UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549q20549

FORM 10-Q

[X]

☒ QUARTERLY REPORT UNDERPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 19341934.

For the quarterly period endedApril 30, October 31, 2018

OR

[ ]

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

SECURITIES EXCHANGE ACT OF 19341934.

For the transition period from _________________   to __________________.

Commission File Number333-161997Number: 001-38426

XIANGTIAN (USA) AIR POWER CO., LTD.

XT Energy Group, Inc.

(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+1 (929) 228-9298

(Registrant’s telephone number)number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes[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 (§232.405 of this chapter) 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

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

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

Indicate the number

As of outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: The registrant hadDecember 11, 2018, there were 591,042,000 shares of the issuer’s common stock, $0.001 par value outstanding at June 15, 2018. The registrant has no other class of common equity.$0.001 per share, outstanding.

1

TABLE OF CONTENTS

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

A number of important factors could cause our actual results to differ materially from those expressed in any forward-looking statements made in this report. Forward-looking statements are often identified by words like: “believe,” “expect,” “estimate,” “anticipate,” “intend,” “project” and similar expressions or words which, by their nature, refer to future events. In some cases, you can also identify forward-looking statements by terminology such as “may,” “will,” “should,” “plans,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” contained in our annual report on Form 10-K filed with the Securities and Exchange Commission on October 30, 2018, which may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

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

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

PART I.I - FINANCIAL INFORMATION

Item 1.

XT Energy Group, Inc. and Subsidiaries

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

Unaudited Condensed Consolidated Balance Sheets

(Stated in USU.S. Dollars)

See

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

3XT Energy Group, Inc. and Subsidiaries

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

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

(Stated in USU.S. Dollars)

(Unaudited)

See

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

4XT Energy Group, Inc. and Subsidiaries

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

See accompanying notes to the condensed consolidated financial statements.)

5

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

(Stated in USU.S. Dollars)
(Unaudited)

See

The accompanying notes to theare an integral part of these unaudited condensed consolidated financial statementsstatements.

XT Energy Group, Inc. and Subsidiaries

6

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

Notes to Unaudited Condensed Consolidated Financial Statements
Three

Note 1 – Nature of business and Nine Months Ended April 30, 2018 and 2017
(Unaudited)organization

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

XT Energy Group, Inc., formerly known as Xiangtian (USA) Air Power Co., Ltd. (the “Company” or “XT Energy”) was incorporated in the State of Delaware on September 2, 2008. 2008 as Goa Sweet Tours Ltd. On April 17, 2012, the Company entered into certain share purchase agreements, by and among Luck Sky International Investment Holdings Limited (“Lucky Sky”), an entity owned and controlled by Zhou Deng Rong, the former Chief Executive Officer and director of the Company, and certain of the Company’s former stockholders who owned, in the aggregate, 7,200,000 shares of the Company’s common stock (90% of the then outstanding shares). On May 15, 2012, Luck Sky purchased all 7,200,000 shares for an aggregate of $235,000. Effective May 29, 2012, the Company’s name was changed to “Xiangtian (USA) Air Power Co., Ltd.”.

On May 30, 2014, the Company purchased 100% of the issued and outstanding shares of Luck Sky (Hong Kong) Aerodynamic Electricity Limited (“Xiangtian HK”) from its sole shareholder, Zhou Jian, who is also the Chairman of the Company. As a result of the acquisition, Xiangtian HK became the Company’s wholly owned subsidiary and the wholly owned subsidiary of Xiangtian HK in the People’s Republic of China (“China,” or the “PRC”), Luck Sky Aerodynamic and Luck Sky (Shenzhen) Aerodynamic Electricity Limited (“Xiangtian Shenzhen”) became the Company’s indirect subsidiary through Xiangtian HK.

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

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

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

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

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

In August 2018, Xianning Xiangtian formed a wholly owned subsidiary, Xianning Xiangtian Trade Co. Ltd. (“Xiangtian Trade”), which is engaged in the business of trading chemical raw materials for the purpose of providing a stable supply for fuel product operation. Xiangtian Trade has no operations since it was incorporated.

