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EX-32.2 - CERTIFICATION - XIANGTIAN (USA) AIR POWER CO., LTD.v413410_ex32-2.htm
EX-31.1 - CERTIFICATION - XIANGTIAN (USA) AIR POWER CO., LTD.v413410_ex31-1.htm
EX-32.1 - CERTIFICATION - XIANGTIAN (USA) AIR POWER CO., LTD.v413410_ex32-1.htm
EX-31.2 - CERTIFICATION - XIANGTIAN (USA) AIR POWER CO., LTD.v413410_ex31-2.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 April 30, 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)    

 

9841 Washingtonian Blvd, Suite 213

Gaithersburg MD 20878

(Address of principal executive offices)

 

001 240-252-1578

(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 June 15, 2015. The registrant has no other class of common equity.

 

 
 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
Condensed Consolidated Balance Sheets as of April 30, 2015 (Unaudited) and July 31, 2014 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended April 30, 2015 and 2014 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2015 and 2014 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Mine Safety Disclosures 21
Item 5. Other Information 21
Item 6. Exhibits 21
Signatures 22

 

2
 

 

PART I. FINANCIAL INFORMATION 

 

Item 1. Financial Statements

 

Xiangtian (USA) Air Power Co., Ltd.

Condensed Consolidated Balance Sheets

(Stated in US Dollars)

 

   April 30, 
2015
   July 31, 
2014
 
   (Unaudited)   (Audited) 
         
Current assets          
Cash and cash equivalence  $491,657   $556,788 
Accounts receivable   806,218    - 
Other receivables   350,283    23,791 
Advances to suppliers   5,523,978    7,490,564 
Due from related parties   403,109    - 
Inventory   2,175,714    1,781,653 
Deferred tax asset   298,171    111,844 
Other current asset   3,847,728    1,146,785 
Total current assets  $13,896,858   $11,111,425 
           
Non-current assets          
Property, plant and equipment, net  $7,793,240   $6,779,256 
Deposit for property, plant and equipment   90,941    1,590,581 
Total non-current assets   7,884,181    8,369,837 
           
Total assets  $21,781,039   $19,481,262 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
LIABILITIES          
Current liabilities          
Accounts payable and accrued liabilities  $2,573,237   $355,861 
Amount due to shareholders   18,978    18,934 
Capital lease interest payable to related parties   172,611    52,542 
Capital lease obligations – current   63,248    31,022 
Amount due to director   417,776    430,928 
Advances from related parties   690,316    3,027,605 
Advance from customers   264,510    120,649 

Billings in excess of costs

   6,663,850    3,847,085 
Total current liabilities   10,864,526    7,884,626 
           
Non-current liabilities          
Capital lease obligations - non-current   2,699,814    2,718,106 
Total non-current liabilities   2,699,814    2,718,106 
           
Total liabilities  $13,564,340   $10,602,732 
           
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 as of April 30, 2015 and July 31, 2014   531,042    531,042 
Additional paid-in capital   9,206,175    9,201,675 
Deficit accumulated   (1,553,110)   (862,211)
Accumulated other comprehensive gain   32,592    8,024 
Total stockholders’ equity   8,216,699    8,878,530 
Total liabilities and stockholders’ equity  $21,781,039   $19,481,262 

 

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

 

3
 

 

Xiangtian (USA) Air Power Co., Ltd.

Condensed Consolidated Statement of Operations and Comprehensive Loss

(Stated in US Dollars)

(Unaudited)

 

   For the 
Three
Months
Ended 
April 30,
2015
   For the 
Three
Months
Ended 
April 30,
2014
   For the 
Nine
Months
Ended 
April 30,
2015
   For the 
Nine
Months
Ended 
April 30,
2014
 
Revenue   1,133,522    -    1,133,522    - 
                     
Cost of sales  $938,674   $-   $938,674   $- 
                     
Sales Tax   3,117         3,117      
                     
Gross profit  $191,731   $-   $191,731   $- 
                     
Operating expenses:                    
Selling expenses   5,731    -    16,391    - 
General and administrative expenses   187,067    153,049    918,378    366,244 
Loss from operations   192,798    153,049    934,769    366,244 
                     
Net gain (loss) from operations   (1,067)   (153,049)   (743,038)   (366,244)
                     
