UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 2054920549q

FORM 10-Q

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

For the quarterly period endedJanuary 31,April 30, 2018

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File Number333-161997

XIANGTIAN (USA) AIR POWER CO., LTD.
(Exact name of registrant as specified in its charter)

No. 6 Longda Road Yanjiao Development Zone
Sanhe City, Hebei Province, China 065201
(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.

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 591,042,000 shares of common stock, $0.001 par value outstanding at March 13,June 15, 2018. The registrant has no other class of common equity.

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TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Xiangtian (USA) Air Power Co., Ltd.
Condensed Consolidated Balance Sheets
(Stated in US Dollars)

See accompanying notes to the condensed consolidated financial statements.

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Xiangtian (USA) Air Power Co., Ltd.
Condensed Consolidated StatementStatements of Operations and Comprehensive Loss
(Stated in US Dollars)
(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

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Xiangtian (USA) Air Power Co., Ltd.
Condensed Consolidated Statement of Stockholders’ Equity
For the SixNine Months Ended January 31,April 30, 2018
(Stated in US Dollars)
(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

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Xiangtian (USA) Air Power Co., Ltd.
Condensed Consolidated Statements of Cash Flows
(Stated in US Dollars)
(Unaudited)

See accompanying notes to the condensed consolidated financial statements

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Xiangtian (USA) Air Power Co., Ltd.
Notes to Condensed Consolidated Financial Statements
Three and SixNine Months Ended January 31,April 30, 2018 and 2017
(Unaudited)

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Xiangtian (USA) Air Power Co., Ltd. (the “Company”) was incorporated in the State of Delaware on September 2, 2008. The Company is in the field of Compressed Air Energy Storage in China and produces electricity generation systems that combine our compressed air storage technology with photovoltaic (PV) panels to achieve a continuous supply of power under weather conditions that are unfavorable to the generation of electricity from PV panels alone. All of the Company’s operations are through its variable interest entities located in the Peoples’ Republic of China (PRC).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US 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 financial statements should be read in conjunction with the financial statements and other information included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2017, as filed with the SEC.

Going Concern

The accompanying Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine-month period ended January 31,April 30, 2018, the Company incurred a net loss of $1,524,525$2,209,643 and used cash in operating activities of $1,625,134,$2,527,012, and at January 31,April 30, 2018, the Company had a working capital deficit of $3,761,747.$4,793,815. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on our July 31, 2017 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty be necessary should we be unable to continue as a going concern.

The Company believes it will require additional funds to continue its operations through fiscal year 2018 and to continue to develop its existing projects and expand into new projects. The Company plans to raise such funds by generating additional sales revenue, implementing cost reductions, and raising loans from major shareholders and directors, or a combination thereof, and the Company believes it is capable of raising such funds in the coming fiscal year. There are no assurances that such funds will be available, and if available, at terms acceptable to the Company.

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Cash and cash equivalents

Cash and cash equivalents were denominated in the following currencies at:

Use of Estimates

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. Significant accounting estimates include, among others, the allowance for doubtful accounts receivable, valuation of inventory, valuation of advances to suppliers, impairment analysis of long-term assets, valuation of allowance on deferred income taxes, valuation of warranty reserves, and the accrual of potential liabilities. Actual results may differ materially from those estimates.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and VIEmajority-owned subsidiaries over which the Company exercises control, and entities for which itthe Company is deemed the primary beneficiary. All significant inter-company accountsIntercompany transactions and transactions have beenbalances are eliminated in consolidation.

During the nine-month period ended April 30, 2018, Sanhe established two subsidiaries, Xiangtian Zhongdian (Hubei) New Energy Co. Ltd. and Jingshan Sanhe Xiangtian New Energy Technology Co. Ltd. with 70% and 100% ownership, respectively. At April 30, 2018, the condensed consolidated financial statements include a noncontrolling interest related to Sanhe’s ownership of 70% of Xiangtian Zhongdian (Hubei) New Energy Co. Ltd.

