UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

xQuarterly Report Pursuant to Section 13 Or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2015

 

¨Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Transition Period from _______ to _______

 

Commission File Number: 000-50155

 


 

NF Energy Saving Corporation

(Exact name of registrant as specified in its charter)


 

Delaware 02-0563302

(State or Other Jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

Room 3106 Block C, 390 Qingnian Avenue, Heping District

Shenyang, P. R. China 110002

(Address of Principal Executive Offices)

 

 

(8624) 25609775

(Registrant’s Telephone Number, including area code)


 

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. x Yes  o 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). x Yes  o No

 

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

 

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

 

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

 

As of October 31, 2015, the registrant had 6,553,289 shares of common stock, $0.001 par value, issued and outstanding.

 

 

 

 

STATEMENT REGARDING FORWARD LOOKING INFORMATION

 

The discussion contained in this 10-Q under the Securities Exchange Act of 1934, as amended, contains forward-looking statements that involve risks and uncertainties. The issuer's actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the Company believes," "management believes" and similar language, including those set forth in the discussions under "Notes to Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations " as well as those discussed elsewhere in this Form 10-Q. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that are subject to the "safe harbor" created by the Private Securities Litigation Reform Act of 1995.

 

 

 

 

TABLE OF CONTENTS

 

      Page
       
PART I - FINANCIAL INFORMATION  
      F-1
  ITEM 1 – FINANCIAL STATEMENTS  
       
  ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1
       
  ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11
       
  ITEM 4 – CONTROLS AND PROCEDURE 12
       
PART II - OTHER INFORMATION  
       
  ITEM 1 – LEGAL PROCEEDINGS 12
       
  ITEM 1A – RISK FACTORS 13
       
  ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 13
       
  ITEM 3 – DEFAULTS UPON SENIOR SECURITIES 13
       
  ITEM 4 – MINE SAFTEY DISCLOSURES 13
       
  ITEM 5 – OTHER INFORMATION 13
       
  ITEM 6 – EXHIBITS 13
       
    SIGNATURES 14

 

 

 

 

NF ENERGY SAVING CORPORATION

 

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(UNAUDITED)

 

 

    Page
     
Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 (Audited)   F-2
     
Condensed Consolidated Statements of Operations And Comprehensive Income for the Three and Nine Months ended September 30, 2015 and 2014   F-3
     
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2015 and 2014   F-4
     
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months ended September 30, 2015   F-5
     
Notes to Condensed Consolidated Financial Statements   F-6 to F-20

 

 F-1 

 

 

NF ENERGY SAVING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

(Currency expressed in United States Dollars (“US$”), except for number of shares)

 

   September 30, 2015   December 31, 2014 
   (Unaudited)   (Audited) 
ASSETS          
Current assets:          
Cash and cash equivalents  $304,854   $1,304,130 
Restricted cash   -    1,950,110 
Accounts receivable, net   7,331,090    8,352,369 
Retention receivable   790,412    743,006 
Inventories   7,231,646    5,623,318 
Prepayments and other receivables   654,950    864,317 
           
Total current assets   16,312,952    18,837,250 
           
Non-current assets:          
Plant and equipment, net   13,309,271    14,042,426 
Land use rights, net   2,874,172    3,018,029 
Construction in progress   12,316,778    12,407,226 
           
TOTAL ASSETS  $44,813,173   $48,304,931 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable, trade  $5,303,092   $5,805,720 
Short-term bank borrowings   6,452,831    8,450,475 
Note payable, related party   -    1,500,000 
Amount due to a related party   431,682    431,682 
Other payables and accrued liabilities   838,217    783,895 
           
Total current liabilities   13,025,822    16,971,772 
           
TOTAL LIABILITIES   13,025,822    16,971,772 
           
Commitments and contingencies          
           
Stockholders’ equity:          
Common stock, $0.001 par value; 50,000,000 shares authorized; 6,553,289 and 5,719,147 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively   6,553    5,719 
Additional paid-in capital   11,605,145    9,887,646 
Statutory reserve   2,227,634    2,227,634 
Accumulated other comprehensive income   3,460,348    4,511,915 
Retained earnings   14,487,671    14,700,245 
           
Total stockholders’ equity   31,787,351    31,333,159 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $44,813,173   $48,304,931 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 F-2 

 

 

NF ENERGY SAVING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

   Three months ended September 30,   Nine months ended September 30, 
   2015   2014   2015   2014 
REVENUE, NET:                    
Product  $2,599,325   $2,907,301   $5,026,510   $6,076,053 
Services   21,949    36,646    85,568    214,293 
Total revenues, net   2,621,274    2,943,947    5,112,078    6,290,346 
                     
COST OF REVENUES:                    
Cost of products   2,231,389    2,035,094    4,061,616    4,732,807 
Cost of services   16,758    22,819    44,157    160,670 
Total cost of revenues   2,248,147    2,057,913    4,105,773    4,893,477 
                     
GROSS PROFIT   373,127    886,034    1,006,305    1,396,869 
                     
OPERATING EXPENSES:                    
Sales and marketing   51,850    15,476    69,013    45,399 
General and administrative   239,824    389,391    861,008    1,167,085 
Total operating expenses   291,674    404,867    930,021    1,212,484 
                     
INCOME FROM OPERATIONS   81,453    481,167    76,284    184,385 
                     
Other (expense) income:                    
Other income   16,749    6,386    18,025    6,520 
Interest income   (16)   958    11,875    32,625 
Interest expense   (104,616)   (106,106)   (318,385)   (315,475)
Total other expense   (87,883)   (98,762)   (288,485)   (276,330)
                     
(LOSS) INCOME BEFORE INCOME TAXES   (6,430)   382,405    (212,201)   (91,945)
                     
Income tax expense   (89)   (54,721)   (373)   (64,841)
                     
NET (LOSS) INCOME   (6,519)   327,684   $(212,574)  $(156,786)
                     
Other comprehensive income:                    
– Foreign currency translation (loss) gain   (1,407,073)   8,481    (1,051,567)   (232,656)
                     
COMPREHENSIVE (LOSS) INCOME  $(1,413,592)  $336,165   $(1,264,141)  $(389,442)
                     
Net loss per share– Basic  $(0.00)  $(0.06)  $(0.04)  $(0.03)
Net loss per share– Diluted  $(0.00)  $(0.06)  $(0.04)  $(0.03)
                     
Weighted average common shares outstanding – Basic   6,219,632    5,708,158    5,969,390    5,656,096 
Weighted average common shares outstanding – Diluted   6,219,632    5,708,158    5,969,390    5,656,096 

 

See accompanying notes to condensed consolidated financial statements.

 

 F-3 

 

 

NF ENERGY SAVING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

   Nine months ended September 30, 
   2015   2014 
Cash flows from operating activities:          
Net loss  $(212,574)  $(156,786)
Adjustments to reconcile net income to net cash used in operating activities          
Depreciation and amortization   932,453    627,048 
Stockbased compensation   -    190,250 
Amortization of deferred compensation   -    94,052 
Change in operating assets and liabilities:          
Accounts and retention receivable   707,283    (1,947,472)
Inventories   (1,837,928)   (1,842,510)
Prepayments and other receivables   188,067    151,601 
Accounts payable   (328,971)   2,020,968 
Income tax payable   -    58,937 
Other payables and accrued liabilities   296,244    148,760 
           
 Net cash used in operating activities   (255,426)   (655,152)
           
Cash flows from investing activities:          
Purchase of plant and equipment   (892,817)   (77,061)
Payments on construction in progress   -    (221,866)
           
 Net cash used in investing activities   (892,817)   (298,927)
           
Cash flows from financing activities:          
Decrease in restricted cash   1,943,981    - 
Proceeds from short-term bank borrowings   2,753,973    5,203,057 
Repayment on short-term bank borrowings   (4,535,956)   (4,552,675)
           
 Net cash provided by financing activities   161,998    650,382 
           
Effect on exchange rate change on cash and cash equivalents   (13,031)   (6,285)
           
NET CHANGE IN CASH AND CASH EQUIVALENTS   (999,276)   (309,982)
           
BEGINNING OF PERIOD   1,304,130    1,020,760 
           
END OF PERIOD  $304,854   $710,778 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for income taxes  $299   $5,797 
Cash paid for interest  $288,176   $247,975 
           
NON-CASH FINANCING AND INVESTING TRANSACTIONS:          
Conversion of note and accrued interest into shares  $1,718,333   $- 

  

See accompanying notes to condensed consolidated financial statements.

