The accompanying notes are an integral
part of the condensed consolidated financial statements
The accompanying notes are an
integral part of the condensed consolidated financial statements
The accompanying notes are an integral
part of the condensed consolidated financial statements
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
|
|
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 name to “NF Energy Saving Corporation.” Since March 7, 2012, the common stock is traded on the Nasdaq
Capital Market.
On
January 1, 2019, the Company transferred its 100% equity interest in Liaoning Nengfa Weiye Energy Technology Co., Ltd. to NF Energy
Equipment Limited (“NF Equipment”). NF Equipment, a Hong Kong limited liability company is 100% owned by NF Energy
Investment Corporation (“NF Investment”), a wholly-owned subsidiary of the Company. NF Investment is a British Virgin
Island limited liability company. Other than its equity interest in NF Equipment, NF Investment does not own any assets or conduct
any operations.
The
Company, through its subsidiaries, mainly operates in the energy technology business in the People’s 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. .
Description
of subsidiaries
|
Name
|
|
Place of incorporation and kind
of legal entity
|
|
Principal activities and place
of operation
|
|
Effective interest
held
|
|
|
|
|
|
|
|
|
|
|
|
NF Energy Saving Investment Limited
|
|
British Virgin Island, a limited liability
company
|
|
Investment holding
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
NF Energy Equipment Limited
|
|
Hong Kong, a limited liability company
|
|
Investment holding
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
Liaoning Nengfa Tiefa Import & Export Co., Ltd.
(“Nengfa Tiefa Import & Export”)
|
|
The PRC, a limited liability company
|
|
Development and production of hi-tech and automatic-intelligence
valve products
|
|
57%
|
|
NFEC
and its subsidiaries are hereinafter referred to as (the “Company”).
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
|
|
2.
|
GOING
CONCERN UNCERTAINTIES
|
The
accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue
as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business
for the foreseeable future.
As
reflected in the accompanying unaudited condensed consolidated financial statements, the Company had an accumulated deficit of
$7,872,792 and negative working capital of $9,315,789 as of June 30, 2019, and incurred a net loss of $1,425,693 for the six months
ended June 30, 2019. In addition, the Company continues to generate operating losses and has a cash outflow from its operations.
Management believes that these factors raise substantial doubt about the Company’s ability to continue as a going concern
for the next twelve months.
The
continuation of the Company as a going concern through the next twelve months is dependent upon the continued financial support
from its stockholders or external financing. Management believes the existing stockholders will provide the additional cash to
meet with the Company’s obligations as they become due and to further implement management’s business plan to extend
its operations and generate sufficient revenues to meet its obligations. While the Company believes in the viability of its strategy
to increase sales volume and in its ability to raise additional funds, there can be neither any assurance to that effect, nor
any assurance that the Company will be successful in securing sufficient funds to sustain its operations.
These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed
financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification
of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. Management
believes that the actions presently being taken to obtain additional funding and implement its strategic plan provides the opportunity
for the Company to continue as a going concern.
|
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
|
●
|
Basis
of presentation and consolidation
|
These
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in the United States of America (“U.S. GAAP”) and reflected the activities of NFEC and its subsidiaries.
All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.
The unaudited interim condensed consolidated
financial information as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 have been prepared, pursuant
to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote
disclosures, which are normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP, have
been omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial information should
be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form
10-K/A for the fiscal year ended December 31, 2018, previously filed with the SEC on September 6, 2019.
In
the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement
of the Company’s unaudited condensed consolidated financial position as of June 30, 2019 and its unaudited condensed consolidated
results of operations for the three and six months ended June 30, 2019 and 2018, and its unaudited condensed consolidated cash
flows for the six months ended June 30, 2019 and 2018, as applicable, have been made. The interim results of operations are not
necessarily indicative of the operating results for the fiscal year or any future periods.
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.
Certain
prior period amounts have been reclassified to conform to the current period presentation.
