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 $7,010,696 and negative working capital
of $10,936,514 as of March 31, 2019, and incurred a net loss of $567,594 for the three months ended March 31, 2019 In addition,
the Company continues to generate operating losses and has limited cash flow from its operations. Management believes 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 (1) 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 (2) 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 March 31, 2019 and for the three months ended March 31, 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 March 31, 2019 and its unaudited condensed consolidated results of operations for the three months ended
March 31, 2019 and 2018, and its unaudited condensed consolidated cash flows for the three months ended March, 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 $183,444 and $179,496 as of March 31, 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 March 31, 2019 and December 31, 2018, the allowance for
doubtful accounts was $11,579,977 and $11,327,271, respectively.
|
●
|
Retention receivable and allowance for
doubtful accounts
|
Retention receivable is the amount withheld
by a customer based upon 5-10% of the contract value, until a product warranty expires. The warranty period is usually 12 months.
As of March 31, 2019 and December 31, 2018, the allowance for doubtful accounts was $962,381 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 March 31, 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.
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 three months ended March 31, 2019
and 2018, the Company did not have any interest and penalties associated with tax positions. As of March 31, 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 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 customers 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 of March 31, 2019 and December 31,
2018, the Company reported a net reserve of $31,297 and $65,529 as retention receivable for the receivables withheld by its customers
for product warranty, respectively.
The Company calculates net loss per share
in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net
income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar
to basic income per share except that the denominator is increased to include the number of additional common shares that would
have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.
|
●
|
Foreign currencies translation
|
Transactions denominated in currencies
other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of
the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into
the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are
recorded in the statement of operations.
The reporting currency of the Company is
the United States Dollar ("US$"). 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:
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
Period-end RMB:US$1 exchange rate
|
|
|
6.7335
|
|
|
|
6,2802
|
|
Three month end average RMB:US$1 exchange rate
|
|
|
6.7468
|
|
|
|
6.3566
|
|
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 months ended March 31, 2019 and 2018, 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, 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 reported a bad debt expense of $16,344 and $0 for its doubtful accounts for the three months ended March
31, 2019 and 2018.
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Accounts receivable, cost
|
|
$
|
12,198,310
|
|
|
$
|
12,602,251
|
|
Less: allowance for doubtful accounts
|
|
|
(11,579,977
|
)
|
|
|
(11,327,271
|
)
|
Accounts receivable, net
|
|
$
|
618,333
|
|
|
$
|
1,274,980
|
|
As of March 31, 2019 and December 31, 2018,
the Company reported its retention receivable as follow:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Retention receivable, cost
|
|
$
|
993,678
|
|
|
$
|
1,007,905
|
|
Less: allowance for doubtful accounts
|
|
|
(962,381
|
)
|
|
|
(942,376
|
)
|
Retention receivable, net
|
|
$
|
31,297
|
|
|
$
|
65,529
|
|
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Inventories consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Raw materials
|
|
$
|
446,399
|
|
|
$
|
519,341
|
|
Work-in-process
|
|
|
129,202
|
|
|
|
322,132
|
|
Finished goods
|
|
|
592,871
|
|
|
|
96,493
|
|
|
|
$
|
1,168,472
|
|
|
$
|
937,966
|
|
For the three months ended March 31, 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.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment consisted
of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Building
|
|
$
|
20,075,648
|
|
|
$
|
19,658,330
|
|
Plant and machinery
|
|
|
6,075,721
|
|
|
|
5,949,422
|
|
Furniture, fixture and equipment
|
|
|
25,291
|
|
|
|
24,765
|
|
|
|
|
26,176,660
|
|
|
|
25,632,517
|
|
Less: accumulated depreciation
|
|
|
(8,074,597
|
)
|
|
|
(7,674,381
|
)
|
Property, plant and equipment, net
|
|
$
|
18,102,063
|
|
|
$
|
17,958,136
|
|
Depreciation expense for the three months
ended March 31, 2019 and 2018 were $236,833 and $232,816.
Land use right consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Land use right, at cost
|
|
$
|
3,064,518
|
|
|
$
|
3,000,815
|
|
Less: accumulated amortization
|
|
|
(566,936
|
)
|
|
|
(540,147
|
)
|
|
|
$
|
2,497,582
|
|
|
$
|
2,460,668
|
|
Amortization expenses for the three months
ended March 31, 2019 and 2018 were $15,292 and $16,231, respectively.
