NF ENERGY SAVING
CORPORATION
CONDENSED CONSOLIDATED
BALANCE SHEETS
AS OF SEPTEMBER 30, 2016 AND DECEMBER
31, 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
273,398
|
|
|
|
434,571
|
|
Restricted cash
|
|
|
-
|
|
|
|
1,848,799
|
|
Accounts receivable, net
|
|
|
7,762,562
|
|
|
|
7,586,651
|
|
Retention receivable
|
|
|
677,927
|
|
|
|
679,924
|
|
Inventories
|
|
|
5,292,193
|
|
|
|
7,051,198
|
|
Prepayments and other receivables
|
|
|
2,020,037
|
|
|
|
1,975,794
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,026,117
|
|
|
|
19,576,937
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Plant and equipment, net
|
|
|
15,681,286
|
|
|
|
10,554,111
|
|
Land use rights, net
|
|
|
2,676,293
|
|
|
|
2,797,655
|
|
Construction in progress
|
|
|
5,167,782
|
|
|
|
11,424,939
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
39,551,478
|
|
|
|
44,353,642
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
3,837,236
|
|
|
|
4,883,076
|
|
Short-term bank borrowings
|
|
|
6,050,038
|
|
|
|
8,057,683
|
|
Amount due to a related party
|
|
|
431,682
|
|
|
|
431,682
|
|
Other payables and accrued liabilities
|
|
|
833,189
|
|
|
|
603,726
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
11,152,145
|
|
|
|
13,976,167
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
$
|
11,152,145
|
|
|
|
13,976,167
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 50,000,000 shares authorized; 6,653,289 and 6,553,289 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
|
|
|
6,653
|
|
|
|
6,553
|
|
Additional paid-in capital
|
|
|
11,701,045
|
|
|
|
11,605,145
|
|
Deferred compensation
|
|
|
(57,600
|
)
|
|
|
-
|
|
Statutory reserve
|
|
|
2,227,634
|
|
|
|
2,227,634
|
|
Accumulated other comprehensive income
|
|
|
1,992,116
|
|
|
|
2,807,340
|
|
Retained earnings
|
|
|
12,529,485
|
|
|
|
13,730,803
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
28,399,333
|
|
|
|
30,377,475
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
39,551,478
|
|
|
|
44,353,642
|
|
See accompanying notes to condensed consolidated
financial statements.
NF ENERGY SAVING
CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF
OPERATIONS AND COMPREHENSIVE
INCOME
FOR THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(Currency expressed
in United States Dollars (“US$”), except for number of shares)
(Unaudited)
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
REVENUE, NET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
1,366,905
|
|
|
$
|
2,599,325
|
|
|
$
|
3,603,738
|
|
|
$
|
5,026,510
|
|
Services
|
|
|
33,447
|
|
|
|
21,949
|
|
|
|
41,028
|
|
|
|
85,568
|
|
Total revenues, net
|
|
|
1,400,352
|
|
|
|
2,621,274
|
|
|
|
3,644,766
|
|
|
|
5,112,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
|
1,462,330
|
|
|
|
2,231,389
|
|
|
|
3,593,519
|
|
|
|
4,061,616
|
|
Cost of services
|
|
|
80,686
|
|
|
|
16,758
|
|
|
|
284,418
|
|
|
|
44,157
|
|
Total cost of revenues
|
|
|
1,543,016
|
|
|
|
2,248,147
|
|
|
|
3,877,937
|
|
|
|
4,105,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS (LOSS) PROFIT
|
|
|
(142,664
|
)
|
|
|
373,127
|
|
|
|
(233,171
|
)
|
|
|
1,006,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,357
|
|
|
|
51,850
|
|
|
|
15,016
|
|
|
|
69,013
|
|
General and administrative
|
|
|
154,245
|
|
|
|
239,824
|
|
|
|
698,488
|
|
|
|
861,008
|
|
Total operating expenses
|
|
|
155,602
|
|
|
|
291,674
|
|
|
|
713,504
|
|
|
|
930,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) PROFIT FROM OPERATIONS
|
|
|
(298,266
|
)
|
|
|
81,453
|
|
|
|
(946,675
|
)
|
|
|
76,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
2,739
|
