NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
|
1.
|
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 current name to “NF Energy Saving Corporation.”
On October 1, 2010, the Company’s common stock was traded on Nasdaq global market. On March 7, 2012, and upon approval by
NASDAQ, the common stock transferred from the Nasdaq Global Market to the Nasdaq Capital Market.
The Company, through its subsidiary, mainly
operates in the energy technology business in the People’s of Republic of China (the “PRC”). The Company specializes
in the provision of energy saving technology consulting, optimization design services, energy saving reconstruction of pipeline
networks and contractual energy management services to China’s electric power, petrochemical, coal, metallurgy, construction,
and municipal infrastructure development industries. The Company also engages in the manufacturing and sales of the energy-saving
flow control equipment. All the customers are located in PRC.
Description of subsidiary
Name
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|
Place of incorporation
and kind of
legal entity
|
|
Principal activities
and place of operation
|
|
Particulars of issued/
registered share
capital
|
|
Effective interest
held
|
|
|
|
|
|
|
|
|
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Liaoning Nengfa Weiye Energy Technology Co. Ltd (“Nengfa Energy”)
|
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The PRC, a limited liability company
|
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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$5,000,000
|
|
100%
|
NFEC and its subsidiary are hereinafter
referred to as (the “Company”).
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
These accompanying consolidated financial
statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.
GAAP”).
In preparing these consolidated financial
statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance
sheet and revenues and expenses during the years reported. Actual results may differ from these estimates.
The consolidated financial statements include
the financial statements of NFEC and its subsidiary. All significant inter-company balances and transactions within the Company
have been eliminated upon consolidation.
|
·
|
Cash and cash equivalents
|
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
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.
The Company maintains restricted cash accounts
held with financial institutions in the PRC, which are pledged as collateral for short-term bank demand notes payable that will
be expired or matured in the next twelve months.
|
·
|
Accounts receivable and allowance for doubtful accounts
|
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 collectibility. 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. As of December 31, 2016 and 2015, the allowance for doubtful accounts was $712,288 and $762,001, respectively.
Retention receivable is the amount withheld
by a customer based upon 5-10% of the contract value, until a product warranty is expired. The warranty period is usually 12 months.
Inventories are stated at the lower of
cost or market value (net realizable value), cost being determined on a weighted average method. Costs include material, labor
and manufacturing overhead costs. The Company reviews historical sales activity quarterly to determine excess, slow moving items
and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides
inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of December 31, 2016
and 2015, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.
|
·
|
Property, plant and equipment
|
Property, plant and equipment are stated
at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line
basis over the following expected useful lives from the date on which they become fully operational and after taking into account
their estimated residual values:
|
|
Expected useful lives
|
|
Residual value
|
Building
|
|
30-50 years
|
|
5%
|
Plant and machinery
|
|
10 – 20 years
|
|
5%
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Furniture, fixture and equipment
|
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5 – 8 years
|
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5%
|
Expenditures for repairs and maintenance
are expensed as incurred. When assets have been retired or sold, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is recognized in the results of operations.
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
All lands in the PRC are 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 purchases 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.
|
·
|
Construction in progress
|
Construction in progress is stated at 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.
|
·
|
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 years presented.
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.
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 years ended December 31, 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.
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
Interest income is recognized on a time
apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
Cost of revenue consists primarily of material
costs, direct labor, depreciation and manufacturing overhead, which are directly attributable to the manufacture of products and
the rendering of services or projects. Shipping and handling costs, associated with the distribution of finished products to customers,
are borne by the customers.
|
·
|
Research and development
|
Research and development costs are expensed
when incurred in the development of new products or processes including significant improvements and refinements of existing products.
Such costs mainly relate to labor and material cost. The Company incurred $96,572 and $105,168 of such costs for the years ended
December 31, 2016 and 2015.
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.
For the years ended December 31, 2016 and
2015, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2016, the Company did
not have any significant unrecognized uncertain tax positions.
The Company conducts the majority of its
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 a foreign tax authority. For the year ended December 31, 2016, the Company filed and
cleared 2015 tax return with its local tax authority.
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
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 5-10% 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 years ended December 31, 2016 and 2015.
The Company calculates net loss 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$"). The Company's subsidiary in the PRC maintain their books and records in their local
currency, the Renminbi Yuan ("RMB"), which is the functional currency as being the primary currency of the economic environment
in which these entities operate.