Other (expense) income:                    
Interest (expense) income   (44,178)   (200)   (126,879)   383 
Other expenses   -    -    (90)   - 
Foreign exchange gain (loss)   491    -    (12)   - 
Total other (expense) income, net   (43,687)   (200)   (126,981)   383 
                     
Net loss before taxes  $(44,754)   (153,249)  $(870,019)   (365,861)
                     
Income tax benefit   20,548    27,857    179,120    38,261 
                     
Net loss  $(24,206)   (125,392)  $(690,899)   (327,600)
                     
 Foreign currency translation adjustment   68,662    (72,225)   24,568    (59,981)
                     
Comprehensive gain (loss)   44,456    (197,617)   (666,331)   (387,581)
                     
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    207,633,700 

 

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

 

4
 

 

Xiangtian (USA) Air Power Co., Ltd.

Condensed Consolidated Statements of Cash Flows

  (Stated in US Dollars)

(Unaudited) 

 

 

    For the
Nine Months Ended
April 30,
2015
    For the
Nine Months Ended
April 30,
2014
 
Cash flows from operating activities:                
Net loss   $ (690,899 )   $ (327,600 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     310,560       -  
Deferred tax asset     (185,177 )     (38,261 )
Rent contributed by shareholders as paid-in capital     4,500       4,500  
Changes in operating assets and liabilities:                
Accounts receivable     (808,753 )     -  
Other receivables     (327,150 )     (118,931 )
Prepayment     2,089,024       -  
Inventory     (367,649 )     -  
Due from related party     (404,376 )     (2,289 )
Other current asset     (2,713,042 )     -  
Accounts payable and accrued liabilities     2,265,143       (6,335,552 )
Billings in excess of costs     2,765,916       -  
Other payables and tax payables     277,548       13,035  
Advance from customers     142,441       596,717  
Capital lease interest payable to related parties     119,631       -  
Amount due to related parties     (2,336,613 )     -  
Net cash provided by (used in) operating activities     141,104       (6,208,381 )
                 
Cash flows from investing activities:                
Purchase of property and equipment     (64,505 )     (3,568,514 )
Net cash used in investing activities     (64,505 )     (3,568,514 )
                 
Cash flows from financing activities:                
Repayment of advances from related parties     -       1,969,738  
Advances from director     (13,031 )     14,974  
Capital contribution from shareholders     -       6,413,031  
Net cash (used in)/provided by financing activities     (13,031 )     8,397,743  
                 
Effect of exchange rate change on cash     (128,699 )     122,618  
                 
Net change in cash and cash equivalents     (65,131 )     (1,256,535 )
                 
Cash and cash equivalents  - beginning of period     556,788       1,640,007  
                 
Cash and cash equivalents  - end of period   $ 491,657     $ 383,472  

 

 

 

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

 

5
 

 

Xiangtian (USA) Air Power Co., Ltd.

Notes to Condensed 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 25, 2012, the Company formed a wholly-owned subsidiary corporation under the laws of the State of Delaware called Xiangtian (USA) Air Power Co., Ltd. ("Merger Sub").

 

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.

 

Merger with LuckSky (Hong Kong) Shares Limited

 

On September 5, 2013, 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. In exchange, the Company acquired 250,000,000 shares, with USD $0,001 par value, of HK Shares, which constituted all of the issued and outstanding shares of HK Shares, from the shareholders of HK Shares for the purpose of merging HK Shares into the Company. The Company has reflected the merger of entities under common control at historical cost and accordingly, there was no change to the carrying value of its assets or liabilities.

 

The Company has submitted the application form to relevant government department in Hong Kong to cancel HK Shares and expects such cancellation to be effective before July 2015. Since the merger was between related parties, the interest in the entity was recorded at historical cost.

 

Acquisition of Sanhe City Lucksky Electrical Engineering Co., Ltd.

 

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.

 

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 is established on August 6, 2014, were included in the accompanying consolidated financial statements as of April 30, 2015 and July 31, 2014 and for the nine months ended April 30, 2015 and 2014, respectively:

 

   April 30, 2015   July 31, 2014 
Total assets  $21,401,700   $17,666,510 
Total liabilities   12,621,604    8,821,079 

   

   For the nine
months
   For the nine months 
   Ended   ended 
   April 30, 2015   April 30, 2014 
           
Net loss  $559,947   $327,085 

 

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 April 30, 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.