The Company’s wholly owned subsidiary, Luck Sky Shen Zhen, through a series of agreements known as variable interest agreements (“VIE” agreements), controls Sanhe City Lucksky Electrical Engineering Co., Ltd. (“Sanhe”), a corporation incorporated under the laws of the PRC. As a result of these contractual arrangements, which obligates Luck Sky Shen Zhen to absorb a majority of the risk of loss from the activities of Sanhe and enables Luck Sky Shen Zhen to receive a majority of its expected residual returns, the Company accounts for Sanhe as a variable interest entity (VIE). The following financial statement amounts and balances of Sanhe are included in the accompanying condensed consolidated financial statements as of January 31,April 30, 2018 and July 31, 2017, and for the sixnine months ended January 31,April 30, 2018 and 2017, respectively:

Fair Value Measurements

Fair value measurements adopted by the Company are based on the authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. FASB authoritative guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.

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Level 3 - Unobservable inputs based on the Company's assumptions.

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The carrying amounts reported in the Condensed Consolidated Balance Sheet for cash and cash equivalents, accounts receivable, inventory, notes receivables, accounts payable, notes payable, accrued liabilities and other payables approximate their fair values due to their short-term nature.

Foreign Currency Translation

The reporting currency of the Company is the United States Dollars (“US$”) and the accompanying financial statements have been expressed in US$. 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. Assets and Liabilities are translated at the exchange rate as of the balance sheet date. Income and expenses are translated at the average exchange rate for the period presented. Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred.

The exchange rates for the applicable periods are as follows:

RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollars at the rates used in translation.

Earnings (Loss) per Share

Basic earnings per share are 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 shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method, 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,April 30, 2018 or January 31,April 30, 2017.

Concentrations

During the sixnine months ended January 31,April 30, 2018, one customer represented 52%38% of the Company's revenue. During the sixnine months ended January 31,April 30, 2017, otheranother customer represented 73%65% of the Company's revenue. At January 31,April 30, 2018 and July 31, 2017, one customer accounted for 75%100% and 88%, respectively, of accounts receivable.

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Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle basedprinciple-based approach for determining revenue recognition. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, and ASU 2017-05, all of which clarify certain implementation guidance within ASU 2014-09. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. The standard can be adopted either retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company is currently in the process of analyzing the information necessary to determine the impact of adopting this new guidance on its financial position, results of operations, and cash flows. The Company will adopt the provisions of this statement in the first quarter of fiscal 2019,July 2018, using the modified retrospective approach. The Company does not believe the adoption of ASU 2014-09 will have a material effect on its financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842). This update will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements and related disclosures. The Company estimates that upon adoption of ASU 2016-02 in July 2020, it will recognize a right-of-use asset and lease liability of approximately $600,000, respectively.

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

NOTE 2 –ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:

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NOTE 3 – INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out) or net realizable value and, net of reserves, consists of the following:

NOTE 4 – COSTS IN EXCESS OF BILLINGS

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

At January 31,April 30, 2018 and July 31, 2017, $3,071,325$3,047,850 and $2,870,392 respectively, of inventory delivered in advance of revenue recognition was deferred and included with costs in excess of billings on the accompanying balance sheet.

NOTE 5 – NOTE RECEIVABLE

On September 18, 2017, the Company entered into an agreement to loan Shenzhen Chun Fu Xin Trading Co. Ltd., an unrelated entity, $159,132 (RMB 1,000,000). The loan is unsecured, earns interest at 5.4% per annum, and is due on September 17, 2018. In March 2018, the Company received a total payment of $163,430 (RMB 1,027,000) as principal and interest payment of the note receivable.

NOTE 65 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

Total depreciation expensesexpense for the sixnine months ended January 31,April 30, 2018 and 2017 was $195,881$317,293 and $200,697,$214,664, respectively.