|
|
|
16,749
|
|
|
|
2,788
|
|
|
|
18,025
|
|
Interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
14,325
|
|
|
|
11,875
|
|
Interest expense
|
|
|
(85,923
|
)
|
|
|
(104,616
|
)
|
|
|
(271,508
|
)
|
|
|
(318,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(83,184
|
)
|
|
|
(87,867
|
)
|
|
|
(254,395
|
)
|
|
|
(288,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(381,450
|
)
|
|
|
(6,414
|
)
|
|
|
(1,201,070
|
)
|
|
|
(212,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(182
|
)
|
|
|
(89
|
)
|
|
|
(248
|
)
|
|
|
(373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(381,632
|
)
|
|
|
(6,503
|
)
|
|
|
(1,201,318
|
)
|
|
|
(212,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– Foreign currency translation loss
|
|
|
(115,838
|
)
|
|
|
(1,407,089
|
)
|
|
|
(815,224
|
)
|
|
|
(1,051,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS
|
|
$
|
(497,470
|
)
|
|
|
(1,413,592
|
)
|
|
|
(2,016,542
|
)
|
|
|
(1,264,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share– Basic
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.18
|
)
|
|
|
(0.04
|
)
|
Net loss per share– Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.18
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding– Basic and diluted
|
|
|
6,577,831
|
|
|
|
6,219,632
|
|
|
|
6,577,831
|
|
|
|
5,969,390
|
|
See accompanying notes to condensed consolidated
financial statements.
NF ENERGY SAVING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016 AND 2015
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,201,318
|
)
|
|
$
|
(212,574
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
577,270
|
|
|
|
932,453
|
|
Stock-based compensation
|
|
|
38,400
|
|
|
|
-
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts and retention receivable
|
|
|
(400,802
|
)
|
|
|
707,283
|
|
Inventories
|
|
|
1,591,606
|
|
|
|
(1,837,928
|
)
|
Prepayments and other receivables
|
|
|
(77,877
|
)
|
|
|
188,067
|
|
Accounts payable
|
|
|
(927,553
|
)
|
|
|
(328,971
|
)
|
Other payables and accrued liabilities
|
|
|
244,712
|
|
|
|
296,244
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(155,562
|
)
|
|
|
(255,426
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of plant and equipment
|
|
|
-
|
|
|
|
(892,817
|
)
|
Payments on construction in progress
|
|
|
(1,814
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,814
|
)
|
|
|
(892,817
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
1,823,919
|
|
|
|
1,943,981
|
|
Repayment on bank demand notes
|
|
|
(1,816,319
|
)
|
|
|
-
|
|
Proceeds from short-term bank borrowings
|
|
|
6,079,730
|
|
|
|
2,753,973
|
|
Repayment on short-term bank borrowings
|
|
|
(6,079,730
|
)
|
|
|
(4,535,956
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
7,600
|
|
|
|
161,998
|
|
|
|
|
|
|
|
|
|
|
Effect on exchange rate change on cash and cash equivalents
|
|
|
(11,397
|
)
|
|
|
(13,031
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(161,173
|
)
|
|
|
(999,276
|
)
|
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
434,571
|
|
|
|
1,304,130
|
|
|
|
|
|
|
|
|
|
|
END OF PERIOD
|
|
$
|
273,398
|
|
|
$
|
304,854
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
248
|
|
|
$
|
299
|
|
Cash paid for interest
|
|
$
|
271,508
|
|
|
$
|
288,176
|
|
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING AND INVESTING TRANSACTIONS:
|
|
|
|
|
|
|
|
|
Conversion of note and accrued interest into shares
|
|
$
|
-
|
|
|
$
|
1,718,333
|
|
Transfer from construction in progress to plant and equipment
|
|
$
|
6,014,313
|
|
|
$
|
-
|
|
See accompanying notes to condensed consolidated
financial statements.
