contract work in progress for the six months ended January 31, 2015 and 2014 were $126,311and $0, respectively, and depreciation relating to selling, general and administrative expenses for the six months ended January 31, 2015 and 2014 were $80,622 and $0, respectively.

 

12
 

 

NOTE 6 - RELATED PARTY TRANSACTIONS

 

Prior to the incorporation of Sanhe, Kelitai Air Powered Machinery Co., Ltd. (“Kelitai”), a subsidiary of LuckSky Group, an entity owned by Zhou Deng Rong, former general manager and former majority shareholder of the Company, executed various purchase agreements (the “Agreements”) with Beijing Hengruier Machinery Company Limited (“Hengruier”) and made certain prepayments on behalf of the Company. On July 15, 2013, Kelitai, Hengruier and the Company executed a tripartite agreement to transfer the rights and obligations of the Agreements to the Company. As of January 31, 2015, Kelitai has paid $1,242,198 on behalf of the Company as prepayments to Hengruier. The outstanding amounts due to related parties were nil as of January 31, 2015.

 

In May 2014, Sanhe entered into an agreement with Kelitai, to purchase some of Keizai’s fixed assets for the use in its own production. The total amount for the fixed assets and inventory was $1,261,872 (RMB 7,844,300). The outstanding amount due to related party – Kelitai - was nil as of January 31, 2015.

 

On July 25, 2014, Luck Sky Shen Zhen obtained an exclusive, worldwide, royalty free license from Zhou Deng Rong and Zhou Jian (his son) and a second exclusive, worldwide royalty free license from LuckSky Group to an aggregate of 48 Chinese patents and related know how and trade secrets, including the technology underlying 13 patent applications (the “Technology”). The Technology represents all of the patents, patent applications and related know how and trade secrets owned by the licensors with respect to PV installations and the air energy storage power generation technology as applied to commercial and residential buildings, but not wind towers. On July 25, 2014, Luck Sky Shen Zhen granted Sanhe an exclusive sublicense with respect to the use of the Technology for commercial and residential buildings, but not for other uses, including wind towers, vehicles and trains, which sublicense also provides for a royalty payment to Luck Sky Shen Zhen equal of five percent of Sanhe’s revenues.

 

Sanhe leases its principal office, factory and dormitory from LuckSky Group in Sanhe City, Hebei Province. LuckSky Group is owned by Zhou Deng Rong, our former CEO and Zhou Jian, our General Manager and Chairman of the Board. The space in the office, factory and dormitory being leased are 1296, 5160 and 1200 square meters, respectively. The office and factory space are leased for a rent of $113,492 (RMB 697,248) per year and the dormitory is leased for a rent of $21,095 (RMB 129,600) per year. The leases expire in April 30, 2024 and are subject to renewal with a prior two-month written notice. LuckSky Group is in the process of obtaining the land use approval and ownership certificate of the leased building. The outstanding amounts due to related parties for real property leases were $99,230 as of January 31, 2015.

 

On April 28, 2012, Zhou Jian obtained the right of usage of 44.3 acres agricultural land where our principal office, factory and dormitory are located for 18 years and 8 months, starting May 1, 2012. The annual price paid for such usage rights is $5,617 (RMB 34,510). On May 1, 2012, Zhou Jian signed a commitment letter that allowed Xiangtian Kelitai, Yanjiao Branch, a division of LuckSky Group to use this agricultural land. LuckSky Group constructed the buildings on such agricultural land. In the event we are unable to use our principal factory and office space as a result of this usage issue, the lease provides that LuckSky Group will use every effort to complete and perfect the ownership and usage rights, or provide Sanhe with equivalent space.