 

Costs in Excess of Billings: 

 

Costs in excess of billings represent unbilled amounts earned and reimbursable under contracts. These amounts become billable according to the contract terms, which usually consider the passage of time, achievement of milestones or completion of the project. Generally, such unbilled amounts will be billed and collected over the next twelve months. There was no cost in excess of billings for the periods ended April 30, 2015 and July 31, 2014.

 

Billings in Excess of Costs: 

 

Billings in excess of costs is comprised of cash collected from customers and billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.

 

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 because reliable estimates are not available for the costs and efforts necessary to complete the construction. 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. The warranty cost is estimated based on our experience with the type of work and any known risks relative to the project and was not material during the periods ended April 30, 2015 and 2014. 

 

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 during the period from July 8, 2013 (inception) to December 31, 2013. 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 6.2018 and 6.2164 as of April 30, 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 6.1824 and 6.1168 for the nine months ended April 30, 2015 and April 30, 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 7.7513 and 7.7497 as of April 30, 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 7.7540 and 7.7556 the nine months ended April 30, 2015 and April 30, 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 exclude all potential dilutive shares of common stock if their effect is anti-dilutive. There were no potential dilutive securities at April 30, 2015 or April 30, 2014.

 

Reclassification of Comparative Amounts

 

Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.

 

Recent Accounting Pronouncements

 

In February 2015, FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The new consolidation standard changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a VIE, and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. Early adoption is allowed, including early adoption in an interim period. A reporting entity may apply a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or may apply the amendments retrospectively. The Company is currently assessing the impact of the adoption of this guidance on the consolidated financial statements.

 

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.

 

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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.

 

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 $1,553,110 as of April 30, 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:

 

    April 30,     July 31,  
    2015     2014  
Raw materials   $ 295,539     $ 115,839  
Accessory parts     899,252       635,708  
Contracts work in process     980,923       1,030,106  
Total   $ 2,175,714       $1,781,653  

 

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

   April 30,   July 31, 
   2015   2014 
Machinery equipment  $5,281,800   $3,997,506 
Computer and office equipment   56,630    59,316 
Vehicle   74,205    38,558 
Property under capital lease   2,763,062    2,756,573 
Total property, plant and equipment   8,175,697    6,851,953 
Less: accumulated depreciation   (382,457)   (72,697)
Total  $7,793,240   $6,779,256 

 

Total depreciation expenses for the nine months ended April 30, 2015 and 2014 were $310,560 and $0, respectively. Depreciation relating to Contract work in progress for the nine months ended April 30, 2015 and 2014 were $189,241 and $0, respectively, and depreciation relating to general and administrative expenses for the nine months ended April 30, 2015 and 2014 were $121,321 and $0, respectively.

 

NOTE 6 – BILLINGS IN EXCESS OF COSTS

 

Billings in excess of costs consist of the following:

 

   April 30, 2015   July 31, 2014 
Costs incurred on uncompleted contracts  $16,716,459   $7,863,873 
           
Billings to date   (23,380,309)   (11,710,958)
           
   $(6,663,850)  $(3,847,085)
           
Included in the accompanying balance sheets as follows:          
Costs in excess of billings on uncompleted contracts  $-   $- 
Billings on uncompleted contracts in excess of costs   (6,663,850)   (3,847,085)
           
   $(6,663,850)  $(3,847,085)

 

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NOTE 7 - RELATED PARTY TRANSACTIONS

 

Due from related parties

 

On April 25, 2015, Sanhe entered into a loan agreement with Xiangtian Kelitai, Yanjiao Branch, a division of LuckSky Group, which is owned by Zhou Deng Rong, former CEO and Sanhe’s former general manager and former majority shareholder of the Company, with a total amount of $507,917 (RMB3,150,000). The loan is unsecured and matures on December 31, 2015. If the loan is not fully repaid on the maturity date, Sanhe will be entitled to receive an interest at 5% per annum. As of April 30, 2015, the outstanding principal on the loan was $403,109.

 

Due to related parties

 

On July 25, 2014, prior to the Acquisition, Sanhe and Luck Sky Shen Zhen and Sanhe’s shareholders entered into a series of VIE Agreements, pursuant to which Sanhe became Luck Sky 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 Luck Sky 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 Luck Sky 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.

 

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.