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At July 31, 2017, the balance of deposits for property, plant, and equipment was $2,080,436. The deposits were for the purchases of machinery equipment that had not been accepted or put into service. During the sixnine months ended January 31,April 30, 2018, machinery in the amount of $2,033,664 was accepted and put into service, and the related deposit of $2,033,664 was transferred to machinery equipment. At January 31,April 30, 2018, the balance of deposits for property, plant, and equipment was $ 95,321.$98,642. \

NOTE 6 – DEPOSIT FOR INVESTMENT

On March 16, 2018, the Company entered into a letter of intent to establish a 60% majority-owned subsidiary for a proposed supermarket project. Pursuant to the letter of intent, the Company paid a deposit to an unrelated party that will be the 40% noncontrolling interest in the proposed project. The deposit was $473,747 (RMB 3,000,000) and is expected to be used as working capital once the subsidiary is formed.

NOTE 7 – ADVANCES TO SUPPLIERS

At January 31,April 30, 2018 and July 31, 2017, the Company had $933,599$2,109,693 and $1,168,867, respectively of outstanding advances to suppliers, which mainly represent interest-free cash deposits paid to suppliers for future purchases of raw materials. At January 31,April 30, 2018 and July 31, 2017, the advances to suppliers were net of a reserve of $1,523,450$1,511,806 and $1,404,565, respectively.

NOTE 8 - NOTES PAYABLE

On December 22,At August 1, 2017, the Company entered intohad no balances for notes payable. During the nine months ended April 30, 2018, the Company issued five notes payables for total proceeds of $2,176,170 (RMB 14.123,344), and paid off one note for $49,821 (RMB 322,543), and recorded a noteforeign currency translation adjustment of $52,885. At April 30, 2018, the balance of notes payable with Zheng Yong, an unrelated party, for $50,608are $2,179,234 (RMB 318,023)13,800,801). The note payable isAll of the notes are unsecured, bearsbear interest at 4.75% per annum, and ismature between January 25, 2019 and April 23, 2019. Three notes totaling $1,989,735 are due on December 21, 2018.

On January 26, 2018, the Company entered into a note payable agreement withto Hubei Henghao Real Estate Development Co. LTD.Ltd., an unrelated entity, for $413,743 (RMB 2,600,000). The note payable is unsecured, bears interest at 4.75% per annum, and is due on January 25, 2019.entity.

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NOTE 9 - RELATED PARTY TRANSACTIONS

Sales to related party

In August 2016, Sanhe began three construction projects for installation of PV panels with Sanhe Liguang Kelitai Equipment Ltd (“Sanhe Keilitai”). Sanhe Keilitai is majority (95%) owned by Zhou Jian, our Chairman of the Board. During the sixnine months ended January 31,April 30, 2018, revenue of $ 54,798$127,026 and costs of sales of $47,434$93,964 were recognized related to these projects. At January 31,April 30, 2018, billings in excess of costs of these contracts totaled $3,000,336. For the six months ended January 31, 2017, the accumulated cost on the construction project was $661,217 and the accumulated billing was $2,329,572.$16,064.

Due to related parties

The advances due to Zhou Deng Rong, our former CEO, and immediate family membermembers of our current CEO and current chairman are unsecured, non-interest bearing, and due on demand and primarily represent payment of professional and consulting fees incurred by the Company.

Sanhe leases its principal office, factory and dormitory, and the related land use right, from Lucksky Group in Sanhe City, Hebei Province, PRC. Lucksky Group is owned by Zhou Deng Rong, our former CEO. For the sixnine months ended January 31,April 30, 2018 and 2017, rent expense for the lease with Lucksky was $62,791$95,502 and $60,986, respectively. At January 31,April 30, 2018 and July 31, 2017, the amount due to Lucksky Group under the leases was $493,417$522,289 and $399,652, respectively.

Due to Director

Advances due to Director at January 31,April 30, 2018 and July 31, 2017 were $511,272$2,303,028 and $500,247, respectively. The advances are unsecured, non-interest bearing and due on demand with no formal terms of repayment.