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
|
|
●
|
Cash
and cash equivalents
|
Cash
and cash equivalents consist primarily of cash in readily available checking and saving accounts. Cash equivalents consist of
highly liquid investments that are readily convertible to cash and that mature within three months or less from the date of purchase.
The carrying amounts approximate fair value due to the short maturities of these instruments.
Cash
and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded
in restricted cash account on the Company’s unaudited interim condensed consolidated balance sheet. The Company’s
restricted cash balance is related to a contract performance guarantee bond. The balance of restricted cash was $179,814 and $179,496
as of June 30, 2019 and December 2018, respectively.
|
|
●
|
Accounts
receivable and allowance for doubtful accounts
|
Accounts
receivable are recorded at the invoiced amount, do not bear interest and are due within contractual payment terms, generally 30
to 90 days from shipment. Credit is granted 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 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 those 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 June 30, 2019 and December 31, 2018, the allowance for doubtful accounts was $11,486,827 and $11,327,271,
respectively.
|
|
●
|
Retention
receivable and allowance for doubtful accounts
|
Under the terms of its contracts with customers,
the Company offers its customers a free product warranty on a case-by-case basis, depending upon the type of customer and the
nature and size of the infrastructure project. The warranty is usually for 12 months. Under such arrangements, a portion of the
project contract value, usually 5-10%, is withheld by the customer as a retention. The Company records this portion of the project
contract value as retention receivable. As of June 30, 2019 and December 31, 2018, the allowance for doubtful accounts relating
to retentions receivable was $938,940 and $942,376, respectively.
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 June 30, 2019 and December 31, 2018, 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
|
|
10
– 30 years
|
|
5%
|
|
Plant
and machinery
|
|
5
– 14 years
|
|
4
~ 5%
|
|
Furniture,
fixture and equipment
|
|
5
years
|
|
4
~ 13%
|
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 AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
All
lands in the PRC are owned by the PRC government. Under applicable law, the PRC government may sell the right to use the land
for a specified period of time. Thus, the Company’s land purchases in the PRC are considered to be leaseholds and are 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 manufacturing facility in Yinzhou District Industrial Park, Tieling
City, Liaoning Province, 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. During the three and six months ended
June 30, 2019, the Company reported an impairment loss of $25,071 and $25,071 from its incomplete construction project, respectively.
There was no impairment loss reported during the comparable periods in 2018.
On
January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied
to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018
are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with
the Company’s historic accounting under ASC 605, Revenue Recognition. The adoption had no material impact on the Company’s
consolidated financial statements and there was no adjustment to the beginning retained earnings on January 1, 2018.
Under
ASC 606, revenue is recognized when control of the promised goods and services is transferred to the Company’s customers,
in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods and services,
net of value-added tax. The Company determines revenue recognition through the following steps:
|
|
ü
|
Identify
the contract with a customer;
|
|
|
ü
|
Identify
the performance obligations in the contract;
|
|
|
ü
|
Determine
the transaction price;
|
|
|
ü
|
Allocate
the transaction price to the performance obligations in the contract; and
|
|
|
ü
|
Recognize
revenue when (or as) the entity satisfies a performance obligation.
|
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.
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.
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
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 six months ended June 30, 2019 and 2018, the Company did not have any interest and penalties associated with tax positions.
As of June 30, 2019, 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.
Under the terms of its contracts with customers,
the Company offers its customers a free product warranty on a case-by-case basis, depending upon the type of customer and the
nature and size of the infrastructure project. The warranty is usually for 12 months. Under such arrangements, a portion of the
project contract value, usually 5-10%, is withheld by the customer as a retention. The Company records this portion of the project
contract value as retention receivable. As of June 30, 2019 and December 31, 2018, the Company reported retentions receivable,
net of $7,022 and $65,529, respectively.
The
Company calculates net loss per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income
per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period.
Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued
and if the additional common shares were dilutive.
|
|
●
|
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates
prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional
currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting
exchange differences are recorded in the statement of operations.
The
reporting currency of the Company is the United States Dollar (“US$”). The Company’s 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$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate
on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses
resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated
other comprehensive income within the statement of stockholders’ equity.