 

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. The royalty payment was deferred.

 

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 $0 and $1,235,667 as of April 30, 2015 and July 31, 2014.

 

On April 1, 2014, LuckSky Group loaned Sanhe $483,830 (RMB 3,000,000). The loan was interest free, and would have matured on December 31, 2014. In July 2014, Sanhe paid RMB 2,000,000 to LuckSky Group. The outstanding balance of RMB 1,000,000 was fully paid in August 2014.

 

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, our former CEO and Sanhe’s 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 April 30, 2015, Kelitai has paid $1,242,198 on behalf of the Company as prepayments to Hengruier. The outstanding amounts for the transactions with Hengruier due to related party-Kelitai were $0 and $1,242,198 as of April 30, 2015 and July 31, 2014.

 

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. This loan was paid off as of April 30, 2015.

 

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. As of April 30, 2015 and July 31, 2014, the rental fee accrued but unpaid under the leases from LuckSky Group were $133,324 and $33,253, respectively.

 

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 April 30, 2015 and July 31, 2014, the rental fee accrued but unpaid under the leases from Sanhe Dong Yi were $172,611 and $52,542, respectively.

 

From time to time, Mr. Zhou Deng Rong prepaid some expenses for the company. As of April 30, 2015 and July 31, 3014, amounts due to related parties were as follows:

 

    April 30, 2015     July 31, 2014  
Rental fees:                
LuckSky Group     133,324       33,253  
Sanhe Dong Yi (Capital lease interest payable)   $ 172,611     $ 52,542  
                 
Purchase Fixed assets:                
Kelitai   $ -     $ 1,235,667  
                 
Borrowings:                
LuckSky Group     -       1,242,198  
Sanhe Dong Yi   $ -     $ 160,865  
                 
Prepaid expenses on behalf of the company:                
Kelitai     -       1,510  
Zhou Deng Rong     556,992       354,112  
                 
Total   $ 862,927     $ 3,080,147  

 

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Due to Shareholders

 

Since inception to April 2014, the Company’s shareholders have paid several employees’ salaries on behalf of the Company. As of April 30, 2015 and July 31, 2014, the amount due to shareholders was $18,978 and $18,934, respectively.

 

Due to Directors

 

From time to time, the Company receives advances from its directors. As of April 30, 2015 and July 31, 2014, the Company received $417,776 and $430,928, respectively. The Company used the funds for its operations. These advances are due on demand, unsecured and non-interest bearing.

 

NOTE 8 - 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 $54,403 and $22,098 as of April 30, 2015 and July 31, 2014, respectively.

 

NOTE 9 - 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 10 - 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.

 

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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 11 - 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 April 30, 2015 and July 31, 2014 as follows:

 

   April 30, 2015   July 31, 2014 
Deferred tax assets:          
Net operating losses  $224,460   $170,552 
           
Total deferred tax assets   224,460    170,552 
Less: valuation allowance   (224,460)   (170,552)
           
Deferred tax assets, net  $-   $- 

 

As of April 30, 2015, for U.S. federal income tax reporting purposes, the Company has approximately $660,179 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 April 30, 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 April 30, 2015, Luck Sky Shenzhen had $30,036 in net operating profit and $7,529 income tax expenses accrued accordingly.

 

  2) Sanhe

 

As of April 30, 2015, Sanhe had $901,742 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 $298,171 and $111,844 as of April 30, 2015 and July 31, 2014, respectively.

 

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NOTE 12. COMMITMENTS, CONTINGENCIES, RISKS AND UNCERTAINTIES

 

Capital Commitments

 

The Company purchased property, plant and equipment which the payment was due within one year. As of April 30, 2015 and July 31, 2014, the Company has a capital commitment of $19,508,643 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 April 30, 2015 are payable as follows: 

 

Remaining 2015     85,997  
Year ending July 31, 2016     343,989  
Year ending July 31, 2017     343,989  
Year ending July 31, 2018     343,989  
After 2018     6,191,227  
Total   $ 7,309,191  

 

Rental expense of the Company for the nine months ended April 30, 2015 and 2014 were $258,801 and $2,943, 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.

