ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in
conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Report on Form 10-K. The
discussion in this section of this Report on Form 10-K contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, those discussed in “Risk Factors” and those discussed
elsewhere in this Report on Form 10-K.
FORWARD LOOKING STATEMENTS
Certain statements in this report, including
statements of our expectations, intentions, plans and beliefs, including those contained in or implied by "Management's Discussion
and Analysis" and the Notes to Consolidated Financial Statements, are "forward-looking statements", within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are subject to certain events,
risks and uncertainties that may be outside our control. The words “believe”, “expect”, “anticipate”,
“optimistic”, “intend”, “will”, and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which
they are made. The Company undertakes no obligation to update or revise any forward-looking statements. These forward-looking statements
include statements of management's plans and objectives for our future operations and statements of future economic performance,
information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital
requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets,
and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could
differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation,
those described in the context of such forward-looking statements, our expansion and acquisition strategy, our ability to achieve
operating efficiencies, industry pricing and technology trends, evolving industry standards, regulatory matters, general economic
and business conditions, the strength and financial resources of our competitors, our ability to find and retain skilled personnel,
the political and economic climate in which we conduct operations and the risk factors described from time to time in our other
documents and reports filed with the Securities and Exchange Commission (the "Commission"). Additional factors that could
cause actual results to differ materially from the forward-looking statements include, but are not limited to: 1) our ability to
successfully develop, manufacture and deliver our products on a timely basis and in the prescribed condition; 2) our ability to
compete effectively with other companies in the same industry; 3) our ability to raise sufficient capital in order to effectuate
our business plan; and 4) our ability to retain our key executives.
Critical Accounting Policies
Our discussion and analysis of our financial
condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, we evaluate
our estimates and judgments, including those related to revenue, receivable, inventory, and accrued expenses. We base our estimates
on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Changes
in estimates are recorded in the period in which they become known.
We believe the following critical accounting
policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
In accordance with the ASC Topic 605, “Revenue
Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred
or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.
The Company’s revenue is principally
derived from two primary sources: sales of energy saving flow control equipment and provision of energy project management and
sub-contracting services.
(a) Sale of products
The Company derives a majority of its revenues
from the sale of energy saving flow control equipment. Generally, the energy saving flow control equipment is manufactured and
configured to customer requirements. The Company typically produces the energy saving flow control equipment for customers during
a period from one to six months. When the Company completes the production in accordance with the customer’s specification,
the customer is required to inspect the finished products for quality and suitability, to its full satisfaction, then the Company
makes delivery to the customer
The Company recognizes revenue from the sale
of such finished products upon delivery to the customers, when the title and risk of loss are fully transferred to the customers.
The Company records its revenues, net of value added taxes (“VAT”). The Company is subject to VAT which is levied on
the majority of the products at the rate of 17% on the invoiced value of sales. As of December 31, 2017 and 2016, there were no
refunds regarding our products.
(b) Service revenue
Service revenue is derived from energy-saving
technical services, project management or sub-contracting services that are not an element of the arrangement for the sale of products.
These services are generally billed on a time-cost plus basis, for the period of service which is generally from two to three months.
Revenue is recognized, net of business taxes
when the service is rendered and accepted by the customers.
(c) Interest income
Interest income is recognized on a time apportionment
basis, taking into account the principal amounts outstanding and the interest rates applicable.
Accounts receivable and allowance for doubtful
accounts
Accounts receivable are recorded at the invoiced
amount, do not bear interest and are due within the contractual payment terms, generally 90 to 180 days from shipment. Credit is
extended based on evaluation of a customer's financial condition, the customer’s credit-worthiness and their payment history.
Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 180 days
and those over a specified amount are reviewed individually for collectability. At the end of each period, the Company specifically
evaluates each individual customer’s financial condition, credit history, and the current economic conditions to monitor
the progress of the collection of accounts receivable. The Company will consider an allowance for doubtful accounts for any estimated
losses resulting from the inability of its customers to make required payments. For the receivables that are past due or not being
paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal
resolution in a court of law.
The payment terms for our accounts receivable
from each source of revenue is set forth below:
|
Revenue items
|
|
General payment terms:
|
|
|
|
|
|
1.
|
Sales of products
|
|
(a)
|
10% of the contract value will be paid by the customer upon signing the contract.
|
|
|
|
(b)
|
50% of the contract value will be paid by the customer after the physical inspection (with a credit term from 90 to 180 days).
|
|
|
|
(c)
|
30% to 35% of the contract value will be paid upon the delivery to the customer (with a credit term from 90 to 180 days).
|
|
|
|
(d)
|
5% to 10% of the contract value will be paid within 12 to 24 months (from the delivery date) as warranty retention for the product.
|
|
|
|
|
|
2.
|
Services
|
|
(a)
|
10% to 15 % of the contract value will be paid by the customer upon signing the contract.
|
|
|
|
(b)
|
The remaining contract value will be paid by the customer upon the completion of the service (with a credit term from 30 to 90 days).
|
In general, accounts receivable with aging
within 90 days, between 91 and 180 days, and between 181 and 360 days represent approximately 30-40%, 50-60%, and 5%-15%, respectively,
of the total accounts receivable. The Company is highly aware of the risk of default, and as a result, we actively monitor accounts
receivable with aging above 1 year and those accounting for at least 1% of the total accounts receivable.
For most of our contracts, our customers are
generally large or state-owned construction contractors or developers mainly engaged in government-sponsored infrastructure projects
such as large hydraulic/aqua-engineering projects, power plants and urban sewage network projects in the PRC. Usually, these infrastructure
projects are undertaken in a number of phrases over a certain period of time. Our flow control equipment components are generally
considered as major or significant components in the development phase of these infrastructure projects. In our industry practice,
we are paid by these construction contractors and/or developers when they have been paid by the local government or state-owned
enterprises after the full inspection of each milestone during the construction phrase. Given that the construction of these infrastructure
projects are complex, very large in size and require a high of quality in completion, the inspection process may take a considerable
amount of time. Therefore, we may not collect the accounts receivable on a timely manner or only after a period longer than our
agreed payment terms.
We have a high level of assurance on the recoverability
of these accounts receivable, based on our ongoing assessment of the customer’s credit-worthiness and their payment history.
These customers are usually large state-owned corporations with good credit ratings. At the end of each period, we specifically
evaluate the structure and collectability of accounts receivable and for receivables that are past due or not being paid according
to the payment terms, and we take appropriate actions to exhaust all means of collection, including seeking legal resolution in
a court of law. For customers with a large accounts receivable balance, we may take other steps, such as limiting sales and changing
payment terms and requesting forms of security. We will consider an adjustment to the allowance for doubtful accounts for any estimated
losses resulting from the inability of our customers to make required payments.
Account balances are charged off against the
allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered
remote. The Company does not have any off-balance sheet credit exposure related to its customers.
Inventories
Inventories are stated at the lower of cost
or market value (net realizable value), cost being determined on a weighted average method. Costs include material, labor and manufacturing
overhead costs. The Company 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.