In general, for consolidation purposes,
assets and liabilities of its subsidiary whose functional currency is not the US$ 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 year:
|
|
2016
|
|
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2015
|
|
Year-end RMB:US$1 exchange rate
|
|
|
6.9437
|
|
|
|
6.4907
|
|
Annual average RMB:US$1 exchange rate
|
|
|
6.6430
|
|
|
|
6.2175
|
|
|
·
|
Stock based compensation
|
The Company accounts for employee and non-employee
stock awards under ASC Topic 718, whereby equity instruments issued to employees for services are recorded based on the fair value
of the instrument issued and those issued to non-employees are recorded based on the fair value of the consideration received or
the fair value of the equity instrument, whichever is more reliably measurable.
Contributions to retirement plans (which
are defined contribution plans) are charged to general and administrative expenses in the accompanying consolidated statements
of operation as the related employee service is provided.
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
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.
For the years ended December 31, 2016 and 2015, the Company operates in one reportable operating segment in the PRC.
|
·
|
Fair value of financial instruments
|
The carrying value of the Company’s
financial instruments (excluding short-term bank borrowing and convertible promissory notes): cash and cash equivalents, restricted
cash, 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 its obligation under finance lease and short-term
bank borrowing approximate the carrying amount. The fair value of convertible promissory notes is disclosed in Note 10.
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.
|
·
|
Recent accounting pronouncements
|
In May 2014, the Financial Accounting Standard
Board (‘FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the
amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will
replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB approved a one-year
deferral of the effective date of the new revenue recognition standard. The amendments in ASU 2014-09 are effective for public
companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The standard
permits the use of either the retrospective or cumulative effect transition method. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue versus Net)
.
In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations
and Licensing
. In May 2016, the FASB issued ASU 2016-11,
Revenue from Contracts with Customers (Topic 606) and Derivatives
and Hedging (Topic 815) - Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16
, and ASU 2016-12,
Revenue from Contracts
with Customers (Topic 606) - Narrow Scope Improvements and Practical Expedients
. These ASUs clarify the implementation guidance
on a few narrow areas and adds some practical expedients to the guidance Topic 606. The Company is evaluating the effect the ASUs
will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method
nor has it determined the effect of these standards on its ongoing financial reporting.
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
In June 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements-Going Concern
(Subtopic 205-40) which provides guidance to an organization’s
management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that
are commonly provided by organizations today in the financial statement footnotes. This guidance in ASU 2014-15 is effective for
annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early
application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued.
The Company does not expect that the adoption will have a material impact on its consolidated financial statements.
In November 2014, FASB issued Accounting
Standards Update No. 2014-16,
Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial
Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force)
.
The amendments permit the use of the Fed Funds Effective Swap Rate (also referred to as the Overnight Index Swap Rate, or OIS)
as a benchmark interest rate for hedge accounting purposes. Public business entities are required to implement the new requirements
in fiscal years (and interim periods within those fiscal years) beginning after December 15, 2015. The Company does not expect
the adoption of ASU 2014-16 to have a material impact on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02
Consolidation (Topic 810): Amendments to the Consolidation Analysis
. ASU 2015-02 changes the analysis that a reporting entity
must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods,
and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an
interim period. The Company is currently in the process of evaluating the impact of the adoption of ASU 2015-02 on its consolidated
financial statements.
In April 2015, the FASB issued ASU 2015-03
Simplifying the Presentation of Debt Issuance Costs
, which changes the presentation of debt issuance costs in the financial
statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt
liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. The guidance is
effective for annual reporting periods beginning after December 15, 2016, with early adoption permitted. The guidance will be applied
retrospectively to each period presented. The adoption of this standard update is not expected to have any impact on the Company's
financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory
, which requires an entity to measure inventory within the scope at the lower of cost and net realizable value.
Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. The effective date for the standard is for fiscal years beginning after December 15, 2016. Early
adoption is permitted. The Company does not expect the adoption of ASU 2015-11 to have a material impact on its consolidated financial
statements.
In September 2015, the FASB issued ASU
No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
. To simplify
the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments eliminate the requirement
to retrospectively account for those adjustments. For public business entities, the amendments are effective for fiscal years beginning
after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to
adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements
that have not been issued. The Company does not expect the adoption of ASU 2015-16 to have a material impact on its consolidated
financial statements.