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

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

Reorganization

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

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

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

Framework Agreement on Business Cooperation

Pursuant to the Framework Agreement on Business Cooperation between Xiangtian Shenzhen and Xianning Xiangtian, the parties agreed to enter into a series of agreements, including Agreement of Exclusive Management, Consulting and Training and Technical Service, Know-How Sub-License Agreement, Equity Pledge Agreement, Exclusive Option Agreement and Power of Attorney. Specifically, Xiangtian Shenzhen will dispatch an operative team to Xianning Xiangtian to assist with Xianning Xiangtian with its planning and managing and regular business operations. The parties agree to share the cooperation profits as set forth in the New VIE Agreements. The term of cooperation is 10 years and may be unilaterally extended by Xiangtian Shenzhen.

Agreement of Exclusive Management, Consulting and Training and Technical Service

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

Exclusive Option Agreement

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

Equity Pledge Agreement

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

Know-How Sub-License Agreement

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

Power of Attorney

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

Spousal Consent Letters

Pursuant to the Spousal Consent Letters, each of the spouses of the Xianning Xiang Shareholders unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Exclusive Option Agreement and Power of Attorney entered by her spouse and the disposal of equity interest of Xianning Xiangtian held by her spouse. Each of the spouses also agreed that she will not assert any rights over the equity interest in Xianning Xiangtian held by and registered in the name of her respective spouse. The Xianning Xiangtian Shareholders’ actions to perform, amend or termination the above-mentioned agreement do not need their spouses’ authorization or consent. In addition, in the event that any of the spouses obtains any equity interest in Xianning Xiangtian held by her respective spouse for any reason, such spouse agrees to enter into similar contractual arrangements.

All of the Company’s operations are through its variable interest entitiesVIEs located in the Peoples’ Republic of China (PRC).PRC.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements reflect the activities of XT Energy and each of the following entities:

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

Note 2 – Summary of significant accounting policies

Liquidity

In assessing the Company’s liquidity, the Company monitors and analyzes its cash on-hand and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. Debt financing in the form of loans payable and loans from related parties have been utilized to finance the working capital requirements of the Company. As of October 31, 2018, the Company’s net working capital was approximately $33,000 and the Company had cash of approximately $25.9 million. Although the Company believes that it can realize its current assets in the normal course of business, the Company’s ability to repay its current obligations will depend on the future realization of its current assets and the future operating revenues generated from its operations.

The Company expects to realize the balance of its current assets within the normal operating cycle of a twelve month period. If the Company is unable to realize its current assets within the normal operating cycle of a twelve month period, the Company may have to consider supplementing its available sources of funds through the following sources:

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

Basis of presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) applicable(“U.S. GAAP”). The Company’s unaudited condensed consolidated financial statements are expressed in U.S. dollars.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to interim financial information and the requirements of Form 10-Q and Rule 8-03 of Regulation S-Xpresent a fair presentation of the SecuritiesCompany’s financial position, its results of operations 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.its cash flows, as applicable, have been made. Interim results are not necessarily indicative of results to be expected for athe 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 statementsThe information included in this Form 10-Q should be read in conjunction with the financial statements and other information included in the Company’s Annual ReportJuly 31, 2018 annual report on Form 10-K for the fiscal year ended July 31, 2017, as filed with the SEC.on October 30, 2018.

Going Concern

Principles of consolidation

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited 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 April 30, 2018, the Company incurred a net loss of $2,209,643 and used cash in operating activities of $2,527,012, and at April 30, 2018, the Company had a working capital deficit of $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 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.

7

Cash and cash equivalents

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

Use of Estimatesestimates and assumptions

The preparation of unaudited condensed consolidated financial statements in conformity with generally accepted accounting principlesU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosuredisclosures of contingent assets and liabilities atas of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the period.periods presented. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include among others, the estimated cost used to calculate the percentage of completion recognized in the Company’s revenues, the useful lives of property, plant and equipment, impairment of long-lived assets, allowance for accounts receivable doubtful accounts, receivable, valuation ofallowance for inventory valuation of advancesobsolescence reserve, allowance for advance to suppliers impairment analysisdoubtful accounts, allowance for deferred tax assets, fair value of long-termthe assets valuationand the liabilities of allowance on deferred income taxes,the entity acquired through its business combination, valuation of warranty reserves, contingent consideration liabilities, and the accrual of potential liabilities. Actual results maycould differ materially from thosethese estimates.