NF ENERGY SAVING
CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other
|
|
|
|
|
|
Total
|
|
|
|
No. of
shares
|
|
|
Amount
|
|
|
Additional
paid-in capital
|
|
|
Deferred
compensation
|
|
|
Statutory
reserve
|
|
|
comprehensive
income
|
|
|
Retained
earnings
|
|
|
stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2016
|
|
|
6,553,289
|
|
|
|
6,553
|
|
|
|
11,605,145
|
|
|
|
-
|
|
|
|
2,227,634
|
|
|
|
2,807,340
|
|
|
|
13,730,803
|
|
|
|
30,377,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share issued for services rendered - IR services
|
|
|
100,000
|
|
|
|
100
|
|
|
|
95,900
|
|
|
|
(57,600
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,400
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(815,224
|
)
|
|
|
-
|
|
|
|
(815,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,201,318
|
)
|
|
|
(1,201,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2016
|
|
|
6,653,289
|
|
|
|
6,653
|
|
|
|
11,701,045
|
|
|
|
(57,600
|
)
|
|
|
2,227,634
|
|
|
|
1,992,116
|
|
|
|
12,529,485
|
|
|
|
28,399,933
|
|
See accompanying notes to condensed consolidated
financial statements.
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), 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, 2015 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, 2016 are not necessarily indicative of the results to be expected for
the entire fiscal year ending December 31, 2016 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, 2015.
|
NOTE
–
2
|
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 subsidiaries
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%
|
|
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
Liaoning Nengfa Weiye Smart Valve Technology Co.Ltd
(“Nengfa Smart Valve”)
|
|
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
|
|
RMB
|
50,000,000
|
|
|
60%
|
|
NFEC and its subsidiaries are hereinafter
referred to as (the “Company”).
|
NOTE
–
3
|
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.
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.
The condensed consolidated financial statements
include the financial statements of NFEC and its subsidiaries. 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 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 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.
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
Retention receivable is the amount withheld
by a customer based upon 5-10% of the contract value, until a product warranty is expired.
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, 2016,
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.
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, 2016 and 2015 was $15,515 and $16,385, respectively.
Amortization expense for the nine months
ended September 30, 2016 and 2015 was $47,046 and $50,142 , respectively.
The estimated amortization expense on the
land use right in the next five years and thereafter is as follows:
Period ending September 30:
|
|
|
|
|
2017
|
|
$
|
61,880
|
|
2018
|
|
|
61,880
|
|
2019
|
|
|
61,880
|
|
2020
|
|
|
61,880
|
|
2021
|
|
|
61,880
|
|
Thereafter
|
|
|
2,366,893
|
|
|
|
|
|
|
Total:
|
|
$
|
2,676,293
|
|
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
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 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 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, 2016 and 2015 was $125,419 and $322,780, respectively.
Depreciation expense for the nine months
ended September 30, 2016 and 2015 was $530,224 and $882,311, respectively.
|
·
|
Impairment of long-lived assets
|
In accordance with the provisions of ASC
Topic 360, “
Impairment or Disposal of Long-Lived Assets
”, all long-lived assets such as property, plant and
equipment held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of
the carrying amount of an asset to its estimated future undiscounted cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of
the assets exceed the fair value of the assets. There has been no impairment charge for the three and nine months ended September
30, 2016.
The Company offers a number of products
and service to its customers, which are:
|
1.
|
Sales of energy saving flow control equipment
|
|
2.
|
Provision of energy project management and sub-contracting service
|
In accordance with the ASC Topic 605,
“Revenue
Recognition”
, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has
occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
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 quality and product conditions, to its full satisfaction, then the Company makes delivery to the customer.
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, 2016 and 2015.
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.
Interest income is recognized on a time
apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
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 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.
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
For the three and nine months ended September
30, 2016 and 2015, the Company did not have any interest and penalties associated with tax positions. As of September 30, 2016,
the Company did not have any significant unrecognized uncertain tax positions.
The Company conducts major businesses 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.
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, 2016 and 2015.
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, 2016
|
|
|
September 30, 2015
|
|
Period-end RMB:US$1 exchange rate
|
|
|
6.66938
|
|
|
|
6.3538
|
|
Average period RMB:US$1 exchange rate
|
|
|
6.57924
|
|
|
|
6.1729
|
|
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
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.