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. To simplify the presentation of deferred income
taxes, the amendments in this update require that deferred income tax liabilities and assets be classified as noncurrent in a classified
statement of financial position. The amendments in ASU 2015-17 are effective for public business entities for financial statements
issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The amendments may
be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company does
not expect that the adoption will have a material impact on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized
through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the
investee). The amendments in this update also require an entity to present separately in other comprehensive income the portion
of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity
has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The amendments
in ASU 2016-01 are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. The Company does not expect that the adoption will have a material impact on its consolidated financial
statements.
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842)
. The new standard establishes a right-of-use (“ROU”) model that requires a lessee
to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be
classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered
into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available. The Company does not expect that the adoption will have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU No.
2016-07,
Simplifying the Transition to the Equity Method of Accounting
, which eliminates the requirement to apply the equity
method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The
amendments in ASU 2016-07 are effective for public companies for fiscal years beginning after December 15, 2016 including interim
periods therein. Early adoption is permitted. The new standard should be applied prospectively for investments that qualify for
the equity method of accounting after the effective date. The Company does not expect that the adoption will have a material impact
on its consolidated financial statements.
In March 2016, the FASB issued ASU No.
2016-09,
Improvements to Employee Share-Based Payment Accounting
, which includes amendments to accounting for income taxes
at settlement, forfeitures, and net settlements to cover withholding taxes. The amendments in ASU 2016-09 are effective for public
companies for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is
permitted but requires all elements of the amendments to be adopted at once rather than individually. The Company is evaluating
the effect that ASU No. 2016-09 will have on the Company’s consolidated financial statements and related disclosures.
In June 2016, the FASB issued Accounting
Standards Update ("ASU") 2016-13,
Financial Instruments-Credit Losses (Topic 326)
, which requires entities to
measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of
credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact
that the standard will have on its consolidated financial statements and related disclosures.
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
In August 2016, the FASB issued ASU No.
2016-15,
Classification of Certain Cash Receipts and Cash Payments
. ASU 2016-15 clarifies the presentation and classification
of certain cash receipts and cash payments in the statement of cash flows. This ASU is effective for public business entities for
fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company
is currently assessing the potential impact of ASU 2016-15 on its financial statements and related disclosures.
In October 2016, the FASB issued ASU No.
2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. This ASU improves the accounting
for the income tax consequences of intra-entity transfers of assets other than inventory. This ASU is effective for fiscal years
and interim periods within those years beginning after December 15, 2017. Early adoption is permitted. The Company does not anticipate
that the adoption of this ASU to have a significant impact on its consolidated financial statements.
In October 2016, the FASB issued ASU No.
2016-17,
Consolidation (Topic 810): Interests Held through Related Parties That Are Under Common Control
. The amendments
in this ASU change how a reporting entity that is the single decision maker of a variable interest entity should treat indirect
interests in the entity held through related parties that are under common control with the reporting entity when determining whether
it is the primary beneficiary of that variable interest entity. The ASU is effective for fiscal years and interim periods within
those years beginning after December 15, 2016. The Company does not expect the adoption of this ASU to have a material impact on
its consolidated financial statements.
In November 2016, the FASB issued Accounting
Standards Update 2016-18 (ASU 2016-18),
Statement of Cash Flows: Restricted Cash
. This ASU provides guidance on the classification
of restricted cash in the statement of cash flows. The amendments in this ASU are effective for interim and annual periods beginning
after December 15, 2017. Early adoption is permitted. The amendments in the ASU should be adopted on a retrospective basis. The
Company does not expect that adoption of this ASU to have a material effect on its consolidated financial statements.
Other accounting standards that have been
issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected
to have a material impact on the Company’s consolidated financial statements upon adoption.
|
3.
|
ACCOUNTS AND RETENTION RECEIVABLE
|
The majority of the Company’s sales
are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company
evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be
uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned
criteria, the Company provided an allowance $0 and $405,708 for the years ended December 31, 2016 and 2015.