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
Translation
of amounts from RMB into US$ has been made at the following exchange rates for the respective period:
|
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
Period-end RMB:US$1 exchange rate
|
|
|
6.8747
|
|
|
|
6,6191
|
|
|
Six-month end average RMB:US$1 exchange rate
|
|
|
6.7808
|
|
|
|
6.3666
|
|
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.
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 three and six months ended June 30, 2019 and 2018, the Company operates
in one reportable operating segment, primarily 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, 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
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 AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
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
January 2017, the Financial Accounting Standard Board (“FASB”) issued ASU 2017-04, Intangibles - Goodwill and Other
(Topic 350): Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes Step 2 of the
goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount
by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard,
which will be effective for the Company beginning in the first quarter of fiscal year 2020, is required to be applied prospectively.
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”),
which supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payments arrangements related to the acquisition
of goods and services from both employees and nonemployees. For public companies, the amendments are effective for annual reporting
periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted,
but no earlier than a company’s adoption date of ASC 606. The Company does not believe that the adoption of ASU 2018-07
will have a material impact on the Company’s consolidated financial statements.
In
August 2018, the FASB issued Accounting Standard Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820), which
modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including, among other changes,
the consideration of costs and benefits when evaluating disclosure requirements. For public companies, the amendments are effective
for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption
is permitted. The Company is currently assessing the impact that adopting this new accounting guidance will have on the Company’s
financial statements and footnote disclosures.
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.
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 incurred a bad debt expense of $138,784 and $1,454,386 for its
doubtful accounts in accounts receivable for the three months ended June 30, 2019 and 2018, respectively, and $155,128 and $1,454,386
for its doubtful accounts in accounts receivable for the six months ended June 30, 2019 and 2018, respectively.
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Accounts receivable, cost
|
|
$
|
11,737,833
|
|
|
$
|
12,602,251
|
|
|
Less: allowance for doubtful accounts
|
|
|
(11,486,827
|
)
|
|
|
(11,327,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
251,006
|
|
|
$
|
1,274,980
|
|
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
As
of June 30, 2019 and December 31, 2018, the Company reported its retention receivable as follow:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Retention receivable, cost
|
|
$
|
945,962
|
|
|
$
|
1,007,905
|
|
|
Less: allowance for doubtful accounts relating to retention receivable
|
|
|
(938,940
|
)
|
|
|
(942,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Retention receivable, net
|
|
$
|
7,022
|
|
|
$
|
65,529
|
|
As
of June 30, 2019 and December 31, 2018, inventories consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Raw materials
|
|
$
|
441,476
|
|
|
$
|
519,341
|
|
|
Work-in-process
|
|
|
108,803
|
|
|
|
322,132
|
|
|
Finished goods
|
|
|
604,456
|
|
|
|
96,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,154,735
|
|
|
$
|
937,966
|
|
For
the three and six months ended June 30, 2019 and 2018, 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.
|
|
7.
|
Prepayments
and other receivables
|
Prepayments
and other receivables present the amount the Company advanced to suppliers for purchase of materials or goods, prepayment to service
providers, reimbursement for business related expenses of employees and the security deposit for the Boqi Pharmacy acquisition.
The table below set forth the balances as of June 30, 2019 and December 31, 2018.
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Advance to suppliers
|
|
$
|
2,695,318
|
|
|
$
|
2,712,936
|
|
|
Prepaid service provider expenses
|
|
|
125,425
|
|
|
|
-
|
|
|
Security deposit for Boqi Pharmacy acquisition
|
|
|
2,040,000
|
|
|
|
-
|
|
|
Other receivables
|
|
|
26,079
|
|
|
|
43,350
|
|
|
|
|
|
4,886,822
|
|
|
|
2,756,286
|
|
|
Less: allowance for doubtful accounts
|
|
|
(2,627,662
|
)
|
|
|
(2,624,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
2,259,160
|
|
|
$
|
131,442
|
|
On
April 20, 2019, the Company issued 500,000 shares of its common stock, valued at $2,040,000, as a security deposit for an acquisition.