 

 F-4 

 

 

NF ENERGY SAVING CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

                  Accumulated        
   Common stock   Additional      other      Total 
   No. of shares   Amount   paid-in capital   Statutory reserve   comprehensive income   Retained earnings   stockholders’ equity 
                             
Balance as of January 1, 2015   5,719,147   $5,719   $9,887,646   $2,227,634   $4,511,915   $14,700,245   $31,333,159 
                                    
Shares issued for settlement of note payable and accrued interest   834,142    834    1,717,499    -    -    -    1,718,333 
                                    
Foreign currency translation adjustment   -    -    -    -    (1,051,567)   -    (1,051,567)
                                    
Net loss for the period   -    -    -    -    -    (212,574)   (212,574)
Balance as of September 30, 2015   6,553,289   $6,553   $11,605,145   $2,227,634   $3,460,348   $14,487,671   $31,787,351 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 F-5 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

  

 

NOTE–1 BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States (“GAAP”), and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

 

In the opinion of management, the consolidated balance sheet as of December 31, 2014 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended September 30, 2015 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2015 or for any future period.

 

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2014.

 

NOTE2 ORGANIZATION AND BUSINESS BACKGROUND

 

NF Energy Saving Corporation (the “Company” or “NFEC”) was incorporated in the State of Delaware in the name of Galli Process, Inc. on October 31, 2000. On February 7, 2002, the Company changed its name to “Global Broadcast Group, Inc.” On November 12, 2004, the Company changed its name to “Diagnostic Corporation of America.” On March 15, 2007, the Company changed its name to “NF Energy Saving Corporation of America.” On August 24, 2009, the Company further changed its name to “NF Energy Saving Corporation.”

 

The Company, through its subsidiaries, mainly engages in the production of heavy industrial components and products such as valves and the provision of technical service and re-engineering projects in the energy saving related industry in the People’s Republic of China (the “PRC”). All the customers are located in the PRC.

 

Description of subsidiary

 

Name  

Place of incorporation

and kind of

legal entity

 

Principal activities

and place of operation

 

Particulars of issued/

registered share

capital

 

Effective interest

held

                 
Liaoning Nengfa Weiye Energy Technology Co. Ltd (“Nengfa Energy”)   The PRC, a limited liability company   Production of a variety of industrial valve components which are widely used in water supply and sewage system, coal and gas fields, power generation stations, petroleum and chemical industries in the PRC   US$5,000,000   100%

 

 F-6 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

NFEC and its subsidiary are hereinafter referred to as (the “Company”).

 

 

NOTE3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying condensed consolidated financial statements and notes.

 

·Use of estimates

 

In preparing these condensed consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and revenues and expenses during the periods reported. Actual results may differ from these estimates.

 

·Basis of consolidation

 

The condensed consolidated financial statements include the financial statements of NFEC and its subsidiary. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.

 

·Cash and cash equivalents

 

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

 

·Accounts receivable

 

Accounts receivable are recorded at the invoiced amount and do not bear interest, which are due within contractual payment terms, generally 30 to 90 days from shipment. Credit is extended based on evaluation of a customer's financial condition, the customer’s credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. At the end of each period, the Company specifically evaluates individual customer’s financial condition, credit history, and the current economic conditions to monitor the progress of the collection of accounts receivables. The Company will consider the allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. For the receivables that are past due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.


 F-7 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

·Retention receivable

 

Retention receivable is the amount withheld by a customer based upon 5-10% of the contract value, until a product warranty is expired. The warranty period is usually 12 months.

 

·Inventories

 

Inventories are stated at the lower of cost or market value (net realizable value), cost being determined on a weighted average method. Costs include material, labor and manufacturing overhead costs. The Company quarterly reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of September 30, 2015, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

 

·Construction in progress

 

Construction in progress is stated at historical cost, which includes acquisition of land use rights, cost of construction, purchases of plant and equipment and other direct costs attributable to the construction of a new manufacturing facility in Yinzhou District Industrial Park, Tieling City, Liaoning Province, the PRC. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction.

 

·Land use rights

 

All land in the PRC is owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time. Thus, the Company’s land purchase in the PRC is considered to be leasehold land and is stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreement on a straight-line basis, which is 50 years and will expire in 2059.

 

Amortization expense for the three months ended September 30, 2015 and 2014 was $16,385 and $16,742, respectively.

 

Amortization expense for the nine months ended September 30, 2015 and 2014 was $50,142 and $50,327, respectively.

 

The estimated amortization expense on the land use right in the next five years and thereafter is as follows:

 

Year ending September 30:     
2016  $64,953 
2017   64,953 
2018   64,953 
2019   64,953 
2020   64,953 
Thereafter   2,549,407 
      
Total:  $2,874,172 

 

 F-8 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

·Plant and equipment

 

Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

 

    Expected useful life   Residual value
Building   30 – 50 years   5%
Plant and machinery   10 – 20 years   5%
Furniture, fixture and equipment   5 – 8 years   5%

 

Expenditure for repairs and maintenance is expensed as incurred. When assets have been retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.

 

Depreciation expense for the three months ended September 30, 2015 and 2014 was $322,780 and $192,385, respectively.

 

Depreciation expense for the nine months ended September 30, 2015 and 2014 was $882,311 and $576,721, respectively.

 

·Impairment of long-lived assets

 

In accordance with the provisions of ASC Topic 360, “Impairment or Disposal of Long-Lived Assets ”, all long-lived assets such as property, plant and equipment held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to its estimated future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment charge for the three and nine months ended September 30, 2015.

 

·Revenue recognition

 

The Company offers the following products and service to its customers:

 

(a) Energy saving flow control equipment; and        
(b) Energy project management and sub-contracting service        

 

In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.

 

(a)Sale of products

 

The Company derives a majority of its revenues from the sale of energy saving flow control equipment. Generally, these products are manufactured and configured to customer requirements. The Company typically produces and builds the energy saving flow control equipment for customers in a period from 1 to 6 months. When the Company completes the production in accordance with the customer’s specification, the customer is required to inspect the finished products for adherence to quality and product conditions, to its full satisfaction, then the Company makes delivery to the customer.

 

 F-9 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

The Company recognizes revenue from the sale of such finished products upon delivery to the customer, whereas the title and risk of loss are fully transferred to the customers. The Company records its revenues, net of value added taxes (“VAT”). The Company is subject to VAT which is levied on the majority of the products at the rate of 17% on the invoiced value of sales. The Company experienced no product returns and recorded no reserve for sales returns for the three and nine months ended September 30, 2015 and 2014.