 

Sanhe also leases a second factory and office in Sanhe City from Sanhe Dong Yi Glass Machine Company Limited, which is owned by Zhou Deng Rong. A portion of this facility is currently used by Sanhe to demonstrate its products but the facility is primarily intended as a backup to the first facility in Sanhe City and/or for expansion. The factory and office are 4,748.96 square meters. The rent paid by Sanhe for the factory and the office is RMB1,306,500 per year. The lease provides that after 30 years, Sanhe will obtain ownership of the property for no additional payment. As of January 31, 2015 and July 31, 2014, the rental fee accrued but unpaid under the leases from LuckSky Group and Sanhe Dong Yi were $248,618 and $85,795, respectively.

 

On July 25, 2014, prior to the Acquisition, Sanhe and LuckSky Shen Zhen and Sanhe’s shareholders entered into a series of VIE Agreements, pursuant to which Sanhe became LuckSky Shen Zhen’s contractually controlled affiliate. The VIE Agreements include the Framework Agreement on Business Cooperation, the Exclusive Management, Consulting and Training and Technical Services Agreement, the Exclusive Option Agreement, the Equity Pledge Agreement, the Know-How Sub-License Agreement and the Power-of-Attorney. The purpose and effect of the VIE Agreements is to provide LuckSky Shen Zhen (the Company’s indirect wholly-owned subsidiary) with all of the management and control of Sanhe and all of its net income. While LuckSky Shen Zhen does not actually own at present any of the equity and shares in Sanhe, the purpose and effect of the VIE Agreements is to instill in LuckSky Shen Zhen total management and voting control of Sanhe for all material purposes. The use of VIE agreements is a common structure used to acquire PRC corporations, particularly in certain industries in which foreign investment is restricted or forbidden by the PRC government.

 

13
 

 

On July 25, 2014, the Company entered into the Stock Purchase Agreement with Zhou Jian and Zhou Deng Rong, the owners of 97% and 3%, respectively, of Sanhe. The Company agreed to issue to Zhou Jian and Zhou Deng Rong 264,850,740 and 8,191,260 shares, respectively, of the Company’s common stock, representing 51.4% of the issued and outstanding shares of common stock.

 

Since inception, the Company’s shareholders have paid several employees’ salaries on behalf of the Company. As of January31, 2015 and July 31, 2014, the amount due to shareholders was $18,834 and $18,934, respectively. The Company promised to pay this debt once we have sufficient cash flow.

 

From time to time, the Company receives advances from its directors and other related parties. As of January 31, 2015 and July 31, 2014, the Company received $431,852 and $430,928 from its directors, respectively. While amounts due to other related parties amounted to $667,643 and $3,080,147 as of January 31, 2015 and July 31, 2014, respectively. The Company used the funds for its operations. These advances are due on demand, unsecured and non-interest bearing.

 

NOTE 7 GOVERNMENT CONTRIBUTION 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. Chinese labor regulations require the Company to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic 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.

 

The outstanding amount was $45,227 and $22,098 as of January 31, 2015 and July 31, 2014, respectively.

 

NOTE 8. STATUTORY RESERVE

 

Pursuant to the laws applicable to the PRC, PRC entities must make appropriations from after-tax profit to the non-distributable “statutory surplus reserve fund”. Subject to certain cumulative limits, the “statutory surplus reserve fund” requires annual appropriations of 10% of after-tax profit until the aggregated appropriations reach 50% of the registered capital (as determined under accounting principles generally accepted in the PRC ("PRC GAAP") at each year-end). For foreign invested enterprises and joint ventures in the PRC, annual appropriations should be made to the “reserve fund”. For foreign invested enterprises, the annual appropriation for the “reserve fund” cannot be less than 10% of after-tax profits until the aggregated appropriations reach 50% of the registered capital (as determined under PRC GAAP at each year-end). If the Company has accumulated loss from prior periods, the Company is able to use the current period net income after tax to offset against the accumulate loss. 

 

NOTE 9 - CAPITAL STOCK AND EQUITY TRANSACTIONS

 

Common Stock

 

The total number of common shares authorized that may be issued by the Company is 1,000,000,000 shares with a par value of $0.001 per share.