See Note 13 to the financial statements for more information.
Management evaluates the recoverable value
of these balances periodically according to the Company’s policy of credit and allowance for doubtful accounts. For the
three and six months ended June 30, 2019, the Company reserved for the doubtful accounts in its prepayments and other receivables
of $2,182 and $2,182, respectively. No allowance expense was reserved for doubtful accounts for the three and six months ended
June 30, 2018.
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
|
|
8.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property,
plant and equipment consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Building
|
|
$
|
19,663,313
|
|
|
$
|
19,658,330
|
|
|
Plant and machinery
|
|
|
5,950,931
|
|
|
|
5,949,422
|
|
|
Furniture, fixture and equipment
|
|
|
24,771
|
|
|
|
24,765
|
|
|
|
|
|
25,639,015
|
|
|
|
25,632,517
|
|
|
Less: accumulated depreciation
|
|
|
(8,136,993
|
)
|
|
|
(7,674,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
17,502,022
|
|
|
$
|
17,958,136
|
|
Depreciation
expense for the three months ended June 30, 2019 and 2018 were $230,212 and $230,569, respectively.
Depreciation
expense for the six months ended June 30, 2019 and 2018 were $467,045 and $463,385, respectively.
Land
use right consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Land use right, at cost
|
|
$
|
3,001,576
|
|
|
$
|
3,000,815
|
|
|
Less: accumulated amortization
|
|
|
(570,299
|
)
|
|
|
(540,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.431,277
|
|
|
$
|
2,460,668
|
|
Amortization
expenses for the three months ended June 30, 2019 and 2018 were $15,139 and $16,181, respectively.
Amortization
expenses for the six months ended June 30, 2019 and 2018 were $30,431 and $32,412, respectively.
The
estimated amortization expense on the land use right in the next five years and thereafter is as follows:
|
Year ending December 31:
|
|
|
|
|
2019
|
|
$
|
30,431
|
|
|
2020
|
|
|
60,863
|
|
|
2021
|
|
|
60,863
|
|
|
2022
|
|
|
60,863
|
|
|
2023
|
|
|
60,863
|
|
|
Thereafter
|
|
|
2,157,394
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
2,431,277
|
|
|
|
10.
|
SHORT-TERM
BANK BORROWINGS
|
Short-term
bank borrowings consist of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Equivalent to RMB 40,000,000 with a
fixed interest rate at 6.09%, monthly payable, due March 18, 2019, which is guaranteed by its related parties and used buildings
and land use rights as collateral.
|
|
|
-
|
|
|
|
5,816,961
|
|
|
Equivalent to RMB 40,000,000
with a fixed interest rate at 8.5%, monthly payable, due March 18, 2020, which is guaranteed by its related parties and used
buildings and land use rights as collateral.
|
|
|
5,816,981
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term bank borrowings
|
|
$
|
5,816,981
|
|
|
$
|
5,816,961
|
|
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
For
the three months ended June 30, 2019 and 2018, the Company reported interest expenses of $129,929 and $108,904, respectively.
For
the six months ended June 30, 2019 and 2018, the Company reported interest expenses of $219,905 and $197,580, respectively.
|
|
11.
|
RELATED
PARTIES AND RELATED PARTIES TRANSACTIONS
|
Accounts
payable, trade-related parts
As
of June 30, 2019 and December 31, 2018, the Company reported trade payables of $398,033 and $416,547, respectively, due to Liaoning
Bainianye New Energy Utilization Co., Ltd., (“Bainianye New Energy”), a company directly controlled by Ms. Li Hua
Wang (the Company’s former Chief Financial Officer) and Mr. Gang Li (the Company’s former Chief Executive Officer
and one of the Company’s current directors). The trade payable is unsecured, interest-free and has no fixed repayment term.
During the three and six months ended June 30, 2019, the Company did not have inventory purchase transaction with Bainianye New
Energy.