  

Contingency

 

On September 23, 2013, Mr. Roy Thomas Phillips, who was then a consultant to the Company and served as the acting CFO of the Company from July 29, 2014 until his resignation on March 29, 2015, obtained 60,000,000 shares of restricted common stock, and two other non-related parties, obtained a total of 7,000,000 shares of restricted common stock, for a total of 67,000,000 shares of restricted common stock from the Company in contemplation of a secondary offering, which was not consummated. The Company has requested that the certificate representing the shares be returned so that the 67,000,000 shares be canceled. The Company has not recorded such 67,000,000 shares as no consideration was received for such shares. The recipients of such shares have agreed to the cancellation of 62,000,000 of such shares, and that they are not the beneficial owners of such 62,000,000 shares. The cancellation of such 62,000,000 shares is pending upon receipt of the actual stock certificate from the recipients. Meanwhile, Mr. Phillips is evaluating the 5,000,000 shares to make an accommodation with respect to such shares, but has made no specific request. The Company has committed to seek the return of the 5,000,000 shares to the fullest extent.

 

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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.

 

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 Kelitai, 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.

 

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

 

The following discussion should be read in conjunction with the unaudited condensed consolidated Financial Statement of the Company for the three-month period and nine-month period ended April 30, 2015 and 2014 and related notes thereto.

 

Three-month period ended April 30, 2015 compared to three-month period ended April 30, 2014

 

Revenue

 

We have recognized $1,133,522 and $0 revenue for the three months ended April 30, 2015 and 2014. The project in Weihai was completed in February 2015. Hence, we recognized the whole revenue and cost of this completed project during the current period according to our revenue recognition policy by completed contract method. 

 

Cost of Sales

 

We have recognized $938,674 and $0 cost of revenue for the three months ended April 30, 2015 and 2014. Same as revenue, we recognized the whole cost of revenue of the Weihai project with accordance to the completed contract method.

 

Gross Profit

 

Gross profit was $191,731 for the three months ended April 30, 2015, compared to $0 for the three months ended April 30, 2014. We recognized the whole completed Weihai project based on the completed contract method.

 

Operating Expenses

 

For the three months ended April 30, 2015, we have incurred total operating expenses in the amount of $192,798, which mainly comprised selling expenses of $5,731, professional expenses of $11,270, consultancy fee expense of $11,122, salary expenses of $119,538, rental fees of $40,927 and general and administrative expenses totaling $4,210. For the three months ended April 30, 2014, we incurred total operating expenses in the amount of $153,049 which mainly comprised professional fees of $140,591, consultancy fee expense of $3,000, rental fees of $973, salary of $2,525 and general and administrative expenses of $5,960. The increase in operating expenses by $39,749, or 26.0%, was primarily due to the increase of salary and rental fees incurred by the operational entity Sanhe after it was acquired by the Company in July 2014.

 

 

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Nine-month period ended April 30, 2015 compared to nine-month period ended April 30, 2014

 

Revenue

 

We have recognized $1,133,522 and $0 revenue for the nine months ended April 30, 2015 and 2014. The project in Weihai was completed in February 2015. Hence, we recognized the related revenue and cost of this project completed during the current period according to our revenue recognition policy by completed contract method.

 

Cost of Sales

  

We have recognized $938,674 and $0 cost of revenue for the nine months ended April 30, 2015 and 2014. Same as revenue, we recognized the whole cost of revenue of the Weihai project with accordance to the completed contract method.

 

Gross Profit

 

Gross profit was $191,731 for the nine months ended April 30, 2015, compared to $0 for the nine months ended April 30, 2014. We recognized the whole completed Weihai project based on the completed contract method.

 

Operating Expenses

 

For the nine months ended April 30, 2015, we have incurred total operating expenses in the amount of $934,769, which mainly comprises selling expenses of $16,391, professional fees of $214,420, consultancy expense of $35,497, salary expenses of $360,112, rental fees of $109,561 and general and administrative expenses of $198,788. For the nine months ended April 30, 2014, we have incurred total operating expenses in the amount of $366,244, which mainly comprises professional fees of $144,491, consultancy expenses of $98,000, salary expenses of $31,634, rental fees of $3,106, and general and administrative expenses of $89,013. The substantial increase of 568,525, or 155.2% in operating expenses was primarily due to increased amounts of professional expense, as well as salary and rental fees incurred by the operational entity Sanhe after it was acquired by the Company in July 2014.