 

During the period ended July 31, 2009, the Company issued 5,000,000 shares of common stock for total cash proceeds of $25,000 to the Company’s sole director and officer. During the year ended July 31, 2010, the Company sold 3,000,000 shares of common stock for total cash proceeds of $30,000.

 

On September 23, 2013, the Company issued 250,000,000 shares of common stock to the shareholders of HK shares, in exchange of 250,000,000 shares of HK shares.

 

On July 25, 2014, we entered into the Stock Purchase Agreement in connection with the acquisition of Sanhe with Zhou Jian and Zhou Deng Rong, the owners of 97% and 3%, respectively, of Sanhe. We agreed to issue to Zhou Jian and Zhou Deng Rong 264,850,740 and 8,191,260 shares, respectively, of our common stock, representing 51.4% of the our issued and outstanding shares of common stock.

 

14
 

 

Preferred Stock

 

The total number of preferred shares authorized that may be issued by the Company is 100,000,000 shares with a par value of $0.001 per share. The preferred stock may be issued in one or more series, from time to time, with each series to have such designation, relative rights, preference or limitations, as adopted by the Company’s Board of Directors. No preferred shares have been issued.

 

NOTE 10 - INCOME TAXES

 

United States

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The cumulative tax effect at the expected rate of 34% of significant items comprising the net deferred tax amount is at January 31, 2015 and July 31, 2014 as follows:

 

   January31, 2015   July 31, 2014 
Deferred tax assets:          
Net operating losses  $232,033   $170,552 
           
Total deferred tax assets   232,033    170,552 
Less: valuation allowance   (232,033)   (170,552)
           
Deferred tax assets, net  $-   $- 

 

As of January 31, 2015, for U.S. federal income tax reporting purposes, the Company has approximately $682,451 of unused net operating losses (“NOLs”) available for carry forward to future years. The benefit from the carry forward of such NOLs will begin expiring during the year ended July 31, 2029. Because United States tax laws limit the time during which NOL carry forwards may be applied against future taxable income, the Company may be unable to take full advantage of its NOLs for federal income tax purposes should the Company generate taxable income. Further, the benefit from utilization of NOL carry forwards could be subject to limitations due to material ownership changes that could occur in the Company as it continues to raise additional capital. Based on such limitations, the Company has significant NOLs for which realization of tax benefits is uncertain.

 

Hong Kong

 

The Company’s subsidiaries established in HKSAR are subject to Hong Kong Profits Tax. However, these subsidiaries did not earn any income derived in Hong Kong from its date of incorporation to January 31, 2015, and therefore were not subject to Hong Kong Profits Tax.

 

PRC 

 

The Company’s subsidiaries established in PRC are subject to income tax rate of 25%.

 

  1) Luck Sky Shenzhen 

 

As of January 31, 2015, Luck Sky Shenzhen had $15,244 in net operating loss carry forwards available to offset future taxable income. Net operating losses can generally be carried forward by five years in PRC. However, there is no foreseeing profit for Luck Sky Shenzhen, so we made 100% valuation allowance.

 

  2) Sanhe

 

As of January 31, 2015, Sanhe had $817,513 in net operating loss carry forwards available to offset future taxable income. Net operating losses can generally be carried forward by five years in PRC. As a result, we recognized deferred tax asset of $267,509 and $113,392 as of January 31, 2015 and July 31, 2014, respectively.

 

15
 

 

NOTE 11. COMMITMENTS, CONTINGENCIES, RISKS AND UNCERTAINTIES

 

Capital Commitments

 

The Company purchased property, plant and equipment which the payment was due within one year. As of January 31, 2015 and July 31, 2014, the Company has a capital commitment of $25,171,043 and $27,777,872, respectively.

 

Operation Commitments

The total future minimum lease payments under the non-cancellable operating lease with respect to the office and the dormitory as of January 31, 2015 are payable as follows: 

 

Year ending July 31, 2015   170,681 
Year ending July 31, 2016   341,363 
Year ending July 31, 2017   341,363 
Year ending July 31, 2018   341,363 
After 2018   6,143,972 
Total  $7,338,742 

 

Rental expense of the Company for the six months ended January 31, 2015 and 2014 were $67,134 and $2,133, respectively.