Amount
Due to related parties
As
of June 30, 2019, the total amount due to related parties was $2,203,822, which amount included:
|
|
1.
|
Amount
due to Mr. Gang Li (the Company’s former Chief Executive Officer and a director)
of $1,359,451, including:
|
|
|
1.1
|
a
$698,212 loan from Mr. Gang Li with an annual interest rate of 8.5% and due on demand.
For the three and six months ended June 30, 2019, the Company reported interest expenses
of $15,469 and $25,078, respectively. No interest expense was reported for the three
and six months ended June 30, 2018;
|
|
|
1.2
|
a
$654,575 loan from Mr. Gang Li with an annual interest rate of 14.4% and due on February
1, 2020. For the three and six months ended June 30, 2019, the Company reported interest
expenses of $25,981 and $39,818, respectively. No interest expense was reported for the
three and six months ended June 30, 2018;
|
|
|
1.3
|
$6,664
due to Mr. Gang Li that is free of interest and due on demand.
|
|
|
2.
|
Amount
due to Ms. Li Hua Wang (the Company’s former Chief Financial Officer) of $267,542,
which is free of interest and due on demand;
|
|
|
3.
|
Amount
due to Mr. Haibo Gong (Import & Export Company’s executive director) of $35,043,
including:
|
|
|
3.1
|
a
$28,001 loan from Mr. Haibo Gong with annual interest rate of 18% and due on demand.
For the three and six months ended June 30, 2019, the Company reported interest expenses
of $2,328 and $6,939, respectively;
|
|
|
3.2
|
$7,042
payable to Mr. Haibo Gong that is free of interest and due on demand;
|
|
|
4.
|
Amount
due to Mr. Yongquan Bi, the current Chief Executive Officer (“CEO”) and Chairman
of the Company, of $355,412 which is free of interest and due on demand;
|
|
|
5.
|
$4,681
due to Mr. Yongjian Zhang, ,a director, which is free of interest and due on demand;
and
|
|
|
6.
|
$181,693
due to Bainianye New Energy, which is free of interest and due on demand;
|
As
of December 31, 2018, the total amount due to related parties was $918,033, which amount included:
|
|
1.
|
Amount
due to Ms. Li Hua Wang (the Company’s former Chief Financial Officer) of $606,191,
which is free from interest and due on demand;
|
|
|
2.
|
Amount
due to Mr. Haibo of $162,421, including:
|
|
|
2.1
|
a
$158,512 loan from Mr. Haibo Gong at an annual interest rate of 18% and due on demand;
|
|
|
2.2
|
$3,909
due to Mr. Haibo Gong that is free from interest and due on demand;
|
|
|
3.
|
Amount
due to Liaoning Bainianye New Energy Utilization Co., Ltd., directly controlled by Ms.
Li Hua Wang and Mr. Gang Li (the Company’s former Chief Executive Officer and a
current director) of $142,759, which is free from interest and due on demand;
|
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
Amount
due from related parties
As
of June 30, 2019 the Company reported $1,155,073 due from Nengfa Weiye Tieling Valve Joint Stock Co., Ltd. (“Tieling Joint
Stock”), which holds 43% of equity interests of Nengfa Tiefa Import & Export, which amount was free from interest and
due on demand. There was no amount due from related parties as of December 31, 2018.
|
|
12.
|
OTHER
PAYABLES AND ACCRUED LIABILITIES
|
Other
payables and accrued liabilities consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Customer deposits
|
|
$
|
449,152
|
|
|
$
|
356,799
|
|
|
Accrued operating expenses
|
|
|
586,369
|
|
|
|
705,479
|
|
|
Payables in dispute
|
|
|
1,170,763
|
|
|
|
879,780
|
|
|
Other payables
|
|
|
199,998
|
|
|
|
103,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,406,282
|
|
|
$
|
2,045,066
|
|
As
of June, 30, 2019 and December 31, 2018, the Company reported $1,170,763 and $879,780 as payables that are in dispute including
payables of $880,000 and $290,000 that were incurred in 2018 and 2019, respectively.
On
August 1, 2018, one of NF Energy’s suppliers filed a lawsuit against NF Energy for an outstanding payable of approximately
RMB 6 million, or approximately $880,000. Until the date of this report, both parties have not reached any agreement or settlement.