Principles

Variable interest entities

On September 30, 2018, Xiangtian Shenzhen terminated the VIE Agreements as part of Consolidationits restructuring to facilitate the shift of business focus between entities controlled by the Company. After the restructuring, the Company’s headquarter is now located in the city of Xianning, Hubei Province, and Sanhe Xiangtian, the Company’s previous headquarters, located in the city of Sanhe, Hebei Province, has become the Company’s sales office. The VIE Agreements include the following:

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

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

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

The Company’s total assets and liabilities presented in the accompanying unaudited condensed consolidated financial statements include the accountsrepresent substantially all of total assets and liabilities of the CompanyVIE because the other entities in the consolidation are non-operating holding entities with nominal assets and its wholly-owned subsidiaries and majority-owned subsidiaries over which the Company exercises control, and entities for which the Company is the primary beneficiary. Intercompany transactions and balances 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).liabilities. The following financial statement amounts and balances of Sanhe arethe VIE were included in the accompanying unaudited condensed consolidated financial statements as of April 30,October 31, 2018 and July 31, 2017,2018 and for the ninethree months ended April 30,October 31, 2018 and 2017, respectively:

Business Combinations

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

Cash

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

Notes Receivable

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

Accounts Receivable, net

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

Inventories, net

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

Advances to Suppliers, net

Advances to suppliers, net, are cash deposited or advanced to outside vendors or services providers for future inventory purchases or future services. This amount is refundable and bears no interest. For any advances to suppliers determined by management that such advances will not be in receipts of inventories or refundable, the Company will recognize an allowance account to reserve such balances. Management reviews its advances to suppliers on a regular basis to determine if the allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. The Company’s management continues to evaluate the reasonableness of the valuation allowance policy and update it if necessary.

Costs and Estimated Earnings in Excess of Billings

Costs and estimated earnings in excess of billings represents revenues recognized in excess of amounts billed. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the unaudited condensed consolidated financial statements.

Loans Receivables

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

Property, Plant and equipment, net

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

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

Construction-in-progress represents contractor and labor costs, design fees and inspection fees in connection with the construction of the Company’s production warehouses, cafeteria, and employee dormitory. No depreciation is provided for construction-in-progress until it is completed and placed into service.

Intangible assets, net

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

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

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

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

The Company also acquired a safety production license with a finite useful of 3 years in June 2018.

Goodwill

Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiaries at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed. As of October 31 and July 31, 2018, no impairment of goodwill was recognized.

Impairment for Long-Lived Assets

Long-lived assets, including plant and equipment and intangible with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. As of October 31, 2018 and July 31, 2018, no impairment of long-lived assets was recognized.

Subscription receivable

Subscription receivable represents unpaid capital contribution from its shareholders.

Fair Value MeasurementsMeasurement

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

Fair value measurements adopted by the Company are based on the authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) which defines fair valueis defined 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 guidanceWhen 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.

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

ASC 820 establishes a fair value hierarchy which prioritizesthat requires an entity to maximize the use of observable inputs used inand minimize the use of unobservable inputs when measuring fair value intovalue. ASC 820 establishes three broad levels as follows:

Level 1 - Quotedof 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.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 2 - Inputs,

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

The following table sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of October 31, 2018:

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

The Company believes the carrying amount reported in the consolidated balance sheet for cash, notes receivable, accounts receivable, inventories, advance to suppliers, costs and estimated earnings in excess of billings, prepaid expenses, other thanreceivables, loan receivables, short-term loans, accounts payable, advances from customers, other payables and accrued liabilities, tax payables and short-term investment payable approximate fair value because of the quoted pricesshort-term nature of such instruments. The carrying amount of long-term investment payable reported in active marketsthe consolidated balance sheets at carrying value, which approximates fair value as the rate of amortization of investment payment discount used were similar to interest rate charged by the bank in the PRC. As of October 31 and July 31, 2018, long-term investment payable balance was $5,973,113, net of discount of $876,577 and $7,205,133, net of discount of $869,173, respectively.

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

Revenue Recognition

On August 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method for contracts that are observable either directly or indirectly.