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

Xiangtian (USA) Air Power Co., Ltd. (the “Company”) was incorporated in the State of Delaware on September 2, 2008. The Company is in the field of Compressed Air Energy Storage in China and produces electricity generation systems that combine our compressed air storage technology with photovoltaic (PV) panels to achieve a continuous supply of power under weather conditions that are unfavorable to the generation of electricity from PV panels alone. All of the Company’s operations are through its variable interest entities located in the Peoples’ Republic of China (PRC).

Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated Financial Statements of the Company for the three-month and six-monthnine-month periods ended January 31,April 30, 2018 and 2017 and related notes thereto.

Three-month period ended January 31,April 30, 2018 compared to three-month period ended January 31,April 30, 2017

Revenue

We have recognized $232,243$423,644 and $965,896$3,276,810 in revenue for the three monthsmonth periods ended January 31,April 30, 2018 and 2017, respectively, representing a decrease of 76%87%, due to a decrease in the sale of power systems.

Cost of Sales

We have recognized $175,441$308,755 and $834,113$2,765,087 in cost of sales for the three monthsmonth period ended January 31,April 30, 2018 and 2017. The costs were in line with the revenue.

Gross Profit

Gross profit was $56,802$114,889 for the three months ended January 31,April 30, 2018, compared to $131,783$511,723 for the three months ended January 31,April 30, 2017.

Operating Expenses

For the three months ended January 31,April 30, 2018, we have incurred total operating expenses in the amount of $725,489,$797,145, which mainly comprised selling expenses of $48,353,$106,001, professional expenses of $219,903,$10,322, salary expenses of $274,851,$258,113, rental fees of $55,460,$72,008, and general and administrative expenses totaling $126,921.$350,701. For the three months ended January 31,April 30, 2017, we have incurred total operating expenses in the amount of $479,365,$550,202, which mainly comprised selling expenses of $5,164,$5,337, professional expenses of $61,612,$175,223, salary expenses of $208,070,$227,819, rental fees of $31,511,$50,642, depreciation expenses of $59,621 and general and administrative expenses totaling $173,009.$31,560. The increase in operating expenses by $246,123,$246,940, or 51%44%, was primarily due to the increaseincreased amounts of professional fees and salary expenses recorded in general and administrative expenses.

Six-monthNine-month period ended January 31,April 30, 2018 compared to six-monthnine-month period ended January 31,April 30, 2017

Revenue

We have recognized $587,437$1,011,081 and $1,052,656$4,329,466 in revenue for the sixnine months ended January 31,April 30, 2018 and 2017. A couple of small projects were completed and $51,178 of panel subassembly was sold in this period. The decrease in revenue is due to a decrease in the sale of power systems.

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Cost of Sales

We have recognized $493,085$801,840 and $905,712$3,670,799 in cost of sales for the sixnine months ended January 31,April 30, 2018 and 2017.2017, respectively. The decrease in cost of sales is due to a decrease in sales.

Gross Profit

Gross profit was $94,352$209,421 for the sixnine months ended January 31,April 30, 2018, compared to $146,944$658,667 for the sixnine months ended January 31,April 30, 2017.

Operating Expenses

For the sixnine months ended January 31,April 30, 2018, we incurred total operating expenses in the amount of $1,611,640,$ 2,408,785, which mainly comprised selling expenses of $64,323,$170,324, professional expenses of $727,049,$737,371, salary expenses of $536,682,$794,795, rental fees of $109,785,$181,793, and general and administrative expenses totaling $173,801.$524,502. For the sixnine months ended January 31,April 30, 2017, we incurred total operating expenses in the amount of $1,186,217,$1,736,419, which mainly comprised selling expenses of $18,190,$23,527, professional expenses of $259,357,$434,580, salary expenses of $415,958,$643,777, rental fees of $66,154,$116,796, depreciation expenses of $198,869 and general and administrative expenses totaling $426,558.$318,870. The increase in operating expenses by $425,423,$672,366, or 35.9%38.7%, was primarily due to the increased amounts of professional expenses, selling expenses and salary expenses for a larger scale of operations.