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.
|
·
|
Stock based compensation
|
The Company accounts for employee and non-employee
stock awards under ASC 718, whereby equity instruments issued to employees for services are recorded based on the fair value of
the instrument issued and those issued to non-employees are recorded based on the fair value of the consideration received or the
fair value of the equity instrument, whichever is more reliably measurable.
|
·
|
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.
|
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
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.
|
·
|
Recent accounting pronouncements
|
The Company has reviewed all recently issued,
but not yet effective, accounting pronouncements and do 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.
NOTE–4 ACCOUNTS
AND RETENTION RECEIVABLES
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Accounts receivable, cost
|
|
$
|
8,275,444
|
|
|
|
8,348,652
|
|
Retention receivable, cost
|
|
|
677,927
|
|
|
|
679,924
|
|
|
|
|
8,953,371
|
|
|
|
9,028,576
|
|
Less: allowance for doubtful accounts
|
|
|
(512,882
|
)
|
|
|
(762,001
|
)
|
|
|
|
|
|
|
|
|
|
Accounts and retention receivable, net
|
|
$
|
8,440,489
|
|
|
|
8,266,575
|
|
For the three and nine months ended
September 30, 2016, the Company wrote back the allowance of $231,837 from the recovery of certain doubtful debts.
Up to October 2016, the Company has subsequently
recovered from approximately 4% of accounts and retention receivable as of September 30, 2016.
NOTE
–
5 INVENTORIES
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
530,020
|
|
|
|
441,692
|
|
Work-in-process
|
|
|
265,610
|
|
|
|
432,394
|
|
Finished goods
|
|
|
4,496,563
|
|
|
|
6,177,112
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,292,193
|
|
|
|
7,051,198
|
|
For the three and nine months ended September
30, 2016 and 2015, no allowance for obsolete inventories was recorded by the Company.
Finished goods are expected to be delivered
to the customer in the next six months.
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
NOTE
–
6 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 2016 upon the granting of property ownership certificate from the local authority.
For the three and nine months ended
September 30, 2016, construction in progress approximately $6 million was was transferred to plant and equipment.
NOTE
–
7 SHORT-TERM
BANK BORROWINGS
Short-term bank borrowings consist of the
following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Payable to financial institutions in the PRC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand bank notes:
|
|
|
|
|
|
|
|
|
Equivalent to RMB12,000,000, due March 30, 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
|
|
$
|
-
|
|
|
|
1,848,800
|
|
|
|
|
|
|
|
|
|
|
Equivalent to RMB100,000, due 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
|
|
|
-
|
|
|
|
15,407
|
|
|
|
|
|
|
|
|
|
|
Equivalent to RMB200,000, due 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
|
|
|
-
|
|
|
|
30,813
|
|
|
|
|
|
|
|
|
|
|
Equivalent to RMB350,000, due December 1, 2016, which is collateralized by its vendor
|
|
|
52,479
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
Equivalent to RMB28,000,000 with interest rate at 1.2 times of the Bank of China Benchmark Lending Rate, monthly payable, due March 19, 2016, which is guaranteed by its vendor
|
|
|
-
|
|
|
|
4,313,864
|
|
|
|
|
|
|
|
|
|
|
Equivalent to RMB12,000,000 with interest rate at 1.2 times of the Bank of China Benchmark Lending Rate, monthly payable, due March 19, 2016, which is guaranteed by its vendor
|
|
|
-
|
|
|
|
1,848,799
|
|
|
|
|
|
|
|
|
|
|
Equivalent to RMB40,000,000 with interest rate at 1.28 times of the Bank of China Benchmark Lending Rate, monthly payable, due March 20, 2017, which is guaranteed by its vendor
|
|
|
5,997,559
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total short-term bank borrowings
|
|
$
|
6,050,038
|
|
|
|
8,057,683
|
|
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
The effective Bank of China Benchmark Lending
rate is 6% and 6% per annum for the three and nine months ended September 30, 2016 and 2015.
NOTE
–
8 AMOUNT
DUE TO A RELATED PARTY
As of September 30, 2016, 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.