Property, Plant and Equipment
Plant and equipment are stated at cost less
accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over
the following expected useful lives from the date on which the asset becomes fully operational and after taking into account its
estimated residual values:
|
|
Expected useful
life
|
|
Residual value
|
|
Building
|
|
30-50 years
|
|
|
5
|
%
|
Plant and machinery
|
|
10-20 years
|
|
|
5
|
%
|
Furniture, fixture and equipment
|
|
5-8 years
|
|
|
5
|
%
|
Expenditure for repairs and maintenance 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.
Land use right
All land in the PRC is owned by the PRC government.
The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time.
Thus, the Company’s land purchase in the PRC is considered to be leasehold land and is stated at cost less accumulated amortization
and any recognized impairment loss. Amortization is provided over the term of the land use right agreement on a straight-line basis,
which is 50 years and will expire in 2059.
Stock based compensation
The Company adopts ASC Topic 718, "Stock
Compensation", ("ASC 718") using the fair value method. Under ASC 718, stock-based compensation is measured using
the Black-Scholes Option-Pricing model on the date of grant. For non-employee stock based compensation, the Company adopts ASC
Topic 505-50, “Equity-Based Payments to Non-Employees”, stock based compensation related to non-employees is accounted
for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more
readily determinable in accordance with ASC 718.
Income taxes
Income taxes are determined in accordance with
the provisions of ASC Topic 740, “Income Taxes”(“ASC 740”). Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for
how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected
to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more
likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently
be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement
with the tax authority assuming full knowledge of the position and relevant facts.
As at December 31, 2017 and 2016, the Company
had no benefit or penalties regarding its income taxes. As of December 31, 2017, there are also no any significant uncertain tax
items.
The main operations of the company are located
in the PRC and have jurisdiction under the local tax law. As a result of these operations, the company’s tax returns are
subject to examination by a foreign tax authority. As of December 31, 2017, the Company filed and cleared the tax returns of 2017
with the appropriate local PRC tax authority.
Foreign currencies translation
Transactions denominated in currencies other
than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional
currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the
statement of operations. The reporting currency of the Company is the United States Dollar ("US$"). The Company's subsidiaries
in the PRC maintain their books and records in their local currency, the Renminbi Yuan ("RMB"), which is the functional
currency as being the primary currency of the economic environment in which these entities operate.
In general, for consolidation purposes, assets
and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic
830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses
are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements
of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of
stockholders’ equity.
Translation of amounts from RMB into US$ has
been made at the following exchange rates for the respective year:
|
|
2017
|
|
|
2016
|
|
Year-end RMB:US$ exchange rate
|
|
|
6.5064
|
|
|
|
6.9437
|
|
Annual average RMB:US$ exchange rate
|
|
|
6.7570
|
|
|
|
6.6430
|
|
RESULTS OF OPERATIONS
Year Ended December 31, 2017 compared to
Year Ended December 31, 2016
The following discussion should be read in
conjunction with the financial statements included in this report and is qualified in its entirety by the foregoing.
REVENUES
Total revenues were $8,508,173 and $6,041,261
for the years ended December 31, 2017 and 2016, respectively. Total revenues increased by $2,466,912, or 40.83%, for the year ended
December 31, 2017 compared to total revenues for the year ended December 31, 2016. The increase in total revenue was due to the
delivered goods that have been confirmed as revenue, which resulted in an increase in total revenue.
Product Revenues
Product revenues are derived principally from
the sale of self-manufactured products and energy saving flow control equipment. Product revenues were $8,267,174 and $5,961,098
for the years ended December 31, 2017 and 2016, respectively. Product revenues for the year ended December 31, 2017 increased by
$2,306,076 or 38.68%, compared to the product revenue for the year ended December 31, 2016. The increase in product revenue was
due to the delivered goods that have been confirmed as revenue which, resulted in an increase in total revenue.
Service Revenues
Service revenues are derived principally from
energy-saving technical services and product collaboration processing services. The energy-saving technical services include providing
energy saving auditing, conservation plans, and/or related service reports. The product re-processing services are generally billed
on a time-cost plus basis. Service revenues were $240,999 and $80,163 for the years ended December 31, 2017 and 2016, respectively,
an increase of $160,836 or 200.63%. The increase in service revenue was primarily due to the increase in orders relating to product
collaboration processing services, which led to an increase the service revenues.
COSTS AND EXPENSES
Cost of Revenues
Cost of revenues consists primarily of material
costs, direct labor, depreciation and manufacturing overhead, which are directly attributable to the manufacture of products and
the rendering of services. Total cost of revenues was $7,591,659 and $5,892,492 for the years ended December 31, 2017 and 2016,
respectively. The total cost of revenues increased by $1,699,167 or 28.83% for the year ended December 31, 2017 compared to the
total cost of revenues for the year ended December 31, 2016. The increase in cost of revenues was primarily due to the increase
in total revenues.
The overall gross profit for the Company was
$916,514 and $148,769, or 10.77% and 2.46%, of total revenues, for the years ended December 31, 2017 and 2016, respectively.
Cost of Products
Total cost of product revenues was $7,378,113
and $5,827,978 for the years ended December 31, 2017 and 2016, respectively. The cost of products increased by $1,550,135 or 26.59%
for the year ended December 31, 2017 compared to the cost of products for the year ended December 31, 2016. The increase in cost
of products was primarily due to the increase in total revenues
The gross profit for products was $889,061
and $133,120, and the gross profit margin was 10.75% and 2.20% for the years ended December 31, 2017 and 2016, respectively.
Cost of Service
Total cost of service revenues was $213,546
and $64,514 for the years ended December 31, 2017 and 2016, respectively. The cost of service revenues increased by $149,032 or
231% for the year ended December 31, 2017 compared to the cost of revenues for the year ended December 31, 2016. The increase was
primarily due to the increase in service revenue. The gross margin for services was $27,453 and $15,649, or 11.39% and 19.52%,
for the years ended December 31, 2017 and 2016, respectively.
Operating Expenses
The total operating expenses were $2,111,585
and $1,628,819 or 24.81% and 26.96% of operating income, for the years ended December 31, 2017 and 2016, respectively. The total
operating expenses increased by $482,766 or 29.63% for the year ended December 31, 2017 compared to the year ended December 31,
2016. The increase of operating expenses is mainly due to increases in property taxes and operating expenses of our subsidiaries.
Sales and marketing expenses
The total sales and marketing expenses were
$63,451 and $35,820, or 0.75% and 0.59%, of total revenues, for the years ended December 31, 2017 and 2016, respectively. The increase
is primarily due to increased consulting expenses of our subsidiaries.
General and administrative expenses
General and administrative expenses were $2,048,134
and $1,592,999, or 24.07%% and 26.37%, of total revenue, for the year ended December 31, 2017 and 2016, respectively. General and
administrative expenses increased by $455,135 or 28.57%. The increase of general and administrative expenses is primarily due to
the increases in property taxes and operating expenses of our subsidiaries. Property taxes increased by $55,322 (or 62.43%) as
compared to last year.
Loss from Operations
As a result of the foregoing, our loss from
operations was $1,195,071 and $1,480,050 for the year ended December 31, 2017 and 2016, respectively. The decrease of loss from
operations was $284,979 or 19%. This decrease in loss from operations is primarily due to the increase in total revenues, partially
offset by the increase in operating expenses.
Other Expenses
For the year ended December 31, 2017, other
expense was $380,600 as compared to $337,283 for the year ended December 31, 2016, which increased by $43,317 or 12.84%. The increase
in other expenses was due to the decrease of the interest revenue and the increase of financial service charges.