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Accounts receivable, cost
|
|
$
|
7,357,282
|
|
|
$
|
8,348,652
|
|
Retention receivable, cost
|
|
|
629,680
|
|
|
|
679,924
|
|
|
|
|
7,986,962
|
|
|
|
9,028,576
|
|
Less: allowance for doubtful accounts
|
|
|
(712,288
|
)
|
|
|
(762,001
|
)
|
Accounts and retention receivable, net
|
|
$
|
7,274,674
|
|
|
$
|
8,266,575
|
|
Up to February 28, 2017, the Company has
subsequently recovered from approximately 10% of accounts and retention receivable as of December 31, 2016.
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
Inventories consisted of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015s
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
519,500
|
|
|
$
|
441,692
|
|
Work-in-process
|
|
|
402,425
|
|
|
|
432,394
|
|
Finished goods
|
|
|
3,684,639
|
|
|
|
6,177,112
|
|
|
|
$
|
4,606,564
|
|
|
$
|
7,051,198
|
|
For the years ended December 31, 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 twelve months.
|
5.
|
PREPAYMENTS AND OTHER RECEIVABLES
|
Prepayments and other receivables consisted
of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Prepayment to vendors for raw materials
|
|
$
|
2,725,969
|
|
|
$
|
923,889
|
|
Prepaid operating expenses
|
|
|
281,881
|
|
|
|
142,432
|
|
Advance to employees
|
|
|
101,219
|
|
|
|
101,246
|
|
Other receivables
|
|
|
-
|
|
|
|
808,227
|
|
|
|
$
|
3,109,069
|
|
|
$
|
1,975,794
|
|
The Company generally makes prepayments
to vendors for raw materials in the normal course of business. Prepayments to vendors are recorded when payment is made by the
Company and relieved against inventory when goods are received, which include provisions that set the purchase price and delivery
date of raw materials.
|
6.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment consisted
of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
17,862,863
|
|
|
$
|
9,709,136
|
|
Plant and machinery
|
|
|
5,832,393
|
|
|
|
5,830,276
|
|
Furniture, fixture and equipment
|
|
|
66,000
|
|
|
|
66,000
|
|
Foreign translation difference
|
|
|
(822,343
|
)
|
|
|
206,887
|
|
|
|
|
22,938,913
|
|
|
|
15,812,299
|
|
Less: accumulated depreciation
|
|
|
(6,170,120
|
)
|
|
|
(5,234,056
|
)
|
Less: foreign translation difference
|
|
|
359,442
|
|
|
|
(24,132
|
)
|
Property, plant and equipment, net
|
|
$
|
17,128,235
|
|
|
$
|
10,554,111
|
|
Depreciation expense for the years ended
December 31, 2016 and 2015 were $936,064 and $1,207,446, of which $556,016 and $933,216 were included in cost of revenue, respectively.
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
Land use right consisted of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Land use right, at cost
|
|
$
|
3,044,062
|
|
|
$
|
3,044,062
|
|
Less: accumulated amortization
|
|
|
(459,192
|
)
|
|
|
(397,607
|
)
|
|
|
|
2,584,870
|
|
|
|
2,646,455
|
|
Add: foreign translation difference
|
|
|
(29,166
|
)
|
|
|
151,200
|
|
Land use right, net
|
|
$
|
2,555,704
|
|
|
$
|
2,797,655
|
|
Amortization expense for the years ended
December 31, 2016 and 2015 were $62,125 and $66,377, respectively.
The estimated amortization expense on the
land use right in the next five years and thereafter is as follows:
Year ending December 31:
|
|
|
|
|
2017
|
|
$
|
59,435
|
|
2018
|
|
|
59,435
|
|
2019
|
|
|
59,435
|
|
2020
|
|
|
59,435
|
|
2021
|
|
|
59,435
|
|
Thereafter
|
|
|
2,258,529
|
|
|
|
|
|
|
Total:
|
|
$
|
2,555,704
|
|
|
8.
|
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 Yingzhou 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 was transferred to property, plant and equipment of $8,158,192 upon the granting of ownership certificate from the local authority
during 2016.