 

Credit risk

 

Cash deposits with banks are held in financial institutions in China, which are not federally insured deposit protection. Accordingly, the Company has a concentration of credit risk related to these uninsured bank deposits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area.

 

Contingencies

 

On July 20, 2014, Mr. Zhou Deng Rong, former general manager and former majority shareholder of the Company, received a verbal summon from the Public Security Bureau in Chi Feng city for investigation assistance purposes and Mr. Zhou is being questioned by the authorities. The investigation is related to the initial offering to the Chinese investors by Xiangtian (Beijing) Equity Investment Fund Management Co., Ltd. Mr. Zhou resigned as General Manager and Director of the Company effective July 29, 2014.

 

The Company has received no notice of any investigation or proceeding with respect to this offering or any other matter and is not aware of any warrant or charges against Mr. Zhou or any notices of any warrant delivered to his family. In addition, no claims have been filed against the Company or any of its affiliates by any shareholder. However, the filing of such a claim or commencement of any governmental investigation or proceeding, even if not justified, could create negative publicity and have a material adverse impact on the Company’s ability to raise additional capital and on the market price of the Company’s common stock. Should any of the allegations or claims be proven, the Company could be adversely affected.

 

Certain Chinese investors purchased the right to receive shares of common stock in a Hong Kong entity with were to be exchanged for stock in a United States entity that would /that would own rights to the compressed air storage technology. Shares in LuckSky (Hong Kong) Shares Limited were issued and then a total of 150,000,000 shares of common stock of the Company were issued upon the merger of LuckSky (Hong Kong) Shares Limited into the Company in September 2013. Allegations have been made by journalists that certain misrepresentations were made by sales agents to such investors, including an alleged representation that they were receiving stock in the Company which owned the business of Sanhe and which shares would be listed on a national securities exchange. As a result of the Company’s acquisition of Sanhe, such investors now own stock in the Company, which controls the business of Sanhe through the VIE Agreements and is the licensee of the air compression energy technology. Allegations have also been made that sales agents improperly sold such securities.

 

16
 

 

However, the filing of such a claim or commencement of any governmental investigation or proceeding against the Company, even if not justified, could create negative publicity and have a material adverse impact on the Company’s ability to raise additional capital and on the market price of the Company’s common stock. Should any of the allegations or claims be proven, the Company could be adversely affected.

 

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

 

Overview

 

Xiangtian (USA) Air Power Co., Ltd. was originally incorporated as Goa Sweet Tours Ltd. in the State of Delaware on September 2, 2008. We were originally formed to provide personalized concierge tour packages to tourists who visit the State of Goa, India.

 

On April 17, 2012, Goa Sweet Tours, Ltd. entered into Share Purchase Agreements (the “Purchase Agreements”), with Luck Sky International Investment Holdings Limited, an entity owned and controlled by Zhou Deng Rong, and certain of our former stockholders who owned, in the aggregate, 7,200,000 shares of our common stock (90% of the then outstanding shares). Luck Sky International Investment Holdings Limited purchased such shares for an aggregate consideration of $235,000. The sale of such shares closed on May 15, 2012.

 

On May 25, 2012, Goa Sweet Tours, Ltd. formed a corporation under the laws of the State of Delaware called Xiangtian (USA) Air Power Co., Ltd. ("Merger Sub") for the purpose of changing its name. On the same day, we acquired one hundred percent of the total outstanding shares of Merger Sub's common stock for cash. As such, Merger Sub became our wholly-owned subsidiary.

 

Effective as of May 29, 2012, Merger Sub was merged with and into the Company. As a result of the merger, the Company’s corporate name was changed to “Xiangtian (USA) Air Power Co., Ltd.” Prior to the merger, Merger Sub had no liabilities and nominal assets and, as a result of the merger, the separate existence of the Merger Sub ceased. The Company was the surviving corporation in the merger and, except for the name change provided for in the Agreement and Plan of Merger, there was no change in the directors, officers, capital structure or business of the Company.