 

(b)Service revenue

 

Service revenue is primarily derived from energy-saving technical services or project management or sub-contracting services that are not an element of an arrangement for the sale of products. These services are generally billed on a time-cost plus basis, for a period of service time from 2 to 3 months. Revenue is recognized, net of business taxes when the service is rendered and accepted by the customer.

 

(c)Interest income

 

Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.

 

·Comprehensive income

 

ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying condensed consolidated statement of stockholders’ equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

 

·Income taxes

 

Income taxes are determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

For the three and nine months ended September 30, 2015 and 2014, the Company did not have any interest and penalties associated with tax positions. As of September 30, 2015, the Company did not have any significant unrecognized uncertain tax positions.

 

 F-10 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

The Company conducts the majority of its business in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority.

 

·Product warranty

 

Under the terms of the contracts, the Company offers its customers with a free product warranty on a case-by-case basis, depending upon the type of customers, nature and size of the infrastructure projects. Under such arrangements, a portion of the project contract balance (usually 5% to 10% of contract value) is withheld by a customer from 12 to 24 months, until the product warranty has expired. The Company has not experienced any material returns or claims where it was under obligation to honor this standard warranty provision. As such, no reserve for product warranty has been provided in the result of operations for the three and nine months ended September 30, 2015 and 2014.

 

·Net loss per share

 

The Company calculates net income per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

 

·Foreign currencies translation

 

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statement of operations.

 

The reporting currency of the Company is the United States Dollar ("US$"). The Company's subsidiaries in the PRC maintain their books and records in their local currency, the Renminbi Yuan ("RMB"), which is the functional currency as being the primary currency of the economic environment in which these entities operate.

 

In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “ Translation of Financial Statement ”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

 

Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective period:

 

   September 30, 2015   September 30, 2014 
Period-end RMB:US$1 exchange rate   6.3538    6.1560 
Average period RMB:US$1 exchange rate   6.1729    6.1502 

 

 F-11 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

·Related parties

 

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

 

·Segment reporting

 

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company operates in two reportable operating segments in the PRC.

 

·Fair value of financial instruments

 

The carrying value of the Company’s financial instruments (excluding short-term bank borrowing and note payable): cash and cash equivalents, accounts and retention receivable, prepayments and other receivables, accounts payable, income tax payable, amount due to a related party, other payables and accrued liabilities approximate at their fair values because of the short-term nature of these financial instruments.

 

Management believes, based on the current market prices or interest rates for similar debt instruments, the fair value of short-term bank borrowings and note payable approximate the carrying amount.

 

The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

 

Level 1 : Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;

 

Level 2 : Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. Black-Scholes Option-Pricing model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs; and

 

Level 3 : Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.

 

Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

 F-12 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

·Recent accounting pronouncements

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

 

NOTE4 ACCOUNTS AND RETENTION RECEIVABLES

 

   September 30, 2015   December 31, 2014 
           
Accounts receivable, cost  $7,676,152   $8,708,662 
Retention receivable, cost   790,412    743,006 
    8,466,564    9,451,668 
Less: allowance for doubtful accounts   (345,062)   (356,293)
Accounts and retention receivable, net  $8,121,502   $9,095,375 

 

Up to November 2015, the Company has subsequently recovered from approximately 5.57% of accounts and retention receivable as of September 30, 2015.

 

NOTE5 INVENTORY

 

   September 30, 2015   December 31, 2014 
           
Raw materials  $850,296   $1,313,987 
Work-in-process   2,098,762    721,798 
Finished goods   4,282,588    3,587,533 
   $7,231,646   $5,623,318 

 

For the three and nine months ended September 30, 2015 and 2014, no allowance for obsolete inventories was recorded by the Company.

 

Finished goods are expected to be delivered to the customer in the next twelve months.

 

NOTE6 CONSTRUCTION IN PROGRESS

 

In 2008, the Company received approval from the local government to construct a new manufacturing facility for energy-saving products and equipment in Yinzhou District Industrial Park, Tieling City, Liaoning Province, the PRC. Total estimated construction cost of a new manufacturing facility is approximately $24 million.

 

The first phase of construction project was completed and began its operations in December 2012. The cost of construction was transferred to property, plant and equipment and its depreciation expense was recorded in 2013. The second phase of construction project was structurally completed in 2013 and granted the approval of fire security by local authority in March 2014. The cost of construction is expected to transfer to property, plant and equipment by the end of 2015 upon the granting of property ownership certificate from the local authority.

 

 F-13 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

NOTE7 SHORT-TERM BANK BORROWINGS

 

Short-term bank borrowings consist of the following:

 

   September 30, 2015   December 31, 2014 
Payable to financial institutions in the PRC:          
           
Demand bank notes:          
Equivalent to RMB24,000,000 due in March 2015, which is collateralized by its restricted cash and guaranteed by its vendor and bears the handling fee equal to 0.05% of its face value.  $-   $3,900,219 
           
Equivalent to RMB1,000,000 due in January 24, 2016, which is collateralized by its restricted cash and guaranteed by its vendor and bears the handling fee equal to 0.05% of its face value.  $157,386   $- 
           
Short-term borrowings:          
Equivalent to RMB21,000,000 with interest rate at 1.2 times of the Bank of China Benchmark Lending Rate, monthly payable, due in March 2015, which is guaranteed by its vendors and secured by land use right   -    3,412,692 
           
Equivalent to RMB7,000,000 with interest rate at 1.2 times of the Bank of China Benchmark Lending Rate, monthly payable, due in March 2015, which is guaranteed by its vendor   -    1,137,564 
           
Equivalent to RMB28,000,000 with interest rate at 6.2% per annum, monthly payable, due March 19, 2016, which is guaranteed by its vendor and the director of the Company   4,406,812    - 
           
Equivalent to RMB12,000,000 with interest rate at 6.2% per annum, monthly payable, due March 19, 2016, which is guaranteed by its vendor and the director of the Company   1,888,633    - 
           
Total short-term bank borrowings  $6,452,831   $8,450,475 

 

The effective Bank of China Benchmark Lending rate is 6% and 6% per annum for the three and nine months ended September 30, 2015 and 2014.

 

 F-14 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

NOTE8 AMOUNT DUE TO A RELATED PARTY

 

As of September 30, 2015, the amount due to a related party represented temporary advances made by the Company’s major stockholder, Pelaris International Ltd, which is controlled by Ms. Li Hua Wang (the Company’s CFO) and Mr. Gang Li (the Company’s CEO), which was unsecured, interest-free with no fixed repayment term. Imputed interest on this amount is considered insignificant.

 

NOTE9 OTHER PAYABLES AND ACCRUED LIABILITIES

 

Other payables and accrued liabilities consisted of the following:

 

   September 30, 2015   December 31, 2014 
   (Unaudited)   (Audited) 
           
Payable to equipment vendors  $184,428   $153,298 
Customer deposits   361,887    131,213 
Value added tax payable   7,147    2,003 
Accrued operating expenses   205,107    414,565 
Accrued salary   791    13,387 
Other payable   78,857    69,429 
   $838,217   $783,895 

 

NOTE10 INCOME TAXES

 

NFEC is registered in the State of Delaware and is subject to the tax laws of United States of America.

 

As of September 30, 2015, the operation in the United States of America incurred $3,195,884 of cumulative net operating losses which can be carried forward to offset future taxable income. The net operating loss carryforwards begin to expire in 2034, if unutilized. The Company has provided for a full valuation allowance against the deferred tax assets of $1,086,601on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.