NOTE
–
9 OTHER
PAYABLES AND ACCRUED LIABILITIES
Other payables and accrued liabilities
consisted of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
$
|
319,604
|
|
|
|
177,718
|
|
Value added tax payable
|
|
|
146,516
|
|
|
|
5,978
|
|
Accrued operating expenses
|
|
|
286,375
|
|
|
|
324,805
|
|
Other payable
|
|
|
80,694
|
|
|
|
95,225
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
833,189
|
|
|
|
603,726
|
|
NOTE
–
10 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, 2016, the operation
in the United States of America incurred $3,159,175 of cumulative net operating losses which can be carried forward to offset future
taxable income. The net operating loss carryforwards begin to expire in 2033, if unutilized. The Company has provided for a full
valuation allowance against the deferred tax assets of $1,074,120 on the expected future tax benefits from the net operating loss
carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
The Company’s subsidiaries operating
in the PRC are subject to the Corporate Income Tax Law of the People’s Republic of China at a unified income tax rate of
25%. The reconciliation of income tax rate to the effective income tax rate for the nine months ended September 30, 2016 and 2015
is as follows:
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Loss before income taxes from PRC operation
|
|
$
|
(1,119,393
|
)
|
|
$
|
(138,865
|
)
|
Statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Income tax expense at statutory rate
|
|
|
(279,848
|
)
|
|
|
(34,716
|
)
|
Effect from non-deductible items
|
|
|
280,096
|
|
|
|
35,089
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
248
|
|
|
$
|
373
|
|
NOTE
–
11 STOCKHOLDERS’
EQUITY
As of September 30, 2016, the Company had
a total of 6,653,289 shares of its common stock issued and outstanding.
NOTE
–
12 CONCENTRATIONS
OF RISK
The Company is exposed to the following concentrations of risk:
Approximately 99% and 98% of the Company’s
revenues for the three and nine months ended September 30, 2016, respectively, were from one customer (Customer A) and $7,218,593
of accounts and retention receivable at September 30, 2016 were due from this customer.
Approximately
94% and 92% of the Company’s revenues for the three and nine months ended September 30, 2015, respectively, were from one
customer (Customer A) and $
5,848,728 of accounts and retention receivable at September 30,
2015 were due from this customer.
All customers are located in the PRC.
For the three and nine months ended September
30, 2016 and 2015, the vendors who accounted for 10% or more of the Company’s purchases and their outstanding accounts payable
balances as at period-end dates, are presented as follows:
|
|
Three months ended September 30, 2016
|
|
|
September 30, 2016
|
|
Vendors
|
|
Purchases
|
|
|
Percentage
of purchases
|
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
Vender C
|
|
|
88,350
|
|
|
|
33
|
%
|
|
|
129,011
|
|
Vendor D
|
|
$
|
155,972
|
|
|
|
59
|
%
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
244,322
|
|
|
|
92
|
%
|
|
|
129,716
|
|
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
|
|
Nine months ended September 30, 2016
|
|
|
|
|
September 30, 2016
|
|
Vendors
|
|
Purchases
|
|
|
Percentage
of purchases
|
|
|
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor A
|
|
$
|
117,460
|
|
|
|
20
|
%
|
|
|
|
|
158,947
|
|
Vendor B
|
|
|
85,510
|
|
|
|
15
|
%
|
|
|
|
|
-
|
|
Vendor C
|
|
|
562,590
|
|
|
|
23
|
%
|
|
|
|
|
129,011
|
|
Vender D
|
|
|
155,972
|
|
|
|
27
|
%
|
|
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
921,532
|
|
|
|
85
|
%
|
|
Total:
|
|
$
|
288,663
|
|
|
|
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
|
|
All vendors are located in the PRC.
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.
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, 2016, borrowings under related party notes were at fixed rates and short-term bank borrowings
were at variable rates.
NF ENERGY SAVING
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(Unaudited)
The reporting currency of the Company is
US$, 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.
NOTE
–
13 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.
Item
2.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
As used herein the terms “we”,
“us”, “our,” “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 include our subsidiaries, Liaoning Nengfa Weiye Energy Technology Company Ltd.,
a corporation organized and existing under the laws of the Peoples’ Republic of China (“PRC”), and Liaoning Nengfa
Weiye Smart Valve Technology Co., Ltd., a limited liability corporation organized and existing under the laws of the PRC.
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”.
NFEC 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.