Income Tax Expenses
For the years ended December 31, 2017 and 2016,
income tax expenses were $2,744 and $246, respectively. The increase of the income tax expenses was $2,498 or 1015.44%.
As of December 31, 2017, the Company’s
operations in the United States of America incurred $3,922,063 of cumulative net operating losses, which can be carried forward
to offset future taxable income. The net operating loss carry forwards begin to expire in 2037, if unutilized. The Company has
provided for a full valuation allowance against the deferred tax assets of $823,633 on the expected future tax benefits from the
net operating loss carry forwards as the management believes it is more likely than not that these assets will not be realized
in the future.
Net loss
As a result of the foregoing, we recorded
a net loss of $1,578,415, a 18.55% loss margin on revenue for the year ended December 31, 2017, as compared to net loss of $1,817,579,
a 30.08% loss margin on revenues, for the year ended December 31, 2016. The net loss for the year ended December 31, 2017 decreased
by $239,164 or 13.15%, as compared to the year ended December 31, 2016. The decrease of net loss is primarily due to the increase
of both product revenues and the gross profit, partially offset by the increase in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
For the year ended December 31, 2017, net cash
used in operating activities was $908,229. This was attributable primarily to net loss of $1,578,415, adjusted by non-cash items
of depreciation and amortization of $944,012 an increase in accounts and retention receivable by $4,814,628, a decrease in inventories
by $2,746,175, an increase in prepayment and other receivable by $316,621, an increase in the accounts payable by $330,012 and
an increase in other payable and accrued liabilities by $1,388,543.
We have followed ASC 230-10-45-28 and choose
to provide information about major classes of cash flow items by the indirect method. In the statement of cash flows, we have reported
the same amount for net cash flow from operating activities indirectly by adjusting net income to reconcile it to net cash flow
from operating activities. The reconciliation has separately reported all major classes of reconciling items, for example, changes
during the period in accounts receivables pertaining to operating activities, in inventory, and in payables pertaining to operating
activities.
As of December 31, 2017, the decrease of the
inventories was mainly due to the delivered goods which has been confirmed as the revenue.
As of December 31, 2017, accounts and retention
receivable was $13,523,894, 99.92% and 0.08% of the product revenue and project revenue, respectively.
The Company is highly aware the risk of default,
and as a result, we actively monitor accounts receivable with aging above 1 year and those that account for about 17% of the total
accounts receivable, thus we believe there is no significant credit risk. The Company will consider an allowance for doubtful accounts
for any estimated losses resulting from the inability of its customers to make required payments. The Company’s accounts
and retention receivable aging was as follows:
Items
|
|
Total
|
|
|
1-90 days
|
|
|
91-180 days
|
|
|
181-365 days
|
|
|
Above 365
days
|
|
Product
|
|
|
13,513,181
|
|
|
|
5,306,583
|
|
|
|
578,140
|
|
|
|
2,903,719
|
|
|
|
4,724,739
|
|
Service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project
|
|
|
10,713
|
|
|
|
9,176
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,537
|
|
Total
|
|
|
13,523,894
|
|
|
|
5,315,759
|
|
|
|
578,140
|
|
|
|
2,903,719
|
|
|
|
4,726,276
|
|
Less: retention receivable
|
|
|
545,940
|
|
|
|
24,375
|
|
|
|
36,537
|
|
|
|
114,611
|
|
|
|
370,417
|
|
Less: allowance for doubtful accounts
|
|
|
760,164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
760,164
|
|
Accounts receivable, net
|
|
|
12,217,790
|
|
|
|
5,291,384
|
|
|
|
541,603
|
|
|
|
2,789,108
|
|
|
|
3,595,695
|
|
Most of our customers make payments in accordance
with the agreed payment terms in a timely manner. In rare cases, we may offer extended payment terms to certain customers for equipment
sales. These customers are usually large state-owned corporations with good credit ratings. At the end of each period, we evaluate
the structure and collectability of accounts receivable and for those receivables that are past due or not being paid according
to the payment terms. We take appropriate actions to exhaust all means of collection, including seeking legal resolution in a court
of law, for our collection efforts. Meanwhile, the Company also adopted strict sales polices according to the signed contracts.
The Company evaluated the existing customers and potential customers; as well as reducing their credit in the sales and raising
the quality of contracts and controls on the doubtful accounts.
As of 31 December, 2017, the accounts receivable
of two customers with aging above 365 days are expected to be collected between April and June, 2018 . The Collecting time indicated
below:
|
|
|
|
|
Collected
amount by end of
|
|
Customer
|
|
AR with aging
above 365 days
|
|
|
June
2018
|
|
|
September 2018
|
|
|
December 2018
|
|
Customer “A”
|
|
|
4,522,932
|
|
|
|
1,356,879
|
|
|
|
1,659,839
|
|
|
|
1,506,210
|
|
We offer a free 12 months of product warranty
on a case-by-case basis, depending upon the type of customers, nature and size of the infrastructure projects. Under such arrangements,
a portion of the project contract balance (usually 5-10% of contract value) is withheld by a customer from 12 to 24 months, until
the product warranty has expired.
Investing activities
As of 31 December, 2017, net cash used
in investing activities was $0.
Financing activities
In March 2017, the Company obtained a Short
term bank loan of $6,147,814 (Equivalent to RMB 40,000,000) from SPD Bank, due March 19, 2018, monthly payable, which is guaranteed
by its vendor.
Inflation
We believe that the relatively moderate rate
of inflation over the past few years has not had a significant impact on our results of operations. At present we are able to increase
our prices due to the rising prices of raw materials.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance sheet
arrangements.
IMPACT OF RECENTLY ISSUED NEW ACCOUNTING
STANDARDS
We do not expect adoption of recently issued
accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
NF ENERGY SAVING CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
NF Energy Saving Corporation
Opinion on the Financial Statements
We have audited the accompanying
consolidated balance sheets of NF Energy Saving Corporation and its subsidiaries (the “Company”) as of December
31, 2017 and 2016, and the related consolidated statements of operation, comprehensive income (loss),
cash flows, and changes in stockholders’ equity for each of the years in the two-year period ended December 31, 2017,
and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016,
and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017,
in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe our audits provide a reasonable
basis for our opinion.
/s/ HKCMCPA Company Limited
We have served as the Company’s auditor since 2006.