 

The Company’s subsidiaries operating in the PRC are subject to the Corporate Income Tax Law of the People’s Republic of China at a unified income tax rate of 25%. The reconciliation of income tax rate to the effective income tax rate for the nine months ended September 30, 2015 and 2014 is as follows:

 

   Nine months ended September 30, 
   2015   2014 
         
(Loss) income before income taxes from PRC operation  $(138,865)  $314,555 
Statutory income tax rate   25%   25%
Income tax expense at statutory rate   (34,716)   78,639 
Effect from non-deductible items   35,089    (17,652)
Tax adjustments   -    3,854 
Income tax expense  $373   $64,841 

 

 F-15 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

NOTE11 STOCKHOLDERS’ EQUITY

 

On May 7, 2015, the Company entered into an Exchange Agreement with Cloverbay International Ltd. (“Cloverbay”), a company controlled by Gang Li, the Company’s Chairman and Chief Executive Officer, and Lihua Wang, the Company’s Chief Financial Officer, to convert an aggregate $1,718,333 of principal amount of debt plus accrued and unpaid interest thereon into 834,142 shares of the Company’s common stock at a conversion rate of $2.06 per share. The debt was represented by a promissory note issued by the Company to Cloverbay in March 2011.

 

As of September 30, 2015, the Company had a total of 6,553,289 shares of its common stock issued and outstanding.

 

NOTE12 SEGMENT INFORMATION

 

The Company’s business units have been aggregated into two reportable segments, as defined by ASC Topic 280:

 

·Heavy manufacturing business – production of valves components and the provision of valve improvement and engineering services; and

 

·Energy-saving related business – production of wind-energy equipment, provision of energy-saving related re-engineering and technical services and long-term construction project.

 

The Company operates these business segments in the PRC and all of the identifiable assets of the Company are located in the PRC during the periods presented.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 3). The Company had no inter-segment sales for the three and nine months ended September 30, 2015 and 2014. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Summarized financial information concerning the Company’s reportable segments is shown in the following table for the three and nine months ended September 30, 2015 and 2014:

 

  Three months ended September 30, 2015
 

Heavy

manufacturing business

  Energy-saving
related business
  Total
Operating revenues, net:                
- Products $ 2,599,325   $ -   $ 2,599,325
- Services   21,949     -     21,949
Total operating revenues   2,621,274     -     2,621,274
Cost of revenues   2,248,147     -     2,248,147
                 
Gross profit   373,127     -     373,127
Depreciation and amortization   344,791     -     344,791
Total assets   44,813,173     -     44,813,173
Expenditure for long-lived assets $ 722,148   $ -   $ 722,148

 

 F-16 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

  Nine months ended September 30, 2015
 

Heavy

manufacturing business

  Energy-saving
related business
  Total
Operating revenues, net:                
- Products $ 5,026,510   $ -   $ 5,026,510
- Services   85,568     -     85,568
Total operating revenues   5,112,078     -     5,112,078
Cost of revenues   4,105,773     -     4,105,773
                 
Gross profit   1,006,305     -     1,006,305
Depreciation and amortization   932,453     -     932,453
Total assets   44,813,173     -     44,813,173
Expenditure for long-lived assets $ 892,817   $ -   $ 892,817

 

  Three months ended September 30, 2014
 

Heavy

manufacturing business

  Energy-saving
related business
  Total
Operating revenues, net:                
- Products $ 2,465,375   $ 441,926   $ 2,907,301
- Services   36,646     -     36,646
Total operating revenues   2,502,021     441,926     2,943,947
Cost of revenues   (1,641,001)     (416,912)     (2,057,913)
                 
Gross profit   747,203     25,014     886,034
Depreciation and amortization   209,127     -     209,127
Total assets   45,389,340     -     45,389,340
Expenditure for long-lived assets $ 298,927   $ -   $ 298,927

 

  Nine months ended September 30, 2014
 

Heavy

manufacturing business

  Energy-saving
related business
  Total
Operating revenues, net:                
- Products $ 5,634,127   $ 441,926   $ 6,076,053
- Services   214,293     -     214,293
Total operating revenues   5,848,420     441,926     6,290,346
Cost of revenues   (4,476,565)     (416,912)     (4,893,477)
                 
Gross profit   1,371,855     25,014     1,396,869
Depreciation and amortization   627,048     -     627,048
Total assets   45,389,340     -     45,389,340
Expenditure for long-lived assets $ 298,927   $ -   $ 298,927

 

 F-17 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

All long-lived assets are located in the PRC.

 

 

NOTE13 CONCENTRATIONS OF RISK

 

The Company is exposed to the following concentrations of risk:

 

(a) Major customers

 

For the three and nine months ended September 30, 2015, only one customer accounted for 10% or more of the Company’s revenues and its outstanding receivable balances as at period-end dates, are presented as follows:

 

   Three months ended September 30, 2015   September 30, 2015 
Customers  Revenues   Percentage
of revenues
   Accounts and retention
receivable
 
                
Customer A  $1,959,525    75%  $5,848,728 

 

   Nine months ended September 30, 2015   September 30, 2015 
Customers  Revenues   Percentage
of revenues
   Accounts and retention
receivable
 
                
Customer A  $4,217,987    83%  $5,848,728 

 

For the three and nine months ended September 30, 2014, the customers who accounted for 10% or more of the Company’s revenues and its outstanding receivable balances as at period-end dates, are presented as follows:

 

   Three months ended September 30, 2014   September 30, 2014 
Customers  Revenues   Percentage
of revenues
   Accounts and retention
receivable
 
             
Customer A  $2,184,447    74%  $5,919,725 
Customer D   441,926    15%   - 
                
Total:  $2,626,373    89%Total: $5,919,725 

 

   Nine months ended September 30, 2014   September 30, 2014 
Customers  Revenues   Percentage
of revenues
   Accounts and retention
receivable
 
                
Customer A  $5,014,743    80%  $5,919,725 

 

 F-18 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

(b) Major vendors

 

For the three and nine months ended September 30, 2015 and 2014, the vendors who accounted for 10% or more of the Company’s purchases and its outstanding balances as at period-end dates, are presented as follows:

 

   Three months ended September 30, 2015   September 30, 2015 
Vendors  Purchases   Percentage
of purchases
   Accounts
payable
 
             
Vendor F  $210,118    19%  $360,196 
Vendor J   165,392    15%   411,707 
                
Total:  $375,510    34%Total: $771,903 

 

   Nine months ended September 30, 2015   September 30, 2015 
Vendors  Purchases   Percentage
of purchases
   Accounts
payable
 
             
Vendor F  $689,239    17%  $360,196 
Vendor J   462,314    12%   411,707 
                
Total:  $1,151,553    29%Total: $771,903 

 

   Three months ended September 30, 2014   September 30, 2014 
Vendors  Purchases   Percentage
of purchases
   Accounts
payable
 
             
Vendor H   423,769    14%   375,916 
Vendor I   416,912    14%   20,143 
Vendor J   306,158    10%   241,805 
                
Total:  $1,146,839    38%Total: $637,864 

 

   Nine months ended September 30, 2014   September 30, 2014 
Vendors  Purchases   Percentage
of purchases
   Accounts
payable
 
                
Vendor F  $557,495    10%Total: $241,249 

 

All vendors are located in the PRC.

 

(c) Credit risk

 

Financial instruments that are potentially subject to credit risk consist principally of trade receivables. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

 

 F-19 

 

 

NF ENERGY SAVING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

 

(d) Interest rate risk

 

As the Company has no significant interest-bearing assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.

 

The Company’s interest-rate risk arises from borrowing under notes and bank borrowings. The Company manages interest rate risk by varying the issuance and maturity dates variable rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. As of September 30, 2015, short-term bank borrowings were at variable rates.

 

(e) Exchange rate risk

 

The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates against US$, the value of RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.