On
January 10, 2019, one of NF Energy’s suppliers filed a lawsuit against NF Energy for an outstanding payable of approximately
of RMB 700,000, and the law suit was settled by both parties on April 8, 2019. NF Energy was obligated to pay the supplier approximately
RMB 710,000 or approximately $100,000.
On
April 22, 2019, one of NF Energy’s suppliers filed a lawsuit against NF Energy for an unpaid outstanding payable of RMB
1,278,181.8. On May 4, 2019, the parties entered into a court-supervised settlement where NF Energy agreed to pay the supplier
approximately RMB 1.26 million or approximately $190,000 in total.
The
Company is authorized to issue 50,000,000 shares of common stock, $0.001 par value, and as of June 30, 2019 and December 31, 2018,
it had 8,073,289 shares and 7,573,289 shares outstanding, respectively.
On
March 12, 2018, the Company issued 500,000 shares of its common stock, at the price of $1.00 per share for aggregate consideration
of $500,000 to Mr. Yongquan Bi, our Chairman and Chief Executive Officer.
On
April 11, 2019, the Company entered into a stock purchase agreement (the “Agreement”) with Lasting Wisdom Holdings
Limited, a company organized under the laws of the British Virgin Islands, Pukung Limited, a company organized under the laws
of Hong Kong, Beijing Xin Rong Xin Industrial Development Co., Ltd., a company organized under the laws of the PRC, Boqi Zhengji
Pharmacy Chain Co., Ltd. a company organized under the laws of the PRC (“Boqi Pharmacy”) and several additional individual
sellers listed in the Agreement whereby the Company will purchase 100% of equity interests of Lasting Wisdom Holdings Limited
(the “Shares”). In accordance with the Agreement, the total purchase price for the Shares is RMB 40 million plus 1.5
million shares of the Company’s common stock. The purchase price is subject to post-closing adjustments (contingent on fair
market value of the acquired companies). On May 14, 2019, the Company issued 500,000 shares of its common stock, valued at $2,040,000,
to the shareholders of Lasting Wisdom Holdings Limited as a security deposit for the acquisition, and the closing of this acquisition
is subject to the result of the final evaluation of the target company. As the date of this report, the acquisition has not closed.
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
Basic
net loss per share is computed using the weighted average number of common shares outstanding during the period. 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 three and six months ended June 30, 2019 and 2018:
|
|
|
For the three months ended
June 30
|
|
|
For the six months ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Net loss attributable
to common shareholders
|
|
$
|
(862,096
|
)
|
|
$
|
(1,649,507
|
)
|
|
$
|
(1,429,690
|
)
|
|
$
|
(2,149,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding – Basic and diluted
|
|
|
7,831,531
|
|
|
|
7,573,289
|
|
|
|
7,703,123
|
|
|
|
7,379,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share –
Basic and diluted
|
|
|
(0.11
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.29
|
)
|
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 PRC (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.
|
|
16.