Hong Kong, China
March 30, 2018
NF ENERGY SAVING CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND
2016
(Currency expressed in United States Dollars
(“US$”), except for number of shares)
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
282,154
|
|
|
$
|
124,637
|
|
Accounts receivable, net
|
|
|
12,217,790
|
|
|
|
6,644,994
|
|
Retention receivable
|
|
|
545,940
|
|
|
|
629,680
|
|
Inventories
|
|
|
2,064,231
|
|
|
|
4,606,564
|
|
Prepayments and other receivables
|
|
|
3,645,652
|
|
|
|
3,109,069
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
18,755,767
|
|
|
|
15,114,944
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
19,987,116
|
|
|
|
17,128,235
|
|
Land use right, net
|
|
|
2,664,054
|
|
|
|
2,555,704
|
|
Construction in progress
|
|
|
26,128
|
|
|
|
2,520,234
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
41,433,065
|
|
|
$
|
37,319,117
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
3,976,334
|
|
|
$
|
3,404,760
|
|
Short-term bank borrowings
|
|
|
7,223,681
|
|
|
|
5,760,618
|
|
Amount due to a related party
|
|
|
431,682
|
|
|
|
431,682
|
|
Other payables and accrued liabilities
|
|
|
2,504,556
|
|
|
|
1,014,999
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,136,253
|
|
|
|
10,612,059
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
14,136,253
|
|
|
|
10,612,059
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 50,000,000 shares authorized; 7,073,289 and 7,073,289 shares issued and outstanding as of December 31, 2017 and 2016, respectively
|
|
|
7,073
|
|
|
|
7,073
|
|
Additional paid-in capital
|
|
|
12,055,825
|
|
|
|
12,055,825
|
|
Deferred compensation
|
|
|
-
|
|
|
|
(355,200
|
)
|
Statutory reserve
|
|
|
2,227,634
|
|
|
|
2,227,634
|
|
Accumulated other comprehensive income
|
|
|
2,613,829
|
|
|
|
858,502
|
|
Retained earnings
|
|
|
10,343,407
|
|
|
|
11,913,224
|
|
|
|
|
|
|
|
|
|
|
Total NFEC stockholders’ equity
|
|
|
27,247,768
|
|
|
|
26,707,058
|
|
Non-controlling interest
|
|
|
49,044
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS’
EQUITY
|
|
|
27,296,812
|
|
|
|
26,707,058
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
41,433,065
|
|
|
$
|
37,319,117
|
|
See accompanying notes to consolidated financial
statements.
NF ENERGY SAVING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND
2016
(Currency expressed in United States Dollars
(“US$”), except for number of shares)
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
REVENUES, NET
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
8,267,174
|
|
|
$
|
5,961,098
|
|
Services
|
|
|
240,999
|
|
|
|
80,163
|
|
Total revenues, net
|
|
|
8,508,173
|
|
|
|
6,041,261
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
|
|
|
|
|
|
Cost of products
|
|
|
7,378,113
|
|
|
|
5,827,978
|
|
Cost of services
|
|
|
213,546
|
|
|
|
64,514
|
|
Total cost of revenues
|
|
|
7,591,659
|
|
|
|
5,892,492
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
916,514
|
|
|
|
148,769
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
63,451
|
|
|
|
35,820
|
|
General and administrative
|
|
|
2,048,134
|
|
|
|
1,592,999
|
|
Total operating expenses
|
|
|
2,111,585
|
|
|
|
1,628,819
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(1,195,071
|
)
|
|
|
(1,480,050
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
(26,863
|
)
|
|
|
2,893
|
|
Interest income
|
|
|
8
|
|
|
|
14,246
|
|
Interest expense
|
|
|
(353,745
|
)
|
|
|
(354,422
|
)
|
Total other expense
|
|
|
(380,600
|
)
|
|
|
(337,283
|
)
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(1,575,671
|
)
|
|
|
(1,817,333
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(2,744
|
)
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(1,578,415
|
)
|
|
|
(1,817,579
|
)
|
|
|
|
|
|
|
|
|
|
Less: net loss attributable to non-controlling
interest
|
|
|
(8,598
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO NF ENERGY SAVING CORPORATION
|
|
$
|
(1,569,817
|
)
|
|
$
|
(1,817,579
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
– Basic
|
|
$
|
(0.22
|
)
|
|
$
|
(0.28
|
)
|
– Diluted
|
|
$
|
(0.22
|
)
|
|
$
|
(0.28
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
– Basic
|
|
|
7,073,289
|
|
|
|
6,575,857
|
|
– Diluted
|
|
|
7,073,289
|
|
|
|
6,575,857
|
|
See accompanying notes to consolidated financial
statements.
NF ENERGY SAVING CORPORATION
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2017 AND
2016
(Currency expressed in United States Dollars
(“US$”), except for number of shares)
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,578,415
|
)
|
|
$
|
(1,817,579
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
– Foreign currency adjustment gain (loss)
|
|
|
1,756,765
|
|
|
|
(1,948,838
|
)
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
1,75
6,765
|
|
|
|
(1,948,838
|
)
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS)
|
|
|
178,350
|
|
|
|
(3,766,417
|
)
|
Less: Comprehensive (loss) attributable to non-controlling interests
|
|
|
(7,160
|
)
|
|
|
-
|
|
Comprehensive income (loss) attributable to NF Energy Saving Corporation
|
|
$
|
185,510
|
|
|
$
|
(3,766,417
|
)
|
NF ENERGY SAVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States Dollars
(“US$”))
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,578,415
|
)
|
|
$
|
(1,817,579
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
944,012
|
|
|
|
998,189
|
|
Stock based compensation
|
|
|
355,200
|
|
|
|
96,000
|
|
Write off of plant and equipment
|
|
|
37,493
|
|
|
|
-
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts and retention receivable
|
|
|
(4,814,628
|
)
|
|
|
473,085
|
|
Inventories
|
|
|
2,746,175
|
|
|
|
2,074,453
|
|
Prepayments and other receivables
|
|
|
(316,621
|
)
|
|
|
(909,360
|
)
|
Accounts payable, trade
|
|
|
330,012
|
|
|
|
(1,212,244
|
)
|
Other payables and accrued liabilities
|
|
|
1,388,543
|
|
|
|
457,288
|
|
Net cash (used in) provided by operating activities
|
|
|
(908,229
|
)
|
|
|
159,832
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
-
|
|
|
|
(191,375
|
)
|
Payments on construction in progress
|
|
|
-
|
|
|
|
(216,130
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(407,505
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
-
|
|
|
|
1,806,410
|
|
Advance from non-controlling interest
|
|
|
16,503
|
|
|
|
-
|
|
Proceeds from short-term bank borrowings
|
|
|
6,955,736
|
|
|
|
6,021,367
|
|
Repayment on short-term bank borrowings
|
|
|
(5,919,775
|
)
|
|
|
(7,872,937
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,052,464
|
|
|
|
(45,160
|
)
|
|
|
|
|
|
|
|
|
|
Effect on exchange rate change on cash and cash equivalents
|
|
|
13,282
|
|
|
|
(17,101
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
157,517
|
|
|
|
(309,934
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
124,637
|
|
|
|
434,571
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
282,154
|
|
|
$
|
124,637
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
2,744
|
|
|
$
|
246
|
|
Cash paid for interest
|
|
$
|
353,745
|
|
|
$
|
354,422
|
|
See accompanying notes to consolidated financial
statements.