 

(f) Economic and political risks

 

The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

 

The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.

 

NOTE14 COMMITMENTS AND CONTINGENCIES

 

As of September 30, 2015, there were no commitments and contingencies involved.

 

NOTE15 SUBSEQUENT EVENTS

 

The Company evaluated subsequent events through the date the financial statements were issued and filed with this Form 10-Q. There were no subsequent events that required recognition or disclosure.

 

 F-20 

 

 

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

 

As used herein the terms "we", "us", "our," the “Registrant,” “NFEC” and the "Company" means, NF Energy Saving Corporation, a Delaware corporation, formerly known as NF Energy Saving Corporation of America, Diagnostic Corporation of America, Global Broadcast Group, Inc., and Galli Process, Inc. These terms also refer to our subsidiary corporations, Liaoning Nengfa Weiye Energy Technology Corporation Ltd. (“Nengfa Energy”), formerly known as Liaoning Nengfa Weiye Pipe Network Construction and Operation Co. Ltd. (“Neng Fa”), a corporation organized and existing under the laws of the Peoples’ Republic of China, which was acquired in November 2006.

 

NF Energy Saving Corporation was incorporated under the laws of the State of Delaware in the name of Galli Process, Inc. on October 31, 2000 for the purpose of seeking and consummating a merger or acquisition with a business entity organized as a private corporation, partnership, or sole proprietorship. On December 31, 2001, Galli Process, Inc. became a majority owned subsidiary of City View TV, Inc., a Florida corporation (“City View”). On February 7, 2002, Galli Process, Inc. changed its name to Global Broadcast Group, Inc. On March 1, 2002, City View merged into Global Broadcast Group, Inc., which was the surviving entity. On November 12, 2004, the Company changed its name to Diagnostic Corporation of America. On March 15, 2007, we changed our name to NF Energy Saving Corporation of America, and on August 24, 2009, the Company further changed its name to NF Energy Saving Corporation, in both instances to more accurately reflect our business after a stock exchange transaction with Neng Fa. Our principal place of business is Room 3106, Tower C, 390 Qingnian Avenue, Heping District, Shenyang, P. R. China 110015. Our telephone number is (8624) 2560-9775.

 

On November 15, 2006, we executed a Plan of Exchange ("Plan of Exchange"), among the Company, Neng Fa, the shareholders of Neng Fa (the "Neng Fa Shareholders") and Gang Li, our Chairman and Chief Executive Officer ("Mr. Li"). Pursuant to and at the closing of the Plan of Exchange, which occurred on November 30, 2006, we issued to the Neng Fa Shareholders 12,000,000 shares of our common stock, or 89.4% of our then outstanding common stock, in exchange for all of the shares of capital stock of Neng Fa owned by the Neng Fa Shareholders. Immediately upon the closing, Neng Fa became our 100% owned subsidiary, and the Company ceased all of its other operations and adopted and implemented the business plan of Neng Fa.

 

Nengfa Energy’s area of business includes research and development, processing, manufacturing, marketing and distribution of energy saving flow control equipment; manufacturing, marketing and distribution of energy equipment and fittings; energy saving technical reconstruction; and energy saving technology consulting services, providing comprehensive solutions for energy-saving emission reduction.

 

On August 26, 2009, the Company completed a 3 for 1 reverse stock split. The total number of then outstanding shares of common stock changed from 39,872,704 pre-split to 13,291,387 post-split.

 

On September 15, 2010, the Company completed a 2.5 for 1 reverse share split of its common stock, the total number of outstanding shares of common stock changed from 13,315,486 pre-split to 5,326,501 post-split.

 

On October 4, 2010 our common stock commenced trading on the Nasdaq Global Market. On March 7, 2012, upon approval by Nasdaq , our common stock transferred from the Nasdaq Global Market to the Nasdaq Capital Market , Our common stock trades on the Nasdaq Stock Market under the ticker symbol “NFEC”.

 

Nengfa Energy is dedicated to energy efficiency enhancement in two fields: (1) manufacturing large diameter energy efficient intelligent flow control systems for thermal and nuclear power generation plants, major national and regional water supply projects and municipal water, gas and heat supply pipeline networks; and (2) energy saving technology consulting, optimization design services, energy saving reconstruction of pipeline networks and contractual energy management services for China’s electric power, petrochemical, coal, metallurgy, construction, and municipal infrastructure industries.

 

 1 

 

 

Nengfa Energy has received many awards and honors from China's regulators, professional associations and renowned international organizations, including the ISO 9001:20000 certification from Det Norske Veritas Management System, the Liaoning Provincial Government's Award of Innovative Enterprise with Best Investment Return Potentials, the Special Industrial Contribution Award of the ESCO Committee of China Energy Conservation Association, and the Grade A Tax Payer Enterprise Award by the Liaoning State Local Tax Administration and the “Contract-abiding and credit enterprise” Award by the Liaoning State Local administrative bureau for industry and commerce. NFEC was awarded of “Hi-tech enterprise” by Liaoning Technology bureau in 2013.

 

Nengfa Energy enjoys a reputation as a leader and dedicated energy saving company in China for over 15 years. Its professional capacity as a provider of energy services is officially certified by China’s National Development and Reform Commission (NDRC). It has been a corporate member on the Board of the ESCO Committee of China Energy Conservation Association and a founding member of China Standardization and Technical Consortium for Energy Conservation and Emission.

 

As a certified energy service provider, Nengfa Energy is entitled to various tax breaks and energy saving awards created by Chinese governments at national, provincial and local levels. The major tax incentive by the central government includes a two-year corporate income tax exemption plus a three-year reduction of corporation income tax for all energy performance based, profit sharing energy service projects. The government policy also incentivizes Nengfa Energy’s clients with tax refunds on goods and properties of the energy saving projects when Nengfa Energy transfers to them at the end of energy service contracts.

 

The current principal development focus of Nengfa Energy is to complete the on-going construction project of the new manufacturing facility which when fully operational will triple the Company's prior capacity to produce large intelligent flow control systems and to provide our Company with more advanced technology to supply high quality energy efficient and safety reliant products for high end markets such as nuclear power plants and super critical power generation plants.

 

Our corporate goal is to maintain our established position as a leading provider of energy efficiency flow control systems, a cutting edge innovator with clean energy and energy efficiency technologies, and a total energy efficiency solution and service provider dedicated to maximum returns to our investors, partners, clients and the environment.

 

Our products and services include the manufacturing and sales of energy-saving flow control equipment, energy saving technology consulting, optimization design services, energy saving reconstruction of pipeline networks and contractual energy management services for China’s electric power, water power, petrochemical, coal, metallurgy, construction, and municipal infrastructure development industries.

 

Examples of contracts entered into by the Company or its subsidiaries are:

 

·In 2007, Nengfa Energy received contracts for our products and services to be used in three sections of the Middle Section-Jingshi Section of the national project to redirect the water from China’s southern rivers to the north of the country. This phase of the project was completed and passed inspection in 2008.

 

·In 2008, the Company received flow control equipment contracts from seven cities in Liaoning Province for their water supply systems.

 

·In 2009, the Company was awarded several flow control equipment supply contracts, including one for the Xijiang diversion project of Guandong Province, and one for Phase 1 of Guangdong Yuedian Huilai Power Plant.

 

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·In 2012, the Company received contracts from Beijing South to North Water Diversion Operation and Management Center, Shanxi Kegong Longsheng technology Ltd, Huaihu Coal Ltd, Chongqing Water-Turbine Ltd, Shenergy Company Limited, Shanghai Qingcaosha City-Environment Project (South Branch Project), Luanhe Power station of China Guodian Corporation ,Qiangui power Ltd , Guizhou Province, Guihang Nenghuan refrigeration engineering Ltd, Shanghai City , Electric power construction corporation (Zambia’s project) , Shandong Province; Lu Electric International Trading corporation, and Shandong Province ( Philippines project).