 

On September 24, 2013, the Company acquired all of the shares of common stock of Lucksky (Hong Kong) Shares Limited, a Hong Kong corporation, for 250,000,000 shares of common stock of the Company, and agreed to acquire 100% of the shares of Sanhe City LuckSky Electrical Engineering Limited (“Sanhe”) common stock for the Company’s common stock. As of the acquisition merger, Lucksky (Hong Kong) Shares Limited and Sanhe had no liabilities and nominal assets. Effective as of September 24, 2013, Lucksky (Hong Kong) Shares Limited was merged with and into the Company and the Company was the surviving entity. The Company has not acquired Sanhe as of the date of this Report.

 

On May 30, 2014, the Company entered into the Stock Purchase Agreement with Zhou Jian, the sole shareholder of Luck Sky HK. Effective May 30, 2014 the Company purchased 100% of the issued and outstanding shares of common stock of Luck Sky HK, and the Company paid Zhou Jian a purchase price in the amount of HKD $10,000.00 (approximately USD$1,289.98) in cash (the “Acquisition”).

 

Luck Sky Shen Zhen is a wholly-owned subsidiary of Luck Sky HK and neither company had any operating business and nominal or liabilities and nominal assets as of the date of the Acquisition. As a result of the Acquisition, Luck Sky HK became our wholly owned subsidiary and Luck Sky Shen Zhen became our indirect subsidiary through Luck Sky HK.

 

LuckSky Group was established in 2000 by Zhou Deng Rong after he obtained a series of patents and developed the air compression and related technology. Sanhe was established in July 2013 and was under common control with LuckSky Group. Since inception, Sanhe served as a distributor of products of the LuckSky Group and its subsidiaries.

 

17
 

 

During the three months ended June 30, 2014, LuckSky Group provided Sanhe with additional working capital and transferred to Sanhe its assets and liabilities related to the compressed air energy storage power generation technology and PV panel installations, but retained its other assets. On April 1, 2014, LuckSky Group loaned Sanhe RMB3,000,000. The equipment, including machinery, was sold to Sanhe for RMB7,681,000, its book value, Xiangtian Kelitai, Yanjiao Branch, a division of LuckSky Group on May 26, 2014. On April 30, 2014, the inventory was sold to Sanhe by Xiangtian Kelita, Yanjiao Branch, a division of LuckSky Group for RMB 130,918.80, its historical value. On May 19, 2014, Sanhe entered into an office equipment transfer (purchase) agreement with Xiangtian Kelitai, Yanjiao Branch, a division of LuckSky Group for a purchase price of RMB162, 900. Sanhe entered into leases with LuckSky Group for a portion of the factory, office space and dormitory located in Sanhe City and a lease with Dong Yi Glass Machine Company Limited, which is owned by Deng Zhou Rong, our former CEO, for a second factory and office space. In addition, 48 employees transferred from LuckSky Group to Sanhe, including all personnel related to the projects under construction and development and administrative and fiancé personnel. See “Business-Properties” and “Certain Relationships and Related Party Transactions.”

 

Acquisition of Sanhe

 

On July 25, 2014, Sanhe and Luck Sky Shen Zhen and Sanhe’s shareholders entered into a series of agreements known as variable interest agreements (the “VIE Agreements”) pursuant to which Sanhe became LuckSky Shen Zhen’s contractually controlled affiliate. The VIE Agreements include the Framework Agreement on Business Cooperation, the Exclusive Management Consulting and Training and Technical Services Agreement, the Exclusive Option Agreement, the Equity Pledge Agreement, the Know-How Sub-License Agreement and the Power-of-Attorney. The purpose and effect of the VIE Agreements is to provide LuckSky Shen Zhen (our indirect wholly-owned subsidiary) with all of the management and control of Sanhe and all of its net income. While LuckSky Shen Zhen does not actually own at present any of the equity and shares in Sanhe, the purpose and effect of the VIE Agreements is to instill in Luck Sky Shen Zhen total management and voting control of Sanhe for all material purposes. The use of VIE agreements is a common structure used to acquire PRC corporations, particularly in certain industries in which foreign investment is restricted or forbidden by the PRC government.