NF ENERGY SAVING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017 AND
2016
(Currency expressed in United States Dollars
(“US$”), except for number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
Total
NFEC
|
|
|
Non-
|
|
|
Total
|
|
|
|
Common
stock
|
|
|
Additional
|
|
|
Deferred
|
|
|
Statutory
|
|
|
comprehensive
|
|
|
Retained
|
|
|
stockholders’
|
|
|
controlling
|
|
|
stockholders’
|
|
|
|
No.
of shares
|
|
|
Amount
|
|
|
paid-in
capital
|
|
|
compensation
|
|
|
reserve
|
|
|
income
|
|
|
earnings
|
|
|
equity
|
|
|
interest
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2016
|
|
|
6,553,289
|
|
|
$
|
6,553
|
|
|
$
|
11,605,145
|
|
|
$
|
-
|
|
|
$
|
2,227,634
|
|
|
$
|
2,807,340
|
|
|
$
|
13,730,803
|
|
|
$
|
30,377,475
|
|
|
$
|
-
|
|
|
$
|
30,377,475
|
|
Share
issued for services rendered
|
|
|
520,000
|
|
|
|
520
|
|
|
|
450,680
|
|
|
|
(451,200
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization
of deferred compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
96,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
96,000
|
|
|
|
-
|
|
|
|
96,000
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,948,838
|
)
|
|
|
-
|
|
|
|
(1,948,838
|
)
|
|
|
-
|
|
|
|
(1,948,838
|
)
|
Net
loss for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,817,579
|
)
|
|
|
(1,817,579
|
)
|
|
|
-
|
|
|
|
(1,817,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2016
|
|
|
7,073,289
|
|
|
$
|
7,073
|
|
|
$
|
12,055,825
|
|
|
$
|
(355,200
|
)
|
|
$
|
2,227,634
|
|
|
$
|
858,502
|
|
|
$
|
11,913,224
|
|
|
$
|
26,707,058
|
|
|
$
|
-
|
|
|
$
|
26,707,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2017
|
|
|
7,073,289
|
|
|
$
|
7,073
|
|
|
$
|
12,055,825
|
|
|
$
|
(355,200
|
)
|
|
$
|
2,227,634
|
|
|
$
|
858,502
|
|
|
$
|
11,913,224
|
|
|
$
|
26,707,058
|
|
|
|
-
|
|
|
$
|
26,707,058
|
|
Contribution
from non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56,204
|
|
|
|
56,204
|
|
Amortization
of deferred compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
355,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
355,200
|
|
|
|
-
|
|
|
|
355,200
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,755,327
|
|
|
|
-
|
|
|
|
1,755,327
|
|
|
|
1,438
|
|
|
|
1,756,765
|
|
Net
loss for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,569,817
|
)
|
|
|
(1,569,817
|
)
|
|
|
(8,598
|
)
|
|
|
(1,578,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2017
|
|
|
7,073,289
|
|
|
$
|
7,073
|
|
|
$
|
12,055,825
|
|
|
$
|
-
|
|
|
$
|
2,227,634
|
|
|
$
|
2,613,829
|
|
|
$
|
10,343,407
|
|
|
$
|
27,247,768
|
|
|
$
|
49,044
|
|
|
$
|
27,296,812
|
|
See accompanying notes to consolidated financial
statements.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
|
1.
|
ORGANIZATION AND BUSINESS BACKGROUND
|
NF Energy Saving Corporation (the “Company”
or “NFEC”) was incorporated in the State of Delaware in the name of Galli Process, Inc. on October 31, 2000. On February
7, 2002, the Company changed its name to “Global Broadcast Group, Inc.” On November 12, 2004, the Company changed its
name to “Diagnostic Corporation of America.” On March 15, 2007, the Company changed its name to “NF Energy Saving
Corporation of America.” On August 24, 2009, the Company further changed its current name to “NF Energy Saving Corporation.”
On October 1, 2010, the Company’s common stock was traded on Nasdaq global market. On March 7, 2012, and upon approval by
NASDAQ, the common stock transferred from the Nasdaq Global Market to the Nasdaq Capital Market.
The Company, through its subsidiaries, mainly
operates in the energy technology business in the People’s of Republic of China (the “PRC”). The Company specializes
in the provision of energy saving technology consulting, optimization design services, energy saving reconstruction of pipeline
networks and contractual energy management services to China’s electric power, petrochemical, coal, metallurgy, construction,
and municipal infrastructure development industries. The Company also engages in the manufacturing and sales of the energy-saving
flow control equipment. All the customers are located in PRC.
Description of subsidiaries
Name
|
|
Place of incorporation
and kind of
legal entity
|
|
Principal activities
and place of operation
|
|
Particulars of issued/
registered share
capital
|
|
Effective interest
held
|
|
|
|
|
|
|
|
|
|
Liaoning Nengfa Weiye Energy Technology Co. Ltd (“Nengfa Energy”)
|
|
The PRC, a limited liability company
|
|
Production of a variety of industrial valve components which are widely used in water supply and sewage system, coal and gas fields, power generation stations, petroleum and chemical industries in the PRC
|
|
US$5,000,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
Liaoning Nengfa Tiefa Import
& Export Co.Ltd (“Nengfa Tiefa Import & Export”)
|
|
The PRC, a limited liability company
|
|
Development and production of hi-tech and automatic-intelligence valve products
|
|
RMB877,192
|
|
57%
|
NFEC and its subsidiaries are hereinafter referred
to as (the “Company”).
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
These accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
In preparing these consolidated financial statements,
management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and
revenues and expenses during the years reported. Actual results may differ from these estimates.
The consolidated financial statements include
the financial statements of NFEC and its subsidiaries. All significant inter-company balances and transactions within the Company
have been eliminated upon consolidation.
|
·
|
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.
|
·
|
Accounts receivable and allowance for doubtful accounts
|
Accounts receivable are recorded at the invoiced
amount and do not bear interest, which are due within contractual payment terms, generally 30 to 90 days from shipment. Credit
is extended based on evaluation of a customer's financial condition, the customer credit-worthiness and their payment history.
Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 90 days
and over a specified amount are reviewed individually for collectability. At the end of each period, the Company specifically evaluates
individual customer’s financial condition, credit history, and the current economic conditions to monitor the progress of
the collection of accounts receivables. The Company will consider the allowance for doubtful accounts for any estimated losses
resulting from the inability of its customers to make required payments. For the receivables that are past due or not being paid
according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal resolution
in a court of law. Account balances are charged off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its
customers. As of December 31, 2017 and 2016, the allowance for doubtful accounts was $760,164 and $712,288, respectively.
Retention receivable is the amount withheld
by a customer based upon 5-10% of the contract value, until a product warranty is expired. The warranty period is usually 12 months.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Inventories are stated at the lower of cost
or market value (net realizable value), cost being determined on a weighted average method. Costs include material, labor and manufacturing
overhead costs. The Company reviews historical sales activity quarterly to determine excess, slow moving items and potentially
obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances
based on excess and obsolete inventories determined principally by customer demand. As of December 31, 2017 and 2016, the Company
did not record an allowance for obsolete inventories, nor have there been any write-offs.
|
·
|
Property, plant and equipment
|
Property, plant and equipment are stated at
cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis
over the following expected useful lives from the date on which they become fully operational and after taking into account their
estimated residual values:
|
|
Expected useful lives
|
|
Residual value
|
|
Building
|
|
30-50 years
|
|
|
5
|
%
|
Plant and machinery
|
|
10 – 20 years
|
|
|
5
|
%
|
Furniture, fixture and equipment
|
|
5 – 8 years
|
|
|
5
|
%
|
Expenditures for repairs and maintenance are
expensed as incurred. When assets have been retired or sold, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the results of operations.
All lands in the PRC are owned by the PRC government.
The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time.