Liquidity and Capital Resources

As of January 31,April 30, 2018, we had a cash balance of $570,973.$2,926,769. During the sixnine months ended January 31,April 30, 2018, net cash used in operating activities totaled $1,625,134.$2,527,012. Net cash used in investing activities totaled $159,132.$572,389. Net cash provided by financing activities during the period totaled $832,696.$4,429,540. The resulting change in cash for the period was a decreasean increase of $585,996,$1,769,800, which was primarily due to net cash used in operations, offset by a cash inflow fromprovided  by related parties and proceeds from notes payable.

As of January 31,April 30, 2018, we had current liabilities of $9,715,374,$15,415,535, which was mainly comprised of accounts payable and accrued liabilities of $3,878,000,$4,092,099, amount due to related parties of $2,865,851,$3,071,370, amount due to directors of $511,272,$2,303,028, advance from customers of $1,078,977,$2,872,122, notes payable of $ 465,197,$2,179,234, other payables of $349,612$331,146 and income tax payable of $566,465.$566,536.

We are dependent on our projects for our projected revenue until we obtain additional customers and anyAny material delay or reduction in the projected cash receipts will adversely affect our operations. While we expect to generate revenue on the completionsale of our projectsproducts to meet the liquidity and capital resources of our operations, delayed receipts or increased costs may cause going concern issues, particularly in light of our limited available cash.

Going Concern

The accompanying Condensed Consolidated Financial Statements have been prepared assumingunder the assumption that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine month period ended January 31,April 30, 2018, the Company incurred a net loss of $1,524,525$2,209,643 and used cash in operating activities of $1,625,134,$2,527,012, and at January 31,April 30, 2018, the Company had a working capital deficit of $3,761,747.$4,793,898. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on our July 31, 2017 financial statements, has raised substantial doubt aboutas to the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty be necessary should we be unable to continue as a going concern.

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The Company believes it will require additional funds to continue its operations through fiscal year 2018 and to continue to develop its existing projects and expand into new projects. The Company plans to raise such funds by generating additional sales revenue, implementing cost reductions, and raising loans from major shareholders and directors, or a combination thereof, and thethereof.

The Company believes it is capable of raising such funds in the coming fiscal year. There are no assurances that such funds will be available, and if available, at terms acceptable to the Company.

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. Significant accounting estimates include, among others, the allowance for doubtful accounts receivable, valuation of inventory, valuation of advances to suppliers, impairment analysis of long-term assets, valuation of allowance on deferred income taxes, valuation of warranty reserves, and the accrual of potential liabilities. Actual results couldmay differ materially from those estimates.

Revenue Recognition

Revenues are generated from (i) the sale and installation of power generation systems and photovoltaic (PV) systems and (ii) the sale of products, primarily made up of PV panels.

Sale and installation of power generation systems and PV systems

Sales of power generation system in conjunction of system installation are generally recognized using the completed-contract method and revenue is recognized when the contract is substantially complete and when collectability is reasonably assured. For certain contracts that involve the use of subcontractors, the percentage-of-completion method is used. We provide for any loss that we expect to incur on contracts when that loss is probable.

Sales of products

Sales of products is recognized when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.

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.

Recent Accounting Pronouncements

See Footnote 1 of consolidated financial statements for a discussion of recently issued accounting standards.

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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. The RMB has recently depreciated against the US dollar and if the RMB depreciates further 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 2% percent for 2017 and 1.8% for 2016 (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, as well as 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 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 Chief Financial Officer have concluded that, because of material weaknesses, our internal control over financial reporting was not effective.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2017.April 30, 2018. Management’s assessment identified the following material weaknesses in the Company’s internal control over financial reporting:

Ineffective Control Environment

The Company did not maintain an effective control environment, which is the foundation necessary for effective internal control over financial reporting. Specifically, the Company (i) did not maintain a functioning independent audit committee and did not maintain an independent board (ii) had an insufficient number of personnel appropriately qualified to perform control design, execution and monitoring activities (iii) had an insufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience and ongoing training in the application of U.S. GAAP and SEC disclosure requirements commensurate with the Company’s financial reporting requirements, (iv) had inadequate segregation of duties consistent with control objectives, and (v) did not formally document policies and controls to enable management and other personnel to understand and carry out their internal control responsibilities including the lack of closing checklists, budget-to-actual analyses, balance sheet variation analysis, proforma financial statements, and the usage of key spreadsheets to monitor.