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
|
9.
|
SHORT-TERM BANK BORROWINGS
|
Short-term bank borrowings consist of the
following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Payable to financial institutions in the PRC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand bank notes:
|
|
|
|
|
|
|
|
|
Equivalent to RMB12,000,000, due 30 March 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 24 January 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 24 January 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
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings:s
|
|
|
|
|
|
|
|
|
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
|
|
|
5,760,618
|
|
|
|
-
|
|
Total short-term bank borrowings
|
|
$
|
5,760,618
|
|
|
$
|
8,057,683
|
|
The effective Bank of China Benchmark
Lending rate was 4.35% and 4.35% per annum for the years ended December 31, 2016 and 2015.
|
10.
|
AMOUNT DUE TO A RELATED PARTY
|
As of December 31, 2016 and 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.
|
11.
|
OTHER PAYABLES AND ACCRUED LIABILITIES
|
Other payables and accrued liabilities
consisted of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
$
|
487,175
|
|
|
$
|
177,718
|
|
Value-added tax payable
|
|
|
89,471
|
|
|
|
5,978
|
|
Accrued operating expenses
|
|
|
387,981
|
|
|
|
324,805
|
|
Other payable
|
|
|
50,372
|
|
|
|
95,225
|
|
|
|
$
|
1,014,999
|
|
|
$
|
603,726
|
|
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
In July 2016, the Company issued 100,000
shares of its common stock to an IR Firm for investor relations services to be rendered for a service period of five months, at
a market value of $0.96 per share, or a total value of $96,000 which full amortized during the year .
In December 2016, the Company issued 120,000
shares of its common stock to an IR Firm for investor relations services to be rendered for a service period of six months, at
a market value of $0.81 per share, or a total value of $97,200. The Company issued 300,000 shares of its common stock to an IR
Firm for investor relations services to be rendered for a service period of twelve months, at a market value of $0.86 per share,
or a total value of $258,000.
As of December 31, 2016 and 2015, the Company
had a total of 7,073,289 and 6,553,289 shares of its common stock issued and outstanding.
For the years ended December 31, 2016 and
2015, the local (“United States of America”) and foreign components of loss before income taxes were comprised of the
following:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Tax jurisdiction from:
|
|
|
|
|
|
|
|
|
- Local
|
|
$
|
(202,525
|
)
|
|
$
|
(136,709
|
)
|
- Foreign
|
|
|
(1,614,808
|
)
|
|
|
(873,031
|
)
|
Loss before income taxes
|
|
$
|
(1,817,333
|
)
|
|
$
|
(1,009,740
|
)
|
The provision for income taxes consisted
of the following:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
- Local
|
|
$
|
-
|
|
|
$
|
-
|
|
- Foreign
|
|
|
246
|
|
|
|
(40,298
|
)
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
- Local
|
|
|
-
|
|
|
|
-
|
|
- Foreign
|
|
|
-
|
|
|
|
-
|
|
Income tax expense (credit)
|
|
$
|
246
|
|
|
$
|
(40,298
|
)
|
The effective tax rate in the years presented
is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rate. The Company
operates in various countries: United States of America and the PRC that are subject to taxes in the jurisdictions in which they
operate, as follows:
United States of America
NFEC is registered in the State of Delaware
and is subject to the tax laws of United States of America.
As of December 31, 2016, the operations
in the United States of America incurred $3,361,700 of cumulative net operating losses which can be carried forward to offset future
taxable income. The net operating loss carryforwards begin to expire in 2036, if unutilized. The Company has provided for a full
valuation allowance against the deferred tax assets of $1,123,394 on the expected future tax benefits from the net operating loss
carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
The PRC
The Company’s subsidiary 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 years ended December 31, 2016 and 2015 is as
follows:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Loss before income taxes from PRC operation
|
|
$
|
(1,614,808
|
)
|
|
$
|
(873,031
|
)
|
Statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Income tax expense at statutory rate
|
|
|
(403,702
|
)
|
|
|
(218,257
|
)
|
Tax effect of non-deductible items
|
|
|
403,948
|
|
|
|
258,555
|
|
Income tax expense (credit)
|
|
$
|
246
|
|
|
$
|
(40,298
|
)
|
The following table sets forth the significant
components of the aggregate deferred tax assets of the Company as of December 31, 2016 and 2015:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,123,394
|
|
|
$
|
1,108,020
|
|
Less: valuation allowance
|
|
|
(1,123,394
|
)
|
|
|
(1,108,020
|
)
|
Deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Management believes that it is more
likely than not that the deferred tax assets will not be fully realizable in the future. Accordingly, the Company provided for
a full valuation allowance against its deferred tax assets of $1,123,394 as of December 31, 2016. In 2016, the valuation allowance
increased by $15,374, primarily relating to net operating loss carryforwards from the local tax regime.