Thus, the Company’s land purchases in the PRC is considered to be leasehold land and is stated at cost less accumulated amortization
and any recognized impairment loss. Amortization is provided over the term of the land use right agreement on a straight-line basis,
which is 50 years and will expire in 2059.
|
·
|
Construction in progress
|
Construction in progress is stated at cost,
which includes acquisition of land use rights, cost of construction, purchases of plant and equipment and other direct costs attributable
to the construction of a manufacturing facility in Yinzhou District Industrial Park, Tieling City, Liaoning Province, the PRC.
Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized
interest is incurred during the period of construction.
|
·
|
Impairment of long-lived assets
|
In accordance with the provisions of ASC Topic
360, “
Impairment or Disposal of Long-Lived Assets
”, all long-lived assets such as property, plant and equipment
held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying
amount of an asset to its estimated future undiscounted cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the
fair value of the assets. There has been no impairment charge for the years presented.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The Company offers the following products and
service to its customers:
(a)
|
Energy saving flow control equipment; and
|
(b)
|
Energy project management and sub-contracting service.
|
In accordance with the ASC Topic 605,
“Revenue
Recognition”
, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has
occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.
The Company derives a majority of its revenues
from the sale of energy saving flow control equipment. Generally, these products are manufactured and configured to customer requirements.
The Company typically produces and builds the energy saving flow control equipment for customers in a period from 1 to 6 months.
When the Company completes the production in accordance with the customer’s specification, the customer is required to inspect
the finished products for quality and product conditions, to its full satisfaction, then the Company makes delivery to the customer.
The Company recognizes revenue from the sale
of such finished products upon delivery to the customer, whereas the title and risk of loss are fully transferred to the customers.
The Company records its revenues, net of value added taxes (“VAT”). The Company is subject to VAT which is levied on
the majority of the products at the rate of 17% on the invoiced value of sales. The Company experienced no product returns and
recorded no reserve for sales returns for the years ended December 31, 2017 and 2016.
Service revenue is primarily derived from energy-saving
technical services or project management or sub-contracting services that are not an element of an arrangement for the sale of
products. These services are generally billed on a time-cost plus basis, for a period of service time from 2 to 3 months. Revenue
is recognized, net of business taxes when the service is rendered and accepted by the customer.
Interest income is recognized on a time apportionment
basis, taking into account the principal amounts outstanding and the interest rates applicable.
Cost of revenue consists primarily of material
costs, direct labor, depreciation and manufacturing overhead, which are directly attributable to the manufacture of products and
the rendering of services or projects. Shipping and handling costs, associated with the distribution of finished products to customers,
are borne by the customers.
|
·
|
Research and development
|
Research and development costs are expensed
when incurred in the development of new products or processes including significant improvements and refinements of existing products.
Such costs mainly relate to labor and material cost. The Company incurred $73,238 and $96,572 of such costs for the years ended
December 31, 2017 and 2016.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
ASC Topic 220,
“Comprehensive Income”,
establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive
income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income,
as presented in the accompanying condensed consolidated statement of stockholders’ equity, consists of changes in unrealized
gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense
or benefit.
Income taxes are determined in accordance with
the provisions of ASC Topic 740, “
Income Taxes
” (“ASC 740”). Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for
how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected
to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more
likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently
be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement
with the tax authority assuming full knowledge of the position and relevant facts.
For the years ended December 31, 2017 and
2016, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2017 and 2016, the
Company did not have any significant unrecognized uncertain tax positions.
The Company conducts the majority of its businesses
in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that
are subject to examination by a foreign tax authority. For the year ended December 31, 2017, the Company filed and cleared 2016
tax return with its local 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 a customer from 12 to 24 months, until the product warranty has expired. The Company has not experienced any material
returns or claims where it was under obligation to honor this standard warranty provision. As such, no reserve for product warranty
has been provided in the result of operations for the years ended December 31, 2017 and 2016.
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.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
|
·
|
Foreign currencies translation
|
Transactions denominated in currencies other
than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional
currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the
statement of operations.
The reporting currency of the Company is the
United States Dollar ("US$"). The Company's subsidiaries in the PRC maintain their books and records in their local currency,
the Renminbi Yuan ("RMB"), which is the functional currency as being the primary currency of the economic environment
in which these entities operate.
In general, for consolidation purposes, assets
and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic
830-30, “
Translation of Financial Statement”,
using the exchange rate on the balance sheet date. Revenues and
expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial
statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement
of stockholders’ equity.
Translation of amounts from RMB into US$ has
been made at the following exchange rates for the respective year:
|
|
2017
|
|
|
2016
|
|
Year-end RMB:US$1 exchange rate
|
|
|
6.5064
|
|
|
|
6.9437
|
|
Annual average RMB:US$1 exchange rate
|
|
|
6.7570
|
|
|
|
6.6430
|
|
|
·
|
Stock based compensation
|
The Company accounts for employee and non-employee
stock awards under ASC Topic 718, whereby equity instruments issued to employees for services are recorded based on the fair value
of the instrument issued and those issued to non-employees are recorded based on the fair value of the consideration received or
the fair value of the equity instrument, whichever is more reliably measurable.
Contributions to retirement plans (which are
defined contribution plans) are charged to general and administrative expenses in the accompanying consolidated statements of operation
as the related employee service is provided.
Parties, which can be a corporation or individual,
are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant
influence over the other party in making financial and operational decisions. Companies are also considered to be related if they
are subject to common control or common significant influence.
ASC Topic 280, “
Segment Reporting
”
establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal
organization structure as well as information about geographical areas, business segments and major customers in financial statements.
For the years ended December 31, 2017 and 2016, the Company operates in one reportable operating segment in the PRC.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
|
·
|
Fair value of financial instruments
|
The carrying value of the Company’s
financial instruments (excluding short-term bank borrowing): 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 fair value of convertible promissory notes is disclosed in Note 10.
The Company also follows the guidance of the
ASC Topic 820-10, “
Fair Value Measurements and Disclosures
” ("ASC 820-10"), with respect to financial
assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes
the inputs used in measuring fair value as follows:
·
|
Level 1
: Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;
|
·
|
Level 2
: Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. Black-Scholes Option-Pricing model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs; and
|
·
|
Level 3
: Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.
|
Fair value estimates are made at a specific
point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
|
·
|
Recent accounting pronouncements
|
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue
from Contracts with Customers
. The standard provides companies with a single model for accounting for revenue arising
from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance.