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Additionally, the Company did not have an adequate process in place to complete its testing and assessment of the design and operating effectiveness of internal control over financial reporting in a timely manner.

Ineffective controls over our financial statement close and reporting process

The Company did not maintain effective controls over our financial statement close and reporting process. Specifically, the Company (i) had insufficient preparation and review procedures for disclosures accompanying the Company’s financial statements, (ii) did not provide reasonable assurance that accounts were complete and accurate and agreed to detailed support and that reconciliations of accounts were properly performed, reviewed and approved, (iii) did not maintain effective controls over the recording and approval of recurring and non-recurring journal entries, (iv) did not have controls to monitor and provide appropriate oversight of a third-party consulting firm used to prepare it financial statements, and (v) did not have effective controls over the completeness, existence and accuracy of related party disclosures.

Inadequate controls over recording of sales and accounts receivable

The Company did not maintain effective controls over the completeness, accuracy, and valuation of revenue and accounts receivable. Specifically, the Company had not implemented effective controls (i) to ensure that credit checks are performed and the decision-making process as to the credit limit is documented and maintained, (ii) to ensure that that all revenue recognition criteria have been satisfied prior to revenue being recognized, including collectability criteria, (iii) to ensure sales invoices are prepared and issued in a timely manner; (iv) to ensure that sales are reconciled to the general ledger; (v) to match cash receipts to amounts invoiced and (vi) to monitor the aging of accounts receivables and to verify the completeness and accuracy of computations for the valuation of accounts receivables reserves and (vii) for the analysis of the completed contract versesversus the percentage of completion method of accounting for contract revenues.

Inadequate controls over inventory valuation.

The Company did not maintain effective controls over the completeness and accuracy of our accounting estimates related to inventory. Specifically, documented processes do not exist for adjustments for excess, defective and obsolete inventory and lower of cost or market considerations.

Inadequate controls over the evaluation of prepayments.

The Company did not design and maintain effective controls around the evaluation of prepayments. Specifically, controls were not designed and in place to ensure that the Company properly and timely evaluated impairment of prepayments, and accounted for them in the proper periods.

Inadequate controls over the depreciation of property and equipment. The Company did not design and maintain effective controls around the depreciation of property and equipment. Specifically, the Company did not record the correct amount of depreciation expense or the appropriate book-to-tax temporary difference in connection with the depreciation of certain property and equipment.

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Inadequate controls over information technology

The Company did not design and maintain effective controls around the normal backup of the Company’s data. As at July 31, 2017,April 30, 2018, the Company retains copies of all financial data and material agreements; however, there is no formal procedure or evidence of normal backup of the Company’s data or off-site storage of data in the event of theft, misplacement, or loss due to unmitigated factors.

Inadequate controls over the valuation of deferred tax assets

The Company did not design and maintain effective controls around the evaluation of the recoverability of deferred tax assets on a regular basis to provide reasonable assurance that such controls will prevent or detect a material error in the financial statements.

In order to improve the efficiency of our internal control over financial reporting, we have taken and are implementing the following measures:

(i)We have planned to establish a desired level of corporate governance with regard to identifying and measuring the risk of material misstatement. We have set up a key monitoring mechanism such as independent directors and audit committee to oversee and monitor Company’s risk management, business strategies and financial reporting procedure.

(ii) We have appointed a qualified Chief Financial Officer.

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 Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the quarter ended January 31,April 30, 2018, 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

There have been no material changes from the risk factors disclosed in our annual report on Form 10-K for the year ended July 31, 2017. Additional risks and uncertainties which are not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also materially and adversely affect any of our business, financial position or future results.

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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.

Item 6. Exhibits

XBRL Exhibit

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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.

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