 

Results of Operations

 

We have not incurred any revenue for the six months ended January 31, 2015 and 2014, as we have just started our business, and no construction projects were completed as of January 31, 2015. Hence, no revenue was recognized per our revenue recognition policy, completed contract method. The related costs incurred on the ongoing projects were classified as construction in progress under inventory.

 

For the six months ended January 31, 2015, we have incurred total operating expenses in the amount of $741,971, which mainly comprises selling expenses of $10,660, professional fees totaling $268,647, and general and administrative expenses totaling $462,664. For the six months ended January 31, 2014, we incurred total operating expenses in the amount of $213,196 which mainly comprises professional fees totaling $98,900, and general and administrative expenses totaling $114,296. The increase in operating expenses from 2014 to 2015 is due to increased amounts of professional fees and administrative expenses related to public reporting and the acquisition of Sanhe.

 

For the three months ended January 31, 2015, we incurred total operating expenses in the amount of $396,920 which mainly comprised selling expenses of $5,325, professional fees totaling $153,849 and general and administrative expenses totaling $237,746. For the three months ended January 31, 2014, we incurred total operating expenses in the amount of $96,814, which mainly comprised of professional fees totaling $29,784, and general and administrative expenses totaling $67,030. The increase in operating expenses from 2014 to 2015 is due to increased amounts of professional fees and administrative expenses related to public reporting and the acquisition of Sanhe.

 

We incurred total operating expenses in the amount of $1,669,496 from inception on September 2, 2008 through January 31, 2015. These operating expenses were comprised of selling expenses of $16,139, professional fees totaling $672,384 and general and administrative expenses totaling $980,973.

 

We have not incurred any expenses for research and development from inception through January 31, 2015. As a result of operating losses, there has been no provision for the payment of income taxes from the date of inception. The Company has a certain deferred tax asset that is available to offset against future taxable income.

 

Liquidity and Capital Resources

 

As of January 31, 2015, we had a cash balance of $420,917. During the six months ended January 31, 2015, net cash generated from operating activities totaled $2,400,790. Net cash used in investing activities totaled $47,790. Net cash repaid for financing activities during the period totaled $2,357,083. The resulting change in cash for the period was a decrease of $135,871, which was primarily due to cash outflow for the purchase of inventory, acquiring raw material, incurring costs and deposits in the ongoing projects, purchasing property and equipment, decrease in the amount due to related parties and increase in the amount other current assets, albeit the cash inflow from advance billings on contracts.

 

18
 

 

As of January 31, 2014, we had a cash balance of $228,900. During the six months ended January 31, 2014, net cash used in operating activities totaled $300,137. Net cash used in investing activities totaled $2,593,965. Net cash provided by financing activities during the period totaled $1,484,170. The resulting change in cash for the period was a decrease of $1,411,117, which was primarily due to cash outflow for the purchase of property and equipment, albeit the cash inflow from advance billings on contracts and amount due to related parties.

 

As of January 31, 2015, we had current liabilities of $21,034,176, which was mainly comprised of advance billings on contracts of $19,244,792, amount due to related parties of $667,643, current capital lease obligations of $54,464, capital lease interest payable to related parties of $126,806, accounts payable and accrued liabilities of $489,785 and amount due to directors of $431,852. As of July 31, 2014, we had current liabilities of $15,748,499, which was mainly comprised of advance billings on contracts of $11,831,607, amount due to related parties of $3,027,605, current capital lease obligations of $31,022, capital lease interest payable to related parties of $52,542, accounts payable and accrued liabilities of $355,861 and amount due to directors of $430,928.