Basic net loss per share is computed using
the weighted average number of common shares outstanding during the year. The dilutive effect of potential common shares outstanding
is included in diluted net loss per share. The following table sets forth the computation of basic and diluted net loss per share
for the years ended December 31, 2016 and 2015:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(1,817,579
|
)
|
|
$
|
(969,442
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic and diluted
|
|
|
6,593,016
|
|
|
|
6,265,339
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – Basic and diluted
|
|
$
|
(0.28
|
)
|
|
$
|
(0.15
|
)
|
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
|
15.
|
CHINA CONTRIBUTION PLAN
|
Under the PRC Law, full-time employees
of its subsidiaries of the Company in the PRC are entitled to state welfare benefits including medical care, welfare subsidies,
unemployment insurance and pension benefits through a China government-mandated multi-employer defined contribution plan. These
benefits are required to accrue for, based on certain percentages of the employees’ salaries. The total contributions made
for such employee benefits were $173,699 and $235,508 for the years ended December 31, 2016 and 2015, respectively.
Under the PRC Law the Company’s subsidiaries
are required to make appropriations to the statutory reserve based on after-tax net earnings and determined in accordance with
generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to
the statutory reserve should be at least 10% of the after-tax net income until the reserve is equal to 50% of the registered capital.
The statutory reserve is established for the purpose of providing employee facilities and other collective benefits to the employees
and is non-distributable other than in liquidation.
|
17.
|
CONCENTRATIONS OF RISK
|
The Company is exposed to the following concentrations of risk:
For the year ended December 31, 2016, one
customer represented more than 10% of the Company’s revenues. This customer accounted for 98% of the Company’s revenues
amounting to $6,050,695 with $6,856,520 of accounts receivable.
For the year ended December 31, 2015, one
customer represented more than 10% of the Company’s revenues. This customer accounted for 83% of the Company’s revenues
amounting to $5,551,731 with $6,651,208 of accounts receivable.
All major customers are located in the
PRC.
For the year ended December 31, 2016, the
vendors who accounted for 10% or more of the Company’s purchases and its outstanding accounts payable balances as at year-end
dates, are presented as follows:
|
|
Year ended December 31, 2016
|
|
|
December 31, 2016
|
|
Vendor
|
|
Purchases
|
|
|
Percentage
of purchases
|
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
Vendor A
|
|
$
|
188,777
|
|
|
|
18
|
%
|
|
$
|
-
|
|
Vendor C
|
|
|
216,060
|
|
|
|
21
|
%
|
|
|
-
|
|
Vendor D
|
|
|
234,019
|
|
|
|
22
|
%
|
|
|
228,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
638,856
|
|
|
|
61
|
%
|
|
|
228,767
|
|
For the year ended December 31, 2015, the
vendors who accounted for 10% or more of the Company’s purchases and its outstanding accounts payable balances as at year-end
dates, are presented as follows:
|
|
Year ended December 31, 2015
|
|
|
December 31, 2015
|
|
Vendor
|
|
Purchases
|
|
|
Percentage
of purchases
|
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
Vendor H
|
|
$
|
728,191
|
|
|
|
13
|
%
|
|
$
|
209,767
|
|
Vendor I
|
|
|
458,998
|
|
|
|
8
|
%
|
|
|
279,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
1,187,189
|
|
|
|
21
|
%
|
Total:
|
$
|
489,537
|
|
NF ENERGY SAVING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
All major vendors are located in the PRC.
(c) Credit
risk
Financial instruments that are potentially
subject to credit risk consist principally of trade receivables. The Company believes the concentration of credit risk in its trade
receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company
does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical trends and other information.
As the Company has no significant interest-bearing
assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
The Company’s interest-rate risk
arises from short-term bank borrowings. The Company manages interest rate risk by varying the issuance and maturity dates variable
rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates.
As of December 31, 2016, short-term bank borrowings were at fixed rates.
(e) Exchange
rate risk
The reporting currency of the Company is
US$, 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.
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18.
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COMMITMENTS AND CONTINGENCIES
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As of December 31, 2016 and 2015, there
were no commitments and contingencies involved.
In accordance with ASC Topic 855, “
Subsequent
Events
”, which establishes general standards of accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after
December 31, 2016 up through the date was the Company issued the audited consolidated financial statements. During the period,
the Company did not have any material recognizable subsequent events.