The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed
to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. The guidance permits
companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year
of adoption, through a cumulative adjustment. In August 2015, the FASB issued ASU 2015-14,
Deferral of the Effective Date
,
which defers the required adoption date of ASU 2014-09 by one year. As a result of the deferred effective date, ASU 2014-09 will
be effective for the Company in its first quarter of fiscal 2018. Early adoption is permitted but not before the original effective
date of the new standard of the first quarter of fiscal 2017. The following ASUs were subsequently issued by the FASB to clarify
the implementation guidance in some areas and add practical expedients: In March 2016, ASU 2016-08,
Revenue from
Contracts with Customers: Principal versus Agent Considerations;
in April 2016, ASU 2016-10,
Revenue from
Contracts with Customers: Identifying Performance Obligations and Licensing;
in May 2016, ASU 2016-12,
Revenue from
Contracts with Customers: Narrow Scope Improvements and Practical Expedients;
and in December 2016, ASU 2016-20,
Technical
Corrections and Improvements to Revenue from Contracts with Customers
. The Company’s is currently finalizing its
evaluation of standard product sales arrangements and has identified an adoption impact related to revenue from certain distributor
agreements which was deferred until the period in which the distributor sells through the inventory to the end customer. In connection
with the adoption of ASU 2014-09, the Company will change the recognition of sales to these distributors whereby revenue will be
estimated and recognized in the period in which the Company transfers control of the product to the distributor; the adoption impact
is not expected to be material. Other than this impact, the Company has not identified any expected impact on the timing and measurement
of revenue for standard product sales arrangements from the adoption of the standard and the Company is currently formalizing its
final conclusions. The Company is also formalizing its evaluation of the impact of adoption on non-product sales arrangements,
which represent less than five percent of revenue.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
In February 2016,
the FASB issued ASU No. 2016-02,
Leases
. The standard requires that a lessee recognize the assets and liabilities
that arise from operating leases. A lessee should recognize in its balance sheet a liability to make lease payments (the lease
liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term
of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize
lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning
of the earliest period presented using a modified retrospective approach. The guidance in ASU 2016-02 is effective for annual and
interim reporting periods beginning after December 15, 2018. The Company’s initial evaluation of its current leases does
not indicate that the adoption of this standard will have a material impact on its consolidated statements of operations.
In March 2016, the
FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting,
which changes the accounting
for employee share-based payments, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements,
as well as classification in the statement of cash flows. Under the new guidance, excess tax benefits associated with share-based
payment awards will be recognized in the income statement when the awards vest or settle, rather than in stockholders’ equity.
In addition, it will increase the number of shares an employer can withhold to cover income taxes on share-based payment awards
and still qualify for the exemption to liability classification. The guidance was effective for the Company in the first quarter
of 2017.
In November 2016,
the FASB issued ASU No. 2016-18,
Statement of Cash Flows - Restricted Cash
, which requires entities
to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of
cash flows. The guidance will be effective for the Company in its first quarter of fiscal 2018. Early adoption is permitted, including
adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that
interim period. The new standard must be adopted retrospectively.
In January 2017, the
FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other,
which eliminates step two of the
quantitative goodwill impairment test. Step two required determination of the implied fair value of a reporting unit, and then
a comparison of this implied fair value with the carrying amount of goodwill for the reporting unit, in order to determine any goodwill impairment.
Under the new guidance, an entity is only required to complete a one-step quantitative test, by comparing the fair value of a reporting
unit with its carrying amount, and any goodwill impairment charge is determined by the amount by which the carrying amount exceeds
the reporting unit’s fair value. However, the loss should not exceed the total amount of goodwill allocated to the reporting
unit. The standard is effective for the Company in the first quarter of 2020, with early adoption permitted as of January 1, 2017,
and is to be applied on a prospective basis.
In March 2017, the
FASB issued ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit
Cost
, which changes how employers that sponsor defined benefit pension or other postretirement benefit plans present
the net periodic benefit cost in the statement of operations. The new guidance requires entities to report the service cost component
in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented
in the statement of operations separately from the service cost component and outside the subtotal of loss from operations. ASU 2017-07
also provides that only the service cost component is eligible for capitalization. The standard is effective for the Company in
the first quarter of 2018, with adoption to be applied on a retrospective basis.
In May 2017, the FASB
issued ASU No. 2017-09,
Compensation-Stock Compensation: Scope of Modification Accounting
, which provides
clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award.
This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied
if there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered
non-substantive. The amendments of this ASU are effective for the Company in the first quarter of 2018, with early adoption permitted.
The adoption of ASU 2017-09 is not expected to have an impact on the Company’s consolidated financial statements.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
In August 2017, the
FASB issued ASU No. 2017-12,
Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities
,
which modifies the presentation and disclosure of hedging results. Further, it provides partial relief on the timing of certain
aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in income. The amendments
in this ASU are effective for the Company in the first quarter of 2019.
In November 2017,
the FASB has issued ASU No. 2017-14,
Income Statement—Reporting Comprehensive Income
(Topic 220),
Revenue Recognition
(Topic 605), and
Revenue from Contracts with Customers
(Topic 606). ASU 2017-14 includes amendments to certain SEC paragraphs
within the FASB Accounting Standards Codification (Codification). ASU 2017-14 amends the Codification to incorporate the following
previously issued guidance from the SEC. ‘The amendments in ASU No. 2017-14 amends the Codification to incorporate SEC Staff
Accounting Bulletin (SAB) No. 116 and SEC Interpretive Release on Vaccines for Federal Government Stockpiles (SEC Release No. 33-10403)
that bring existing SEC staff guidance into conformity with the FASB’s adoption of and amendments to ASC Topic 606, Revenue
from Contracts with Customers.
In September 2017,
the FASB has issued ASU No. 2017-13,
Revenue Recognition
(Topic 605),
Revenue from Contracts with Customers
(Topic
606),
Leases
(Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the
July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.” The amendments in ASU
No. 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU No. 2014-09 and ASU No.
2016-02. Both of the below entities may still adopt using the public company adoption guidance in the related ASUs, as amended.
The effective date is the same as the effective date and transition requirements for the amendments for ASU 2014-09 and ASU 2016-02.
Other accounting standards that have been issued
or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to
have a material impact on the Company’s consolidated financial statements upon adoption.
|
3.
|
ACCOUNTS AND RETENTION RECEIVABLE
|
The majority of the Company’s sales
are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company
evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be
uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned
criteria, the Company has not provided the allowance for the years ended December 31, 2017 and 2016.
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accounts receivable, cost
|
|
$
|
12,977,954
|
|
|
$
|
7,357,282
|
|
Retention receivable, cost
|
|
|
545,940
|
|
|
|
629,680
|
|
|
|
|
13,523,894
|
|
|
|
7,986,962
|
|
Less: allowance for doubtful accounts
|
|
|
(760,164
|
)
|
|
|
(712,288
|
)
|
|
|
|
|
|
|
|
|
|
Accounts and retention receivable, net
|
|
$
|
12,763,730
|
|
|
$
|
7,274,674
|
|
Up to March 20, 2018, the Company has subsequently
recovered from approximately 11% of accounts and retention receivable as of December 31, 2017.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Inventories consisted of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
499,213
|
|
|
$
|
519,500
|
|
Work-in-process
|
|
|
555,694
|
|
|
|
402,425
|
|
Finished goods
|
|
|
1,009,324
|
|
|
|
3,684,639
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,064,231
|
|
|
$
|
4,606,564
|
|
For the years ended December 31, 2017 and 2016,
no allowance for obsolete inventories was recorded by the Company.