Level 3 - Unobservable inputswere not completed as of July 31, 2018. This did not result in an adjustment to the retained earnings upon adoption of this new guidance as the Company’s revenue was recognized based on the Company's assumptions.amount of consideration expected to receive in exchange for satisfying the performance obligations.

8

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

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

Sale and installation of power generation systems

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

The key assumptions used in the estimate of costs to complete relate to the unit material cost, the quantity of materials to be used, the installation cost and those indirect costs related to contract performance. The estimate of unit material cost is reviewed and updated on a quarterly basis, based on the updated information available in the supply markets. The estimate of material quantity to be used for completion and the installation cost is also reviewed and updated on a quarterly basis, based on the updated information on the progress of project execution. If the supply market conditions or the progress of project execution were different, it is likely that materially different amounts of contract costs would be used in the percentage of completion method of accounting. Thus the uncertainty associated with those estimates may impact the Company’s unaudited condensed consolidated financial statements. Selling, general, and administrative costs are charged to expense as incurred. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the unaudited condensed consolidated financial statements. Claims for additional contract costs are recognized upon a signed change order from the customer.

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Balance SheetFinancial Statements

Sales of products

The Company continues to derive its revenues from sales contracts with its customers with revenues being recognized upon delivery of products. Persuasive evidence of an arrangement is demonstrated via sales contract and invoice; and the sales price to the customer is fixed upon acceptance of the sales contract and there is no separate sales rebate, discount, or other incentive. Such revenues are recognized at a point in time after all performance obligations are satisfied and based on when control of goods transfer to a customer, which is generally similar to when its delivery has occurred prior to August 1, 2018.

The Company’s disaggregate sale of products streams for cashthe three months ended October 31, 2018 and cash equivalents, accounts receivable, inventory, accounts payable, notes payable,2017 are summarized as follows:

Warranty

The Company generally provides limited warranties for work performed under its contracts. The warranty periods typically extend for up to five years following substantial completion of the Company’s work on a project. At the time a sale is recognized, the Company records estimated future warranty costs under ASC 460. Such estimated costs for warranties are estimated at completion and these warrants are not service warranties separately sold by the Company. Generally, the estimated claim rates of warranty are based on actual warranty experience or Company’s best estimate. There were no such reserves record for the three months ended October 31, 2018 and 2017. No right of return exists on sales of inventory. As of October 31 and July 31, 2018, accrued liabilitieswarranty expense amounted to $64,325 and $67,651, respectively, and classified in the caption “other payables and accrued liabilities” in the accompanying unaudited condensed consolidated balance sheets.

Advertising costs

Advertising costs are expensed as incurred and included in selling and general and administrative expenses. Advertising costs amounted to $31,972 and $0 for the three months ended October 31, 2018 and 2017, respectively.

Employee benefit

The full-time employees of the Company are entitled to staff welfare benefits including medical care, housing fund, pension benefits, unemployment insurance and other welfare, which are government mandated defined contribution plans. The Company is required to accrue for these benefits based on certain percentages of the employees’ respective salaries, subject to certain ceilings, in accordance with the relevant PRC regulations, and make cash contributions to the state-sponsored plans out of the amounts accrued. Total expenses for the plans were $42,722 and $26,327 for the three months ended October 31, 2018 and 2017, respectively.

Value added taxes

The Company is subject to value added tax (“VAT”). Revenue from sales of goods purchased from other entities is generally subject to VAT at the rate of 16% starting in May 2018 or at the rate of 17% in April 2018 and prior. The Company is entitled to a refund for VAT already paid on goods purchased. The VAT balance is recorded in other payables approximate their fair values dueon the consolidated balance sheets. Revenues are presented net of applicable VAT.

XT Energy Group, Inc. and Subsidiaries

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

Notes to their short-term nature.Unaudited Condensed Consolidated Financial Statements

Income taxes

The Company accounts for income taxes in accordance with U.S. GAAP for income taxes. The charge for taxation is based on the results for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred taxes are accounted for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the unaudited condensed consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. No penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. PRC tax returns filed in 2015 to 2017 are subject to examination by any applicable tax authorities.