|
CONCENTRATIONS
OF RISK
|
The
Company is exposed to the following concentrations of risk:
For
the three and six months ended June 30, 2019, the customers who represented more than 10% of the Company’s revenues and
its outstanding accounts receivable as of the balance sheet date are presented as follow:
|
|
|
For the three months ended
June 30,
2019
|
|
|
As of
June 30,
2019
|
|
|
Customers
|
|
Revenues
|
|
|
Percentage of revenues
|
|
|
Accounts receivable
|
|
|
Customer A
|
|
$
|
39,481
|
|
|
|
12
|
%
|
|
$
|
-
|
|
|
Customer B
|
|
|
62,047
|
|
|
|
18
|
%
|
|
|
140,364
|
|
|
Customer C
|
|
|
53,809
|
|
|
|
16
|
%
|
|
|
59,974
|
|
|
Customer D
|
|
|
61,275
|
|
|
|
18
|
%
|
|
|
(9,495
|
)
|
|
|
|
$
|
216,612
|
|
|
|
64
|
%
|
|
$
|
190,843
|
|
|
|
|
For the six months ended
June 30,
2019
|
|
|
As of
June 30,
2019
|
|
|
Customers
|
|
Revenues
|
|
|
Percentage of revenues
|
|
|
Accounts receivable
|
|
|
Customer A
|
|
$
|
127,773
|
|
|
|
14
|
%
|
|
$
|
-
|
|
|
Customer E
|
|
|
334,978
|
|
|
|
37
|
%
|
|
|
-
|
|
|
|
|
$
|
462,751
|
|
|
|
51
|
%
|
|
$
|
-
|
|
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
For
the three and six months ended June 30, 2018, the customers that accounted for 10% or more of the Company’s revenues and
its outstanding accounts receivable balances as at balance sheet date, are presented as follows:
|
|
|
For the three months ended June 30, 2018
|
|
|
As of
June 30,
2018
|
|
|
Customers
|
|
Revenues
|
|
|
Percentage of revenues
|
|
|
Accounts receivable
|
|
|
Customer F
|
|
$
|
231,544
|
|
|
|
41
|
%
|
|
$
|
-
|
|
|
Customer G
|
|
|
123,730
|
|
|
|
22
|
%
|
|
|
-
|
|
|
Customer H
|
|
|
114,031
|
|
|
|
20
|
%
|
|
|
6,396,289
|
|
|
|
|
$
|
469,305
|
|
|
|
83
|
%
|
|
$
|
6,396,289
|
|
|
|
|
For the six months ended June 30, 2018
|
|
|
As of
June 30,
2018
|
|
|
Customers
|
|
Revenues
|
|
|
Percentage of revenues
|
|
|
Accounts receivable
|
|
|
Customer F
|
|
$
|
231,544
|
|
|
|
33
|
%
|
|
$
|
-
|
|
|
Customer G
|
|
|
123,730
|
|
|
|
17
|
%
|
|
|
-
|
|
|
Customer H
|
|
|
114,037
|
|
|
|
16
|
%
|
|
|
6,396,289
|
|
|
|
|
$
|
469,311
|
|
|
|
66
|
%
|
|
$
|
6,396,289
|
|
For
the six months ended June 30, 2019, revenues contributed from customers located outside of the PRC accounted for $472,232 or approximately
52% of total revenues. For the six months ended June 30, 2018, all customers were located in the PRC.
For
the three and six months ended June 30, 2019, the venders that accounted for 10% or more of the Company’s purchases and
its outstanding balances as at balance sheet dates, are presented as follows:
|
|
|
For the three months ended June 30, 2019
|
|
|
As of
June 30,
2019
|
|
|
Venders
|
|
Purchases
|
|
|
Percentage of total purchases
|
|
|
Accounts payable
|
|
|
Vender A
|
|
$
|
72,550
|
|
|
|
32
|
%
|
|
$
|
4,376
|
|
|
Vender B
|
|
|
56,463
|
|
|
|
25
|
%
|
|
|
68,939
|
|
|
|
|
$
|
129,013
|
|
|
|
57
|
%
|
|
$
|
73,315
|
|
|
|
|
For the six months ended June 30, 2019
|
|
|
As of
June 30,
2019
|
|
|
Venders
|
|
Purchases
|
|
|
Percentage of total purchases
|
|
|
Accounts payable
|
|
|
Vender A
|
|
$
|
72,550
|
|
|
|
21
|
%
|
|
$
|
4,376
|
|
|
Vender B
|
|
|
56,463
|
|
|
|
17
|
%
|
|
|
68,939
|
|
|
|
|
$
|
129,013
|
|
|
|
38
|
%
|
|
$
|
73,315
|
|
For
the three and six months ended June 30, 2018, no vender accounted for 10% of the Company’s purchases.
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.
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
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 of variable rate debt, limiting the amount of variable rate debt, and continually monitoring the effects
of market changes in interest rates. As of June 30, 2019 and December 31, 2018, short-term bank borrowings were at fixed rates.
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 primarily 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. 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.