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
The estimated amortization expense on the
land use right in the next five years and thereafter is as follows:
Year ending December 31:
|
|
|
|
2019
|
|
$
|
45,878
|
|
2020
|
|
|
61,170
|
|
2021
|
|
|
61,170
|
|
2022
|
|
|
61,170
|
|
2023
|
|
|
61,170
|
|
Thereafter
|
|
|
2,207,024
|
|
|
|
|
|
|
Total:
|
|
$
|
2,497,582
|
|
|
9.
|
SHORT-TERM BANK BORROWINGS
|
Short-term bank borrowings consist of the
following:
|
|
March 31,
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.
|
|
|
5,940,447
|
|
|
|
-
|
|
Total short-term bank borrowings
|
|
$
|
5,940,447
|
|
|
$
|
5,816,961
|
|
For the three months ended March 31, 2019
and 2018, the Company reported interest expenses of $89,976 and $88,676, respectively.
|
10.
|
RELATED PARTIES AND RELATED PARTIES TRANSACTIONS
|
Accounts payable, trade-related parts
As of March 31, 2019 and December 31, 2018,
the Company reported trade payables of $414,994 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 CFO) 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 months ended March 31, 2019, the Company did not
have inventory purchase transaction with Bainianye New Energy.
Amount Due to related parties
As of March 31, 2019, the total amount
due to related parties was $2,007,513 mainly included:
|
1.
|
Amount due to Mr. Gang Li (the Company’s former Chief Executive Officer and one of current
directors) of $1,387,958 totally including:
|
|
1.1
|
a $712,854 loan from Mr. Gang Li with annually interest rate of 8.5% and due on demand. For the
three months ended March 31, 2019 and 2018, the Company reported interest expenses of $9,609 and $0, respectively;
|
|
1.2
|
a $668,300 loan from Mr. Gang Li with annual interest rate of 14.4% and due on February 1, 2019.
For the three months ended March 31, 2019 and 2018, the Company reported interest expenses of $13,837 and $0, respectively;
|
|
1.3
|
$6,804 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 $265,045,
which is free of interest and due on demand;
|
|
3.
|
Amount due to Mr. Haibo Gong (Import & Export Company’s executive director) of $74,966,including:
|
|
3.1
|
a $69,429 loan from Mr. Haibo Gong with annual interest rate of 18% and due on demand. For the
three months ended March 31, 2019, the Company reported interest expenses of $4,611;
|
|
3.2
|
a $5,537 payable to Mr. Haibo Gong that is free of interest and due on demand;
|
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
4.
|
Amount due to Mr. Yongquan Bi, the current Chief Executive Officer (“CEO”) and Chairman
of the Company, of $92,000 which is free ofinterest and due on demand;
|
|
5.
|
$4,682 due to Mr. Yongjian Zhang, one of the Company’s directors, which is free of interest
and due on demand; and
|
|
6.
|
$182,862 due to Bainianye New Energy of which is free of interest and due on demand;
|
As of December 31, 2018, the total amount
due to related parties mainly was $918,033 included:
|
1.
|
Amount due to Ms. Li Hua Wang (the Company’s former Chief Financial Officer) of $606,194,
which is free from interest and due on demand;
|
|
2.
|
Amount due to Mr. Haibo Gong (Import & Export Company’s executive director) of $162,423
totally including:
|
|
2.1
|
amount to $158,513 loan from Mr. Haibo Gong with annual interest rate of 18% and due on demand.
For the three months ended March 31, 2018, the company reported interest expenses amount to $2,995;
|
|
2.2
|
amount to $3,910 due to Mr. Haibo Gong that 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 (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), of $174,256 which free from interest and due on demand;
|
Amount due from related parties
As of March 31, 2019 and December 31, 2018,
the Company reported amount due from related parties of $1,179,295 and $0, respectively.