Comprehensive Income (Loss)

The Company follows the provisions of the Financial Accounting Standards Board (the “FASB”) ASC 220 “Reporting Comprehensive Income”. Comprehensive income (loss) is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company had other comprehensive (loss) income of ($380,986) and 89,875 for the three months ended October 31, 2018 and 2017, respectively, from foreign currency translation adjustments.

Foreign Currency Translation

The reporting currency of the Company is the United States Dollars (“US$”) and the accompanying financial statements have been expressed in US$.Dollars. The Company’s functional currency of the Company is the Chinese Renminbi (“RMB”) as substantially all of the Company’s PRC subsidiaries’ operations use this denomination. The consolidated financial statementsForeign denominated monetary assets and liabilities are presented in U.S. dollars. Assetstranslated into their United States dollar equivalents using foreign exchange rates which prevailed at the balance sheet date. Non-monetary assets and Liabilitiesliabilities are translated at the exchange rate as ofrates prevailing at the balance sheettransaction date. IncomeRevenues and expenses are translated at average rates of exchange during the year. Gains or losses resulting from foreign currency transactions are included in results of operations.

For the purpose of presenting these financial statements of subsidiaries in PRC, the Company’s assets and liabilities are expressed in United States Dollars at the exchange rate on the balance sheet date, which is 6.9758 and 6.8204 as of October 31, 2018 and July 31, 2018, respectively; stockholders’ equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rate during the period, which is 6.8779 and 6.6227 for the period presented. Capital accountsthree months ended October 31, 2018 and 2017, respectively. The resulting translation adjustments are reported under accumulated other comprehensive income (loss) in the stockholders’ equity section of the unaudited condensed consolidated balance sheets.

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

For the purpose of presenting these financial statements of the subsidiary in Hong Kong, the Company’s assets and liabilities are expressed in United States Dollars at the exchange rate on the balance sheet date, which is 7.8404 and 7.8490 as of October 31, 2018 and July 31, 2018, respectively; stockholders’ equity accounts are translated into United States dollars from RMB at their historical rates, and income and expense items are translated at the weighted average exchange rates whenrate during the capital transactions occurred.

The exchange ratesperiod, which is 7.8417, 7.8135 for the applicable periodsthree months ended October 31, 2018 and 2017, respectively. The resulting translation adjustments 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 thatreported under accumulated other comprehensive loss in the RMB amounts could have been, or could be, converted into US dollars atstockholders’ equity section of the rates used in translation.unaudited condensed consolidated balance sheets.

Earnings (Loss)(loss) per Share

Basic earnings (loss) per share areis computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted earningsloss 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. EarningsLoss per share excludes all potential dilutive shares of common stock if their effect is anti-dilutive. There were no potential dilutive securities at April 30,for the three months ended October 31, 2018 or April 30,and 2017.

Concentrations

DuringStatutory Reserves

Pursuant to the ninelaws applicable to the PRC, PRC entities must make appropriations from after-tax profit to the non-distributable “statutory surplus reserve fund”. Subject to certain cumulative limits, the “statutory surplus reserve fund” requires annual appropriations of 10% of after-tax profit until the aggregated appropriations reach 50% of the registered capital (as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) at each year-end). For foreign invested enterprises and joint ventures in the PRC, annual appropriations should be made to the “reserve fund”. For foreign invested enterprises, the annual appropriation for the “reserve fund” cannot be less than 10% of after-tax profits until the aggregated appropriations reach 50% of the registered capital (as determined under PRC GAAP at each year-end). If the Company has accumulated loss from prior periods, the Company is able to use the current period net income after tax to offset against the accumulate loss. For the three months ended April 30, 2018, one customer represented 38% of the Company's revenue. During the nine months ended April 30, 2017, another customer represented 65% of the Company's revenue. At April 30,October 31, 2018 and July 31, 2017, one customer accounted for 100%the Company has contributed $149,543 and 88%,$0, respectively, of accounts receivable.to the statutory reserves.