 

We had a non-current liabilities balance of $2,687,509 as of January 31, 2015, compared with $2,718,106 as of July 31, 2014.

 

We had net assets of $8,170,744 and $8,878,530 as of January 31, 2015 and July 31, 2014, respectively.

 

On July 18, 2013, Sanhe borrowed $1,242,198 (RMB 7,722,000), pursuant to a loan agreement with Xiangtian Kelitai, Yanjiao Branch, a division of LuckSky Group, which is owned by Zhou Deng Rong. The loan is interest free, and matures on December 31, 2014. Of the principal amount of this loan, RMB 5,233,000 was initially paid by LuckSky Group to a third party supplier to purchase equipment that was later transferred to Sanhe. The remaining loan was used to purchase equipment necessary for producing components of compressed air energy storage power generators. As of January 31, 2015, Sanhe has repaid the loan from prepayment received from customers for its projects.

 

There were no projects completed as of January 31, 2015. In the course of developing such projects, we continue to sustain losses and have not generated any revenues. We expect to finance operations primarily through non-interest bearing loans from the Company’s directors and progress billings on the ongoing projects. Amounts due to related parties declined to $667,643 as of January 31, 2015 from $3,027,605 as of July 31, 2014. We estimate that our cash and cash equivalents and projected cash receipts from operations are sufficient to fund operations for the next six months. When additional funds become required, the additional funding may come from equity financing from the sale of our common stock, but there can be no assurance that such financing will be available on acceptable terms. If we are successful in completing an equity financing, existing shareholders will experience dilution of their interest in our company.

 

As of January 31 2015, we have signed five project contracts and four of them are in process. One of the three projects in Shandong province commenced operations in February 2015 and the other two projects are expected to commence operations in March 2015. The project in Hubei province is expected to commence operation in May 2015.We are negotiating to terminate the project in Sichuan province. We are dependent on these four projects for all our projected revenue until we obtain additional customers and any material delay or reduction in the projected cash receipts will adversely affect our operations. While we expect to generate revenue on the completion of our projects to meet the liquidity and capital resources of our operations, delayed receipts may cause going concern issues.

 

Sanhe signed a supplemental agreement with Shandong Thaidai Photovoltaic Technology Co., Ltd., the supplier of Shandong Binzhou project in January 2015. The Company paid a deposit of $1,623,843 (RMB 10,000,000) to third party Ni Baofeng, who is the guarantor of Sanhe’s obligations under the agreement with Shandong Thaidai. In order to help assure Sandong Thaidai’s fulfillment of its supply obligations and to facilitate completion of the project, Ni Baofeng agreed to not release the RMB10,000,000 to Shandong Thaidai without the consent of Sanhe.

 

  

The Company has incurred losses since its inception resulting in an accumulated deficit of $1,528,903 as of January 31, 2015 and further losses are anticipated in the development of its business raising substantial doubt about the Company’s ability to continue as a going concern. Our future financial results are also uncertain due to a number of factors, some of which are outside our control. These risk factors include, but are not limited to:

 

  our ability to raise additional funding;

 

  the results of our proposed operations.

 

19
 

 

Going Concern Consideration

 

Our operations and financial results are subject to numerous various risks and uncertainties that could adversely affect our business, financial condition and results of operations.

 

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

 

Use of Estimates and Assumptions

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

 

Fair Value Measurements

 

The Company applies the provisions of ASC Subtopic 820-10, “Fair Value Measurements”, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements.  ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements. 

 

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

  

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

 

¨        Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

¨        Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

¨        Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

There were no assets or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of January 31, 2015 and July 31, 2014.

 

Revenue Recognition

 

Sales of power generation system in conjunction of system installation are recognized under accounting for construction-type contracts, using the completed contract method. Accordingly, revenue is recognized upon the completion of the construction, provided persuasive evidence of an arrangement exists, title and risk of loss has transferred, the fee is fixed and determinable, and collection is reasonably assured. We provide for any loss that we expect to incur on these contracts when that loss is probable.