 

·In 2013, the Company received contracts from Zheneng Zhenhai gas thermal power Ltd; Chongqing water turbine factory Ltd; Chongqing Wanliu power Ltd ; Dalian Petrochemical Company of Petro of China ; China National Electric Power Engineering Ltd ; Xinyu iron and steel Ltd; Shandong Electric Power Corporation; Jiajie gas-fired cogeneration branch of Shanxi new energy industry group; and the Amedyan Power Ltd of State Grid; Chuangshi Energy Ltd, Beijing; Peiling Water-resource Development Ltd, Chongqing; Iron and Steel Ltd, Maanshan; Oilfield Construction Group Ltd, Daqing ; Harbin Air-condition Ltd; China resources power (haifeng) Ltd.

 

·In 2014, the Company received contracts from LXB Water Supply Co., Ltd. Shandong Luneng Huaneng Power International Trade Company of Taiyuan Dongshan Gas Turbine Thermal Power Co., Ltd., Beijing Sea of Inner Mongolia Coal Gangue Power Co., Ltd. and other companies. At the same time, the Company has also completed the installation of desulfurization, denitration and dust removal systems at the 660T/h boiler room of the Chinese Aviation Company.

 

·In 2015, the Company received contracts from Gansu Coal Group Co.Ltd, Nanning Tiefa Valve Co., Ltd, Weinan Dongnan Bureau , Shanxi Ruiguang power Co., Ltd and Harbin Binhe Technology Co., Ltd, Jianxi Shangrao water diversion project, Italian Tecnedil Internationa SRL, etc.

 

FORWARD LOOKING STATEMENTS

 

Certain statements in this report, including statements of our expectations, intentions, plans and beliefs, including those contained in or implied by "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Notes to Consolidated Financial Statements, are "forward-looking statements", within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are subject to certain events, risks and uncertainties that may be outside our control. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements, our expansion and acquisition strategy, our ability to achieve operating efficiencies, industry pricing and technology trends, evolving industry standards, general economic and business conditions, the strength and financial resources of our competitors, our ability to find and retain skilled personnel, the political and economic climate in which we conduct operations and the risk factors described from time to time in our other documents and reports filed with the Securities and Exchange Commission (the "Commission"). Additional factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: 1) our ability to successfully develop, manufacture and deliver our products on a timely basis and in compliance with our contract terms; 2) our ability to compete effectively with other companies in our industry segments; 3) our ability to raise capital or generate sufficient working capital in order to effectuate our business plan; 4) our ability to retain our key executives; and 5) our ability to win and perform significant construction and infrastructure projects.

 

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CRITICAL ACCOUNTING POLICIES

 

An appreciation of our critical accounting policies is necessary to understand our financial results. These policies may require management to make difficult and subjective judgments regarding uncertainties, and as a result, such estimates may significantly impact our financial results. The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes. We applied our critical accounting policies and estimation methods consistently in all periods presented.

 

Revenue Recognition

 

In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.

 

The Company’s revenue is principally derived from two primary sources: Sales of energy saving flow control equipment and provision of energy project management and sub-contracting services, and provision of energy-saving reconstruction projects.

 

(a) Sale of products

 

The Company derives a majority of its revenues from the sale of energy saving flow control equipment. Generally, the energy saving flow control equipment is manufactured and configured to customer requirements. The Company typically produces the energy saving flow control equipment for customers over a period from one to six months. When the Company completes production in accordance with the customer’s specification, the customer is required to inspect the finished products at the Company’s plant to approve quality and conformity and make final acceptance. Once the product is accepted by the customer, the Company undertakes delivery to the customer, usually within a month.

 

The Company recognizes revenue from the sale of such finished products upon delivery to the customers, when the title and risk of loss are fully transferred to the customers. The Company records its revenues, net of value added taxes (“VAT”). The VAT rate is 17%.

 

(b) Service revenue

 

Service revenue is derived from energy-saving technical services, project management or sub-contracting services. These services are generally billed on a time-cost plus basis, for the period of service provided, which is generally from two to nine months. Revenue is recognized when the service is rendered and accepted by the customer.

 

(c) Interest income

 

Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.

 

Accounts Receivable

 

Accounts receivable are recorded at the invoiced amount, do not bear interest and are due within the contractual payment terms, generally 30 to 90 days from shipment. Credit is extended based on evaluation of a customer's financial condition, the customer’s credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. At the end of each period, the Company specifically evaluates each individual customer’s financial condition, credit history, and the current economic conditions to monitor the progress of the collection of accounts receivable. The Company will consider an allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. For the receivables that are past due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means of collection has been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.

 

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For most of our contracts, our customers are generally large or stated-owned construction contractors or developers mainly engaged in government-sponsored infrastructure projects such as large hydraulic/aqua-engineering projects, power plants and urban sewage network projects in the PRC. Usually, these infrastructure projects are undertaken in a number of phrases over a certain period of time. Our flow control equipment components are generally considered as major or significant components in the development phase of these infrastructure projects. As is standard in our industry practice, we are paid by these contractors and/or developers when they have been paid by the local government or state-owned enterprises after the full inspection of each milestone during each construction phrase. Given that the construction of these infrastructure projects are very large, complex, and requires a high of quality level at completion, the inspection process may take a considerable amount of time. Therefore, we may not collect the accounts receivable in a timely manner or only after a period longer than our agreed payment terms.

 

We have a high level of assurance on the recoverability of these accounts receivable, based on our ongoing assessment of customers’ credit-worthiness and their payment history. These customers are usually large state-owned corporations with good credit ratings. At the end of each period, we specifically evaluate the structure and collectability of accounts receivable and for receivables that are past due or not being paid according to the payment terms, we take appropriate action to exhaust all means of collection, including seeking legal resolution in a court of law. For customers with large amounts of accounts receivable, we may take other steps, such as limiting sales and changing payment terms and requesting forms of security. We will consider an adjustment to the allowance for doubtful accounts for any estimated losses resulting from the inability of our customers to make required payments.

 

Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.

 

Product Warranties

 

Under the terms of its contracts, the Company offers a free 12 to 24 months of product warranty on a case-by–case basis, depending upon the type of customer, and the nature and size of the infrastructure project. Under such arrangements, a portion of the project contract balance (usually 5-10% of contract value) is withheld by a customer from 12 to 24 months, until the product warranty has expired. The Company has not experienced any material returns under this warranty provision.

 

Inventories

 

Inventories are stated at the lower of cost or market (net realizable value), with the cost being determined on a weighted average method. Costs include material, labor and manufacturing overhead costs. Quarterly, the Company reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand.

 

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Plant and Equipment

 

Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

 

  Expected useful life   Residual value
Building 30–50 years   5%
Plant and machinery 1020 years   5%
Furniture, fixture and equipment 58 years   5%

 

Expenditure for repairs and maintenance is expensed as incurred. When assets have been retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.

 

Land Use Rights

 

All land in the PRC is owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time. Thus, the Company’s land purchase in the PRC is considered to be leasehold land and is stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreement on a straight-line basis, which is 50 years and will expire in 2059.

 

Income Taxes

 

Income taxes are determined in accordance with the provisions of ASC Topic 740, “Income Taxes ” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

Foreign Currencies Translation

 

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the condensed consolidated statement of operations.