9

Recent Accounting Pronouncements

In May 2014,Contingencies

From time to time, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,Revenue from Contracts with Customers (Topic 606). ASU 2014-09Company is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAPparty to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and replace it with a principle-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 anthe 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),reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company’s management does not expect any liability from the disposition of such claims and litigation individually or 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 analyzingaggregate would have a material adverse impact on the information necessary to determine the impact of adopting this new guidance on itsCompany’s unaudited condensed consolidated financial position, results of operations and cash flows. The Company will adopt the provisions of this statement in 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.

Recently issued accounting pronouncements

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The Company estimatesamendments in this Update affect any entity that uponis required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. Management does not believe the adoption of this ASU 2016-02 in July 2020, it will recognizewould have a right-of-use asset and lease liability of approximately $600,000, respectively.material effect on the Company’s unaudited condensed consolidated financial statements.

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

NOTE 2 –ACCOUNTS RECEIVABLE

Accounts receivableReclassification

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

Note 3 – Business combinations

Acquisition of Hubei Jinli

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

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

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

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

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

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

The following table summarizes the consideration transferred to acquire Hubei Jinli at the date of acquisition:

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

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

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

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

The following unaudited pro forma combined results of operations presents the Company’s financial results as if the acquisition of Hubei Jinli had been completed on August 1, 2017. The unaudited pro forma results do not reflect operating efficiencies or potential cost savings which may result from the consolidation of operations. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations that the Company would have recognized had we completed the transaction on August 1, 2017. Future results may vary significantly from the results in this pro forma information because of future events and transactions, as well as other factors.

Acquisition of Tianjin Jiabaili

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

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

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

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

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

The following table summarizes the consideration transferred to acquire Tianjin Jiabaili at the date of acquisition:

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

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

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

Contingent liabilities

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

Profit sharing payments to former shareholders’ of Hubei Jinli

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

Profit sharing payments to former shareholders’ of Tianjin Jiabaili

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

Investment payable

Investment payable consists of the following:

10

NOTE 3

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

Investment payable – INVENTORIESrelated parties

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

Investment payable – related parties consist of the following:

NOTE

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

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

Debt discount

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

Note 4 – COSTS IN EXCESS OF BILLINGSAccounts receivable, net

Accounts receivable, net consist of the following:

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

Note 5 – Inventories, net

Inventories, net, consist of the following:

Note 6 – Costs and estimated earnings in excess of billings

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

At April 30, 2018

XT Energy Group, Inc. and July 31, 2017, $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.Subsidiaries

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT(Formerly Known as Xiangtian (USA) Air Power Co. Ltd.)

Property, plant and equipment consists of the following:Notes to Unaudited Condensed Consolidated Financial Statements

Total depreciation expense

Note 7 – Deposit for the nine months ended April 30, 2018 and 2017 was $317,293 and $214,664, respectively.investment

11

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 nine months ended 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 April 30, 2018, the balance of deposits for property, plant, and equipment was $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$439,857 (RMB 3,000,000) and is expected to be used as working capital once the subsidiary is formed.

NOTE 7 – ADVANCES TO SUPPLIERS

At April 30, 2018 and On July 31, 2017, the Company had $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 April 30, 2018 and July 31, 2017, the advances to suppliers were net of a reserve of $1,511,806 and $1,404,565, respectively.

NOTE 8 - NOTES PAYABLE

At August 1, 2017, the Company had no balances for notes payable. During the nine months ended April 30,20, 2018, the Company issued five notes payables for total proceedsrescinded the letter of $2,176,170intent and the unrelated party is required to fund the deposit to the Company by October 20, 2018. The Company collected $14,539 (RMB 14.123,344), and paid off one note for $49,821100,000) as of October 31, 2018. The Company has received additional approximately $0.1 million (RMB 322,543), and recorded a foreign currency translation adjustment of $52,885. At April 30,710,000) in November 2018. In November 2018, the Company entered an extension agreement with the unrelated party to extend the remaining balance of notes payable are $2,179,234approximately $0.3 million (RMB 13,800,801). All2,190,000) to April 2019.

Note 8 – Property, plant and equipment, net

Property, plant and equipment consist of the notesfollowing:

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

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

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

XT Energy Group, Inc. and Subsidiaries

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

Notes to Unaudited Condensed Consolidated Financial Statements

Note 9 – Intangible assets, net

Intangible assets consist of the following:

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

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

Note 10 – Debt

Short-term loan - bank

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