 

20
 

 

Warranty and Returns

 

The Company generally provides limited warranties for work performed under its contracts. The warranty periods typically extend for a limited duration following substantial completion of the Company's work on a project. At the time a sale is recognized, we record estimated future warranty costs. Such estimated costs for warranties are included in the individual project cost estimates for purposes of accounting for long-term contracts. Generally, the estimated claim rates of warranty are based on actual warranty experience or Company’s best estimate.

 

No right of return exists on sales of equipment. Replacement part returns are estimable and accrued at the time a sale is recognized.

 

Recent Accounting Pronouncements

 

In August 2014, the Financial Accounting Standards Board issued ASU No. 2014-15, Presentation of Financial Statements— Going Concern (Subtopic 205-40). This standard is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments contained in this ASU apply to all companies and not-for-profit organizations. The amendments are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The Company is currently assessing this ASU’s impact on the Company’s consolidated results of operations and financial condition.

 

In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in this Update remove the definition of a development stage entity from the Master Glossary of the Accounting Standards Codification, thereby removing the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. For public business entities, those amendments are effective for annual reporting periods beginning after March 16, 2015, and interim periods therein. Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued (public business entities) or made available for issuance (other entities). Upon adoption, entities will no longer present or disclose any information required by Topic 915.The Company adopted this ASU as early application for the financial statements of the period from July 8, 2013 (inception) to December 31, 2013.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle the ASU includes provisions within a five step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) an entity satisfies a performance obligation. The standard also specifies the accounting for some costs to obtain or fulfill a contract with a customer and requires expanded disclosures about revenue recognition. The standard provides for either full retrospective adoption or a modified retrospective adoption by which it is applied only to the most current period presented. This ASU is effective January 1, 2017. The Company is currently assessing this ASU’s impact on the Company’s consolidated results of operations and financial condition.

 

The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

 

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.

 

21
 

 

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. The inflation rate in China was reported at approximately 3.7% percent for 2014 and 2.6% for 2013 (see http://www.statista.com/statistics/270338/inflation-rate-in-china/). 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 or in international markets.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. The Company’s management, with the participation of the Chief Executive Officer and Acting Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”). Based on that evaluation, the Company’s Chief Executive Officer and Acting Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective.

 

Changes in internal controls.

 

The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management, with the participation of the Chief Executive Officer and Acting Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the quarter ended January 31, 2014, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

The Company currently is not a party to any legal proceedings and, to the Company’s knowledge; no such proceedings are threatened or contemplated.

 

Item 1A. Risk Factors

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

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

 

None

 

Item 3. Default Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

22
 

 

Item 6. Exhibits

 

Exhibit No.   Description

 

10.15 

 

 

 Agreement dated January 4, 2015 by and between Sanhe Xiangtian Electric Engineering Co., Ltd. and Shandong Thaidai Photovoltaic Technology Co., Ltd. (Filed herewith)

     
31.1   Certification of Chief Executive Officer pursuant to 13a-14 and 15d-14 of the Exchange Act. (Filed herewith)
     
31.2   Certification of Acting Chief Financial Officer pursuant to 13a-14 and 15d-14 of the Exchange Act. (Filed herewith)
     
32.1   Certificate pursuant to 18 U.S.C. ss. 1350 for Zhiqi Zhang, Chief Executive Officer. (Filed herewith)
     
32.2   Certificate pursuant to 18 U.S.C. ss. 1350 for Roy Thomas Phillips, Acting Chief Financial Officer. (Filed herewith)

 

XBRL Exhibit

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.

 

23
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

  XIANGTIAN (USA) AIR POWER CO., LTD.
     
  By:  /s/ Zhiqi Zhang
    Chief Executive Officer
    (Principal Executive Officer)

 

    By: /s/ Roy Thomas Phillips
    Roy Thomas Phillips
    Acting Chief Financial Officer
    (Principal Accounting Officer)
     
    Date: March 16, 2015

 

24