 

We have not incurred any expenses for research and development from inception through April 30, 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 April 30, 2015, we had a cash balance of $491,657. During the nine months ended April 30, 2015, net cash generated from operating activities totaled $141,104. Net cash used in investing activities totaled $64,505. Net cash used in financing activities during the period totaled $13,031. The resulting change in cash for the period was a decrease of $65,131, which was primarily due to cash outflow for the purchase of inventory, acquiring raw material, incurring costs in the ongoing projects, purchasing property and equipment, increase in the amount due to related parties and other current assets, albeit the cash inflow from advance billings on contracts and decrease in accounts payable.

 

As of April 30, 2014, we had a cash balance of $383,472. During the nine months ended April 30, 2014, net cash used in operating activities totaled $6,208,381. Net cash used in investing activities totaled $3,568,514. Net cash provided by financing activities during the period totaled $8,397,743. The resulting change in cash for the period was a decrease of $1,256,535, 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 April 30, 2015, we had accounts receivable of $806,218 related to the amount due from customer for the completion of Weihai project. There was no accounts receivable in the prior period.

 

As of April 30, 2015, we had current liabilities of $10,864,526, which was mainly comprised of advance from customers of $264,510, net advance billings of $6,663,850, amount due to shareholders of $18,978, amount due to related parties of $690,316, current capital lease obligations of $63,248, capital lease interest payable to related parties of $172,611, accounts payable and accrued liabilities of $2,573,237 and amount due to directors of $417,776. As of July 31, 2014, we had current liabilities of $7,884,626, which was mainly comprised of advance from customers of $120,649, net advance billings of $3,847,085, amount due to shareholders of $18,934, 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.

 

As of April 30, 2015 and July 31, 2014, Billings in excess of cost increased $2,816,765 with a 73.2% growth and accounts payable and accrued liabilities increased $2,217,376 with a 623.1% growth. This was due to three more projects stared in November 2014 and January 2015. Advances from customers and payables for purchasing inventories were hugely incurred. The total amounts of amounts due to related parties and capital lease interest payable to related parties decreased by $2,217,220, or 72.0%. Sanhe has repaid the liabilities with prepayment received from customers for its projects.

 

We had a non-current liabilities balance of $2,699,814 as of April 30, 2015, compared with $2,718,106 as of July 31, 2014.

 

We had net assets of $8,216,699 and $8,878,530 as of April 30, 2015 and July 31, 2014, respectively.

 

One project in Weihai was completed as of April 30, 2015. In the course of developing such projects, we continue to sustain losses. We generated initial revenue of $1,133,522 as of April 30, 2015 as a result of completion of the Weihai project. We have not generated any revenues from our remaining projects.

 

We expect to finance operations primarily through non-interest bearing loans from the Company’s directors and progress billings on the ongoing projects. 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 April 30, 2015, we have signed five project contracts and four of them are in process. One of the three projects in Shandong province commenced operation in February 2015 and the other two projects are expected to commence operation at the end of June 2015. The project in Hubei province is expected to commence operation in September 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 $2,579,896 (RMB 16,000,000) 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 money to Shandong Thaidai without the consent of Sanhe. As of April 30, 2015, the remaining balance of the deposit is $322,487 (RMB 2,000,000).

 

The Company has incurred losses since its inception resulting in an accumulated deficit of $1,553,110 as of April 30, 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:

 

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our ability to raise additional funding;

 

the results of our proposed operations.

 

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 April 30, 2015 and July 31, 2014.

 

Billings in Excess of Costs: 

 

Billings in excess of costs is comprised of cash collected from customers and billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.

 

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 because reliable estimates are not available for the costs and efforts necessary to complete the construction. 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. The warranty cost is estimated based on our experience with the type of work and any known risks relative to the project and was not material during the periods ended April 30, 2015 and 2014.

 

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 February 2015, FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The new consolidation standard changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a VIE, and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. Early adoption is allowed, including early adoption in an interim period. A reporting entity may apply a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or may apply the amendments retrospectively. The Company is currently assessing the impact of the adoption of this guidance on the consolidated financial statements.

 

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.

 

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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.

 

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.

 

Item 6. Exhibits

 

Exhibit No.   Description
     
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 Zhiqi Zhang, 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.

 

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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 and
    Acting Chief Financial Officer
    (Principal Executive Officer
    Principal Accounting Officer)
     
    Date: June 22, 2015

 

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