 

The reporting currency of the Company is the United States dollar ("US$"). The Company's subsidiaries in the PRC, Nengfa Energy and Sales Company maintain their books and records in the local currency of the PRC, the Renminbi ("RMB"), which is the primary currency of the economic environment in which these entities operate.

 

In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

 

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Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective period:

 

   September 30, 2015   September 30, 2014 
Period-end RMB:US$1 exchange rate   6.3538    6.1560 
Average period RMB:US$1 exchange rate   6.1729    6.1502 

 

RESULTS OF OPERATIONS

 

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

REVENUES

 

Total revenues were $2,621,274 and $5,112,078 for the three and nine months ended September 30, 2015 respectively, as compared to $2,943,947 and $6,290,346 for the corresponding period in 2014. Total revenues decreased by $322,673 and $1,178,268, a decrease of 10.96% and 18.73%, for the three and nine months ended September 30, 2015, respectively, as compared to total revenues for the three and nine months ended September 30, 2014. The decrease in total revenue was due to the postponement in shipments of certain products, which led to a reduction in product revenues.

 

Product Revenues

 

Product revenues are derived principally from the sale of self-manufactured products relating to energy- saving flow control equipment. Product revenues were $2,599,325 and $5,026,510, or 99.16% and 98.33% of total revenues, for the three and nine months ended September 30, 2015, respectively, as compared to $2,907,301and $6,076,053, or 98.76% and 96.59% of total revenues, for the corresponding period in 2014. Product revenues decreased by $307,976 and $1,049,543, or 10.59% and 17.27%, for the three and nine months ended September 30, 2015, respectively, as compared to the same period in 2014. The decrease in product revenue was primarily due to a delay in the construction schedule of one of our customer’s projects, which led to a postponement in shipments of the related products.

 

Service Revenues

 

Service revenues are derived principally from energy-saving technical services and product collaboration processing services. The energy-saving technical services include providing energy saving auditing, conservation plans, and/or related service reports. Service revenues were $21,949 and $85,568, or 0.84% and 1.67% of total revenues, for the three and nine months ended September 30, 2015, respectively, as compared to $36,646 and $214,293, or 1.24% and 3.41% of total revenues, for the corresponding period in 2014. Service revenues decreased by $14,697 and $128,725 or 40.1% and 60.07%, for the three and nine months ended September 30, 2015, respectively, compared to the corresponding period in 2014. [The decrease in service revenue was primarily due to the main facilities related to working for service which are operated in manufacture of product so that decreasing the service revenues.

 

COSTS AND EXPENSES

 

Cost of Revenues

 

Cost of revenues consists primarily of material costs, direct labor, depreciation and manufacturing overhead, which are directly attributable to the manufacturing of products and the rendering of services. Total cost of revenues was $2,248,147 and $4,105,773 for the three and nine months ended September 30, 2015, respectively, as compared to $2,057,913 and $4,893,477 for the corresponding three and nine months in 2014, an increase of $190,234 and a decrease of $787,704 or 9.24% and 16.1%. The increase in cost of revenues for the three month period was primarily due to the decreased sales of products with high margin ratios and the decrease in cost of revenues for the nine month period was primarily due to the decrease in total revenues.

 

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The overall gross profit for the Company was $373,127 and $1,006,305 (14.23% and 19.68% margin) for the three and nine months ended September 30, 2015, respectively, as compared to $886,034 and $1,396,869 (30.09% and 22.21% margin) for the corresponding three and nine months in 2014, respectively, a decrease of $512,907 and $390,564, or 57.89% and 27.96%, compared to the corresponding period in 2014. The decrease of gross margin was due to the decreased sales of products with high margin ratios.

 

Cost of Products

 

Total cost of products was $2,231,389 and $4,061,616 for the three and nine months ended September 30, 2015, respectively, as compared to $2,035,094 and $4,732,807 for the corresponding period in 2014, an increase of $196,295 and a decrease of $671,191, or 9.65% and 14.18%. The increase for the three month period is primarily due to a lower mix of products for which the Company has a competitive advantage in the market being sold in this quarter and the decrease for the nine month period is primarily due to the decrease of product revenues.

 

The gross profit for products was $367,936 and $964,894 (14.16% and 19.2% margin) for the three and nine months ended September 30, 2015, respectively, as compared to $872,207 and $1,343,246 (30% and 22.11% margin) for the corresponding three and nine months in 2014, a decrease of $504,271 (57.82%) and $378,352 (28.17%). The decrease is primarily due a lower mix of products for which the Company has a competitive advantage in the market being sold in this quarter.

 

Cost of Services

 

The cost of services was $16,758 and $44,157 for the three and nine months ended September 30, 2015, respectively, as compared to $22,819 and $160,670 for the corresponding period in 2014, a decrease of $6,061 (26.56%) and $116,513 (72.52%), respectively. This decrease is primarily due to the decrease in service revenue.

 

The gross profit for services was $5,191 and $41,411 (23.65% and 48.4% margin) for the three and nine months ended September 30, 2015, respectively, as compared to $13,827 and $53,623 (37.73% and 25.02% margin) for the corresponding period in 2014. This decrease is primarily due to the decrease in service revenue.

 

Operating Expenses

 

Total operating expenses were $291,674 and $930,021 for the three and nine months ended September 30, 2015, respectively, as compared to $404,867 and $1,212,484 for the corresponding period in 2014, a decrease of $113,193 and $282,463 or 27.96% and 23.3%, respectively. The decrease of operating expenses is mainly due to the decrease in general and administrative expenses, such as IR fees.

 

Selling and Marketing Expenses

 

The selling and marketing expenses were $51,850 and $69,013 for the three and nine months ended September 30, 2015, respectively, as compared to $15,476 and $45,399 for the corresponding period in 2014, an increase of $36,374 and $23,614, or 235% and 52.01%, respectively. The increase is primarily due to the increase of marketing expenses for expanding into new markets in the PRC.

 

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General and Administrative Expenses

 

General and administrative expenses were $239,824 and $861,008 for the three and nine months ended September 30, 2015, respectively, as compared to $389,391 and $1,167,085 for the corresponding period in 2014, a decrease of $149,567 and $306,077, or 38.41% and 26.23%, respectively. The decrease of general and administrative expenses is primarily due to the decrease of the fees for IR.

 

Income from operations

 

As a result of the factors mentioned above, income from operations was $81,453 and $76,284 for the three and nine months ended September 30, 2015, respectively, as compared to income from operations of $481,167 and $184,385 for the corresponding three and nine months period in 2014, a decrease of $399,714 and $108,101, or 83.07% and 58.63%. The decrease in income from operations is primarily due to both the decrease in the gross profit.

 

Other (Expenses) Income

 

Other expense were $87,883 and $288,485 for the three and nine months ended September 30, 2015, respectively, as compared to $98,762 and $276,330 for the corresponding period in 2014. As a result, the loss before income taxes was $6,430 and $212,201 for the three and nine months ended September 30, 2015, respectively, as compared to the income before income taxes of $382,405 and a loss before income taxes of $91,945 for the corresponding three and nine months period in 2014, an absolute change of $388,835 and $120,256, or 101.68% and 130.79%, respectively.

 

Income Tax Expense

 

For the three and nine months ended September 30, 2015, income tax expense was $89 and $373, respectively, as compared to $54,721 and $64,841 for the same period in 2014, a decrease of $54,632 and $64,468, or 99.84% and 99.42%.

 

As of September 30, 2015, the Company’s operations in the United States of America have resulted in $3,195,884 of cumulative net operating losses, which can be carried forward to offset future taxable income. The net operating loss carry forward will begin to expire in 2033, if not utilized. The Company has provided for a valuation allowance against the deferred tax assets of $1,086,601 on the expected future tax benefits from the net operating loss carry forward as management believes it is more likely than not that these assets will not be realized in the future.