NFEC has received many awards and honors
from China's regulators, professional associations and renowned international organizations, including the ISO 9001:2008 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 “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.
NFEC 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,
NFEC is entitled to various tax breaks and energy saving awards created by Chinese governments at national, provincial and local
levels. The major tax incentives by the central government include 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 NFEC's clients with tax refunds on goods and properties of the energy saving projects when NFEC transfers to
them at the end of the energy service contracts.
The current principal development focus
of NFEC is to renew the product, such as large intelligent flow control facility and to provide our Company with more advanced
technology to supply high grade energy efficient and safety reliant products for high end markets.
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 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.
|
|
|
|
|
·
|
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, Chifeng Jianxi Shangrao water
diversion project, Inner Mongolia Caisen hydropower station, Chifeng Xincheng thermal power co., Ltd, Sinkiangr conservancy hub
project and Italian Tecnedil International SRL, etc.
|
|
·
|
In 2016, the Company received contracts from
the 2*660MW
project of a subsidiary of State Grid, Shanxin, a 2*660MW low calorific coal power generation project and the Hubei Huanggang cogeneration
project, Jiangsu Guohua Chenjia Gang power co.,Ltd, Shandong electric power construction co.,Ltd ,
2*350 MW cogeneration
project of
Shandong Junan Liyuan Thermal Power Co.,Ltd.,
2*1000 MW circulating water
system project of Guangdong Datang International Leizhou Power Plant , 2*1000 MW of coal-fired power generating project of Shanxin
Shentou Power Co.Ltd, 2*660 MW generator project of
North China Power Engineering (Beijing)
Co.,Ltd and Liaoning Dahufang reservoir
water diversion
project 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.
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 three primary sources: Sales of energy saving flow control equipment and provision of energy project management and
sub-contracting services.
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%.
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.
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.
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.
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 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.
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$"). The Company's subsidiaries in the PRC, Nengfa Energy and Nengfa Smart Valve maintain their books and records
in the local currency of the PRC, the Renminbi ("RMB"), which is the primary currency of the economic environment
in which these entities operate.
In general, for consolidation purposes,
assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with
ASC Topic 830-30, “
Translation of Financial Statement”
, using the exchange rate on the balance sheet date. Revenues
and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial
statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement
of stockholders’ equity.
Translation of amounts from RMB into US$
has been made at the following exchange rates for the respective period:
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
Period-end RMB:US$1 exchange rate
|
|
|
6.66938
|
|
|
|
6.3538
|
|
Average period RMB:US$1 exchange rate
|
|
|
6.57924
|
|
|
|
6.1729
|
|
RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2016 AND 2015
REVENUES
Total revenues were $1,400,352 and $3,644,766
for the three and nine months ended September 30, 2016 respectively, as compared to $2,621,274 and $5,112,078 for the corresponding
period in 2015. Total revenues decreased by $1,220,922 and $1,467,312 a decrease of 46.58% and 28.7% for the three and nine months
ended September 30, 2016, respectively, as compared to total revenues for the three and nine months ended September 30, 2015. The
decrease in total revenue was primarily due to the postponed project which led to a delayed delivery of the product.
Product Revenues
Product revenues are derived principally
from the sale of self-manufactured products relating to energy- saving flow control equipment. Product revenues were $1,366,905
and $3,603,738 or 97.61% and 98.87% of total revenues for the three and nine months ended September 30, 2016, respectively, as
compared to $2,599,325 and $5,026,510, or 99.16% and 98.32% of total revenues, for the corresponding period in 2015. Product revenues
decreased by $1,232,420 and $1,422,772, or 47.41% and 28.30% for the three and nine months ended September 30, 2016, respectively,
as compared to the same period in 2015. The decrease in product revenue was primarily due to a postponed project which led to a
delayed delivery of the product.
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 $33,447 and $41,028,
or 2.39% and 1.13% of total revenues for the three and nine months ended September 30, 2016 respectively, as compared to $21,949
and $85,568, or 0.84% and 1.67% of total revenues for the corresponding period in 2015. Service revenues increased by $11,498 and
decreased by $44,540, or 52.38% and 52.05% for the three and nine months ended September 30, 2016, respectively, compared to the
corresponding period in 2015. The decrease in service revenue was primarily due to the decrease in the Company’s clients
relating to service revenue.