As of March 31, 2019, the total amount
due from related parties included $1,179,295 due from Nengfa Weiye Tieling Valve Joint Stock Co., Ltd. (“Tieling Joint Stock”),
the noncontrolling interest of Nengfa Tiefa Import & Export. All amount due from related parties was free from interest and
due on demand.
|
11.
|
OTHER PAYABLES AND ACCRUED LIABILITIES
|
Other payables and accrued liabilities
consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
$
|
322,206
|
|
|
$
|
356,799
|
|
Accrued operating expenses
|
|
|
697,068
|
|
|
|
705,479
|
|
Payables with disputes
|
|
|
1,195,046
|
|
|
|
879,780
|
|
Other payables
|
|
|
180,392
|
|
|
|
103,008
|
|
|
|
$
|
2,394,712
|
|
|
$
|
2,045,066
|
|
As of March 31, 2019 and December 31, 2018,
the Company reported $1,195,046 and $879,780 as payables with disputes which included mainly a dispute payable of approximately
$870,000 occurred in 2018 and a dispute payable of approximately $190,000 occurred in 2019.
On August 1, 2018, one of NF Energy’s
suppliers filed a lawsuit against NF Energy for unpaid outstanding payable of approximately RMB 6 million or $870,000. Until the
date of this report, both parties have not reached any agreement or settlement.
On April 22, 2019, one of NF Energy’s
suppliers filed a lawsuit against NF Energy for unpaid outstanding payable of RMB 1,278,181.8. On May 24, 2019, the parties
entered into a court-supervised settlement where NF Energy agreed to pay the supplier approximately RMB 1.26 million
or $190,000 in total.
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
The Company is authorized to issue 50,000,000
shares of common stock, $0.001 par value, and as of March 31, 2019 and December 31, 2018, it had 7,573,289 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.
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 months ended March 31, 2019 and 2018:
|
|
For the three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net loss attributable to common shareholders
|
|
$
|
(567,594
|
)
|
|
$
|
(499,699
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic and diluted
|
|
|
7,573,289
|
|
|
|
7,184,400
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – Basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
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.
|
15.
|
CONCENTRATIONS OF RISK
|
The Company is exposed to the following
concentrations of risk:
For the three months ended March 31, 2019,
two customers who represented more than 10% of the Company’s revenues and its outstanding accounts receivable as of the balance
sheet date is presented as follow:
|
|
For the three months ended March 31, 2019
|
|
|
As of
March 31,
2019
|
|
Customers
|
|
Revenues
|
|
|
Percentage of revenues
|
|
|
Accounts receivable
|
|
Customer A
|
|
$
|
88,737
|
|
|
|
15
|
%
|
|
$
|
-
|
|
Customer B
|
|
|
336,668
|
|
|
|
58
|
%
|
|
|
-
|
|
|
|
$
|
425,505
|
|
|
|
73
|
%
|
|
$
|
-
|
|
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
For the three months ended March 31, 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 March 31, 2018
|
|
|
As of
March 31,
2018
|
|
Customers
|
|
Revenues
|
|
|
Percentage of revenues
|
|
|
Accounts receivable
|
|
Customer C
|
|
$
|
37,664
|
|
|
|
26
|
%
|
|
$
|
-
|
|
Customer D
|
|
|
25,211
|
|
|
|
17
|
%
|
|
|
29,856
|
|
Customer E
|
|
|
26,432
|
|
|
|
18
|
%
|
|
|
22,810
|
|
Customer F
|
|
|
22,232
|
|
|
|
15
|
%
|
|
|
1,655
|
|
|
|
$
|
111,539
|
|
|
|
76
|
%
|
|
$
|
54,321
|
|
During the three months ended March 31,
2019, the two main customers are located outside of the PRC which contributed significant increase of revenues in the three months
ended March 31, 2019. During the three months ended March 31, 2018, all customers are located in the PRC.
Financial instruments that are potentially
subject to credit risk consist principally of trade receivables. The Company believes the concentration of credit risk in its trade
receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company
does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical trends and other information.
As the Company has no significant interest-bearing
assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
The Company’s interest-rate risk
arises from 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 March 31, 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 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.
NF ENERGY SAVING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
At 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 to the shareholders of Lasting Wisdom Holdings Limited as security
deposit and the closing of this acquisition is depending on the result of the final evaluation of the target company. As the date
of this report, the acquisition is not finished yet. The Company plans to raise RMB 40,000,000 from private placement transactions
in equity to pay off the cash portion of the purchase price.
On April 22, 2019, one of NF Energy’s
suppliers filed a lawsuit against NF Energy for an outstanding payable of RMB 1,278,181.8. On May 24, 2019, the parties entered
into a court-supervised settlement where NF Energy agreed to pay the supplier RMB 1.26 million.