 

Net (loss) income

 

As a result of the factors mentioned above, net loss was $6,519 and $212,574 for the three and nine months ended September 30, 2015, respectively, as compared to net income of $327,684 and net loss of $156,786 for the corresponding period in 2014, a decrease of $334,203 in net profit and an increase of $55,788 in net loss if compared with the corresponding period in 2014, or 101.99% and 35.58%. The decrease of net profit is primarily due to the decrease in gross profit.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Operating activities

 

For the nine months ended September 30, 2015, net cash used in operating activities was $255,426. This was attributable primarily to a net loss of $212,574, adjusted by non-cash items of depreciation and amortization of $932,453, a decrease in accounts and retention receivable by $707,283, an increase in inventories by $1,837,928, a decrease in prepayment and other receivable by $188,067, a decrease in the accounts payable by $328,971 and an increase in other payables and accrued liabilities by $296,244.

 

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We have followed ASC 230-10-45-28 and choose to provide information about major classes of cash flow items by the indirect method. In the statement of cash flows, we have reported the same amount for net cash flow from operating activities indirectly by adjusting net income to reconcile it to net cash flow from operating activities. The reconciliation has separately reported all major classes of reconciling items, for example, changes during the period in accounts receivables pertaining to operating activities, in inventory, and in payables pertaining to operating activities.

 

As of September 30, 2015, the increase of inventories was primarily derived from the market fluctuation and delay in construction of some projects such that the product could not be delivered to the customers.

As of September 30, 2015, accounts and retention receivable was $8,121,502, 99.79% of which is product revenue accounts receivable, and 0.21% of which is service revenue accounts receivable.

 

The Company is highly aware the risk of default, and as a result, we actively monitor accounts receivable with aging above 1 year and those accounting for about 1% of the total accounts receivable, thus there is no significant credit risk. The Company will consider an allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. The Company’s accounts and retention receivable aging was as follows:

 

Items  Total   1-90 days   91-180 days   181-365 days   Above 365 days 
                          
Product   8,449,004    2,688,312    1,342,296    2,346,197    2,072,198 
Service   17,560    -    7,572    6,295    3,693 
Total   8,466,564    2,688,312    1,349,868    2,352,492    2,075,892 
Less: retention   790,412    160,773    79,087    268,129    282,423 
Less: allowance for doubtful accounts   345,062    -    -    -    345,062 
Accounts receivable, net   7,331,090    2,527,539    127,0781    2,084,363    1,448,407 

 

Most of our customers make payments in accordance with the agreed payment terms in a timely manner. In rare cases, we may offer extended payment terms to certain customers for equipment sales. These customers are usually large state-owned corporations with good credit ratings. At the end of each period, we evaluate the structure and collectability of accounts receivable and for those receivables that are past due or not being paid according to the payment terms. We take appropriate actions to exhaust all means of collection, including seeking legal resolution in a court of law, for our collection efforts. Meanwhile, the Company also adopted strict sales polices according to the signed contracts. The Company evaluated the existing customers and potential customers; as well as reducing their credit in the sales and raising the quality of contracts and controls on the doubtful accounts. As of September 30, 2015, the accounts receivable of three customers with aging over 365 days are expected to be collected by the end of December 2015. The anticipated collecting time is indicated below:

 

Customer   AR with aging above 365 days     To be collected amount by September 2015     To be collected amount by December 2015  
Customer “A”     1,054,196       -       436,274  
Customer “C”     479,715       -       335,402  

 

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We offer a free 12 to 24 months of product warranty on a case-by-case basis, depending upon the type of customers, nature and size of the infrastructure projects. Under such arrangements, a portion of the project contract balance (usually 5-10% of contract value) is withheld by a customer from 12 to 24 months, until the product warranty has expired.

 

Investing activities

 

For the nine months ended September 30 2015, net cash used in investing activities was $892,817 which was primarily used in the construction of Phase II in the new facility.

 

In 2008, the Company received approval from the local government to construct a new manufacturing facility for energy-saving products and equipment in Yinzhou District Industrial Park, Tieling City, Liaoning Province, the PRC. Total estimated construction cost of a new manufacturing facility is approximately $24 million.

 

The first phase of construction project was completed and began its operations in December 2012. The second phase of construction project was structurally completed in 2013 and the property ownership certificate relating to the completed construction was approved, the Company expects that the property ownership certificated relating to uncompleted construction will be approved by the end of 2015.

 

Financing activities

 

For the nine months ended September 30, 2015, the net financing cash inflow was $161,998, which was due to the increase of short bank borrowings and the decrease of bank demand notes.

 

In March 2011, the Company obtained a short-term loan of $1,500,000 from a related company which is controlled by Ms. Lihua Wang (the Company’s CFO) and Mr. Gang Li (the Company’s CEO). This note was unsecured, carried interest at 6% per annum, payable at maturity and due on May 31, 2013. Prior to maturity, the note holder agreed to extend the maturity term to May 31, 2015. On May 7, 2015, the aggregate of $1,718,333.33 of principal amount of debt plus accrued and unpaid interest due under this loan was converted into 834,142 shares of the Company’s common stock at a conversion rate of $2.06 per share.

 

INFLATION

 

We believe that the relatively moderate rate of inflation over the past few years has not had a significant impact on our results of operations.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any material off-balance sheet arrangements.

 

IMPACT OF RECENTLY ISSUED NEW ACCOUNTING STANDARDS

 

We do not expect adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not Applicable.

 

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Item 4. Controls and Procedures

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer.  Based on that evaluation and the identification of a material weakness in internal control over financial reporting described below, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures, as of September 30, 2015, and during the period prior were not effective.

 

Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive officer and principal financial officer and effected by the Company’s Board of Directors, management and other personnel, 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 and includes those policies and procedures that:

 

·Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with management authorization; and

 

·Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Due to the Company’s limited resources, the Company does not have accounting personnel with extensive experience in maintaining books and records and preparing financial statements in accordance with US GAAP which could lead to untimely identification and resolution of accounting matters inherent in the Company’s financial transactions in accordance with US GAAP .This material weakness was identified by our Chief Executive Officer and Chief Financial Officer and our plans for remediation are described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed with the SEC on March 27, 2015.

 

Changes in Internal Control over Financial Reporting

 

There were no changes made in our internal controls over financial reporting during the fiscal quarter ended September 30, 2015 that have materially affected or are reasonably likely to materially affect these controls.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None

 


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Item 1A.   Risk Factors

 

Not Applicable

 

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

 

None

 

Item 3.      Defaults Upon Senior Securities.

 

None.

 

Item 4.      Mine Safety Disclosures

 

Not applicable.

 

Item 5.      Other Information.

 

None.

 

Item 6.      Exhibits.

 

The list of Exhibits, required by Item 601 of Regulation S-K to be filed as a part of this Form 10-Q are set forth on the Exhibit Index immediately preceding such Exhibits and is incorporated herein by this reference.

 

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SIGNATURES

 

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

 

  NF Energy Saving Corporation
  (Registrant)
 

     
Date: November 13, 2015 By: /s/ Gang Li
    Gang Li
    Chairman, Chief Executive Officer and President

 

 

Date: November 13, 2015 By: /s/ Lihua Wang
    Lihua Wang
   

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

 

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INDEX TO EXHIBITS

 

Exhibit No. Description

 

31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

 

32.2Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

 

101The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Stockholders’ Equity (iv) the Statements of Cash Flows, and (v) the Notes to Financial Statements

 

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