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 $1,543,016 and $3,877,937 for the three and nine months ended
September 30, 2016 respectively, as compared to $2,248,147 and $4,105,773 for the corresponding three and nine months in 2015,
a decrease of $705,131 and $227,836 or decrease by 31.36% and 5.55%, respectively. The decrease in cost of revenues was primarily
due to decrease in total revenues.
The overall gross profit for the Company
was -$142,664 and -$233,171 (-10.18% and -6.39% margin) for the three and nine months ended September 30, 2016, respectively, as
compared to $373,127 and $1,006,305 (14.23% and 19.68% margin) for the corresponding three and nine months in 2015, respectively,
a decrease of $515,791 and $1,239,476, or 138.23% and 123.17%, compared to the corresponding period in 2015. The decrease in gross
profit margin was primarily due to the longer production cycle of the LXB Water Supply Project, and uneven material inputs, all
of which led to the decrease in gross profit as well as the increase in fixed costs.
Cost of Products
Total cost of products was $1,462,330 and
$3,593,519 for the three and nine months ended September 30, 2016, respectively, as compared to $2,231,389 and $4,061,616 for the
corresponding period in 2015, a decrease of $769,059 and $468,097, or decrease by 34.46% and 11.52%. This decrease is primarily
due to the decrease of product revenues.
The gross profit for products was -$95,425
and $10,219 (-6.98% and 0.28% margin) for the three and nine months ended September 30, 2016, respectively, as compared to $367,936
and $964,894 (14.15% and 19.19% margin) for the corresponding three and nine months in 2015, a decrease of $463,361 (125.93%) and
$954,675 (98.94%). This decrease is primarily due to the decrease of product revenues.
Cost of Services
The cost of services was $80,686 and $284,418
for the three and nine months ended September 30, 2016, respectively, as compared to $16,758 and $44,157 for the corresponding
period in 2015, an increase of $63,928 and $240,261, or increase by 381.47% and 544.10%, respectively. This increase is primarily
due to the decreased in finished good and increased in amortization in fixed cost.
The gross profit for services was -$47,239
and -$243,390(-141.23% and -593.22%) for the three and nine months ended September 30, 2016 respectively, as compared to $5,191
and $41,411 (23.65% and 48.4% margin) for the corresponding period in 2015. This decrease is primarily due to the increased amortization
in fixed cost.
Operating Expenses
Total operating expenses were $387,439
and $945,341 for the three and nine months ended September 30, 2016 respectively, as compared to $291,674 and $930,021 for the
corresponding period in 2015, an increase of $95,765 and $15,320, respectively. The increase of operating expenses is primarily
due to the increase in general and administrative expenses, such as IR fees.
Selling and Marketing Expenses
The selling and marketing expenses were
$1,357 and $15,016 for the three and nine months ended September 30, 2016, respectively, as compared to $51,850 and $69,013 for
the corresponding period in 2015, a decrease of $50,493 and $53,997, respectively. This decrease is primarily due to the decrease
in depreciation expense.
General and Administrative Expenses
General and administrative expenses were
$386,082 and $930,325 for the three and nine months ended September 30, 2016, respectively as compared to $239,824 and $861,008
for the corresponding period in 2015, an increase of $146,258 and $69,317, or 60.99% and 8.05%, respectively. The increase of general
and administrative expenses is primarily due to the increase in the fees for IR.
Loss from operations
As a result of the factors mentioned above,
loss from operations was $530,103 and $1,178,512 for the three and nine months ended September 30, 2016, respectively, as compared
to loss from operations of $81,453 and $76,284 for the corresponding three and six months period in 2015, an increase of $611,556and
$1,254,796, respectively. The decrease in income from operations is primarily due to the decrease in revenues and the increase
in operating expenses.
Other (Expenses) Income
Other income was $148,653 and -$22,558
for the three and nine months ended September 30, 2016 respectively, as compared to -$87,867 and -$288,485 for the corresponding
period in 2015, an increase of $236,520 and $265,927, respectively. This increase is primarily due to the decrease in interest
expense and the increase in other income. As a result, the loss before income taxes was $381,450 and $1,201,070 for the three and
nine months ended September 30, 2016 respectively, as compared to the loss before income taxes of $6,414 and $212,201 for the corresponding
three and nine months period in 2015, an increase of $375,036 and $988,869.
Income Tax Expense
For the three and nine months ended
September 30, 2016, income tax expense was $182 and $248 respectively, as compared to $89 and $373 for the same period in
2015, an increase of $93 and decrease of $125, or increase by104.49% and decrease by 33.51%. This decrease is primarily due
to the increase in the loss before income taxes.
As of September 30, 2016, the Company’s
operations in the United States of America have resulted in $3,159,175 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 $1,074,120 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.
The Company’s effective income tax
rate for the three months and nine month ended September 30, 2016 was 15%.
Net loss
As a result of the factors mentioned above,
net loss was $381,632 and $1,201,318 for the three and nine months ended September 30, 2016 respectively, as compared to net loss
of $6,503 and $212,574 for the corresponding period in 2015, an increase of $375,129 and $988,744. This increase is primarily due
to the decrease in revenues and the increase in operating expenses.
LIQUIDITY
AND CAPITAL RESOURCES
Operating
activities
For
the nine months ended September 30, 2016, net cash used in operating activities was $155,562. This was attributable primarily
to net loss of $381,632, adjusted by non-cash items of depreciation and amortization of $577,270 a decrease in accounts and retention
receivable by $400,802, an increase in inventories by $1,591,606, a decrease in prepayment and other receivable by $77,877, a
decrease in the accounts payable by $927,553 and an increase in other payable and accrued liabilities by $244,712.
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, 2016, the decrease of inventories was primarily due to the flexible market and the delayed delivery relating
to the postponed project. It is anticipated that the inventories will be delivered by the end of 2016.
As
of September 30, 2016, accounts and retention receivable was $8,893,270, whose revenue for the nine months ended September 30,
2016, 99.33% generated from the product revenue and 0.67% from service revenue, respectively.
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 that account for about 17% 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
|
|
|
8,893,270
|
|
|
|
1,372,556
|
|
|
|
1,512,951
|
|
|
|
4,075,111
|
|
|
|
1,932,652
|
|
Service
|
|
|
60,101
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,101
|
|
Total
|
|
|
8,953,371
|
|
|
|
1,372,556
|
|
|
|
1,512,951
|
|
|
|
4,075,111
|
|
|
|
1,992,753
|
|
Less: retention
|
|
|
677,927
|
|
|
|
77,734
|
|
|
|
75,496
|
|
|
|
402,775
|
|
|
|
121,922
|
|
Less: allowance
for doubtful
|
|
|
512,881
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Accounts receivable,
net
|
|
|
7,762,562
|
|
|
|
1,294,822
|
|
|
|
1,437,455
|
|
|
|
3,672,336
|
|
|
|
1,357,949
|
|
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. The Company takes 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. This
year, we have strengthened the team construction of accounts receivable settlement, and we have organized nearly 30 professional
people to track the accounts receivable and resident the customer until the accounts receivable have been recovered. We hope that
these measures will improve the collection of the accounts receivable.
As
of September 30, 2016, the accounts receivable of two customers with aging above 365 days are expected to be collected by the
end of December 2016. The Collecting time indicated below:
Customer
|
|
AR
with aging
above 365 days
|
|
|
Expected
to be
collected
amount by
September 2016
|
|
|
Expected
to be
collected amount
by December
2016
|
|
Customer “A”
|
|
|
920,100
|
|
|
|
-
|
|
|
|
220,100
|
|
Customer “C”
|
|
|
453,305
|
|
|
|
-
|
|
|
|
453,305
|
|
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, 2016, net cash used in investing activities was $1,814 which was mainly used in repayment
of accounts payable related to the new facilities.
In
2008, the Company was approved by 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 will be approximately $24 million. It covers an area of 81,561 sq. m acres.
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 2016 upon the granting of property ownership certificate
from the local authority.
For
the nine months ended September 30, 2016, construction in progress transfer to plant and equipment was approximately $6 million.
Financing
activities
For
the nine months ended September 30, 2016, the net financing cash inflow was $7,600.
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.