Finished goods are expected to be delivered
to the customer in the next twelve months.
|
5.
|
PREPAYMENTS AND OTHER RECEIVABLES
|
Prepayments and other receivables consisted
of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Prepayment to vendors for raw materials
|
|
$
|
3,395,923
|
|
|
$
|
2,725,969
|
|
Prepaid operating expenses
|
|
|
186,507
|
|
|
|
281,881
|
|
Advance to employees
|
|
|
63,222
|
|
|
|
101,219
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,645,652
|
|
|
$
|
3,109,069
|
|
The Company generally makes prepayments to
vendors for raw materials in the normal course of business. Prepayments to vendors are recorded when payment is made by the Company
and relieved against inventory when goods are received, which include provisions that set the purchase price and delivery date
of raw materials.
|
6.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment consisted of
the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
20,050,074
|
|
|
$
|
17,862,863
|
|
Plant and machinery
|
|
|
6,172,396
|
|
|
|
5,832,393
|
|
Furniture, fixture and equipment
|
|
|
66,000
|
|
|
|
66,000
|
|
Foreign translation difference
|
|
|
816,833
|
|
|
|
(822,343
|
)
|
|
|
|
27,105,303
|
|
|
|
22,938,913
|
|
Less: accumulated depreciation
|
|
|
(7,053,055
|
)
|
|
|
(6,170,120
|
)
|
Less: foreign translation difference
|
|
|
(65,132
|
)
|
|
|
359,442
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
19,987,116
|
|
|
$
|
17,128,235
|
|
Depreciation expense for the years ended December
31, 2017 and 2016 were $882,935 and $936,064, of which $783,192 and $556,016 were included in cost of revenue, respectively.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Land use right consisted of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Land use right, at cost
|
|
$
|
3,044,062
|
|
|
$
|
3,044,062
|
|
Less: accumulated amortization
|
|
|
(520,269
|
)
|
|
|
(459,192
|
)
|
|
|
|
2,523,793
|
|
|
|
2,584,870
|
|
Add: foreign translation difference
|
|
|
140,261
|
|
|
|
(29,166
|
)
|
|
|
|
|
|
|
|
|
|
Land use right, net
|
|
$
|
2,664,054
|
|
|
$
|
2,555,704
|
|
Amortization expense for the years ended December
31, 2017 and 2016 were $61,077 and $62,125, respectively.
The estimated amortization expense on the land
use right in the next five years and thereafter is as follows:
Year ending December 31:
|
|
|
|
2018
|
|
$
|
63,430
|
|
2019
|
|
|
63,430
|
|
2020
|
|
|
63,430
|
|
2021
|
|
|
63,430
|
|
2022
|
|
|
63,430
|
|
Thereafter
|
|
|
2,346,904
|
|
|
|
|
|
|
Total:
|
|
$
|
2,664,054
|
|
|
8.
|
SHORT-TERM BANK BORROWINGS
|
Short-term bank borrowings consist of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Payable to financial institutions in the PRC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand bank notes:
|
|
|
|
|
|
|
|
|
Equivalent to RMB7,000,000, due on
March 19, 2018, which is guaranteed by its vendor
|
|
$
|
1,075,867
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Equivalent to RMB40,000,000
with interest rate at 1.28 times of the Bank of China Benchmark Lending Rate, monthly payable, due on March 19, 2018, which
is guaranteed by its vendor
|
|
|
6,147,814
|
|
|
|
5,760,618
|
|
|
|
|
|
|
|
|
|
|
Total short-term bank borrowings
|
|
$
|
7,223,681
|
|
|
$
|
5,760,618
|
|
The effective Bank of China Benchmark Lending
rate was 4.35% and 4.35% per annum for the years ended December 31, 2017 and 2016.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
|
9.
|
AMOUNT DUE TO A RELATED PARTY
|
As of December 31, 2017 and 2016, the amount
due to a related party represented temporary advances made by the Company’s major stockholder, Pelaris International Ltd,
which is controlled by Ms. Li Hua Wang (the Company’s CFO) and Mr. Gang Li (the Company’s CEO), which was unsecured,
interest-free with no fixed repayment term. Imputed interest on this amount is considered insignificant.
|
10.
|
OTHER PAYABLES AND ACCRUED LIABILITIES
|
Other payables and accrued liabilities consisted
of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
$
|
513,382
|
|
|
$
|
487,175
|
|
Value-added tax payable
|
|
|
627,290
|
|
|
|
89,471
|
|
Accrued operating expenses
|
|
|
506,944
|
|
|
|
387,981
|
|
Other payable
|
|
|
856,940
|
|
|
|
50,372
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,504,556
|
|
|
$
|
1,014,999
|
|
In July 2016, the Company issued
100,000 shares of its common stock to an IR Firm for investor relations services to be rendered for a service period of five
months, at a market value of $0.96 per share, or a total value of $96,000 which was fully amortized during the year end
December 31, 2016.
In December 2016, the Company issued
120,000 shares of its common stock to an IR Firm for investor relations services to be rendered for a service period of six
months, at a market value of $0.81 per share, or a total value of $97,200 which was fully amortized during the year end
December 31, 2017.
In December 2016, the Company issued
300,000 shares of its common stock to an IR Firm for investor relations services to be rendered for a service period of
twelve months, at a market value of $0.86 per share, or a total value of $258,000 which was fully amortized during the year
end December 31, 2017.
As of December 31, 2017 and 2016, the Company
had deferred compensation of $0 and $355,220, respectively, which was charged against of the stockholder’s equity.
As of December 31, 2017 and 2016, the
Company had a total of 7,073,289 and 7,073,289 shares of its common stock issued and outstanding, respectively.
For the years ended December 31, 2017 and 2016,
the local (“United States of America”) and foreign components of loss before income taxes were comprised of the following:
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Tax jurisdiction from:
|
|
|
|
|
|
|
|
|
- Local
|
|
$
|
(560,363
|
)
|
|
$
|
(202,525
|
)
|
- Foreign
|
|
|
(1,015,308
|
)
|
|
|
(1,614,808
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(1,575,671
|
)
|
|
$
|
(1,817,333
|
)
|
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The provision for income taxes consisted of
the following:
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
- Local
|
|
$
|
-
|
|
|
$
|
-
|
|
- Foreign
|
|
|
2,744
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
- Local
|
|
|
-
|
|
|
|
-
|
|
- Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
2,744
|
|
|
$
|
246
|
|
The effective tax rate in the years presented
is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rate. The Company
operates in various countries: United States of America and the PRC that are subject to taxes in the jurisdictions in which they
operate, as follows:
United States of America
NFEC is registered in the State of Delaware
and is subject to the tax laws of United States of America.
On December 22, 2017, the United States Congress
enacted the Tax Cuts and Jobs Act (the “Act”) resulting in significant modifications to existing law. The Company has
completed the accounting for the effects of the Act during the quarter ended December 31, 2017. The Company’s financial statements
for the year ended December 31, 2017 reflect certain effects of the Act which includes a reduction in the corporate tax rate from
34% to 21% as well as other changes.
As of December 31, 2017, the operations in
the United States of America incurred $3,922,063 of cumulative net operating losses which can be carried forward to offset future
taxable income. The net operating loss carryforwards begin to expire in 2037, if unutilized. The Company has provided for a full
valuation allowance against the deferred tax assets of $823,633 on the expected future tax benefits from the net operating loss
carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
The PRC
The Company’s subsidiaries operating
in the PRC are subject to the Corporate Income Tax Law of the People’s Republic of China at a unified income tax rate of
25%. The reconciliation of income tax rate to the effective income tax rate for the years ended December 31, 2017 and 2016 is as
follows:
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Loss before income taxes from PRC operation
|
|
$
|
(1,015,308
|
)
|
|
$
|
(1,614,808
|
)
|
Statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Income tax expense at statutory rate
|
|
|
(253,827
|
)
|
|
|
(403,702
|
)
|
Tax effect of non-deductible items
|
|
|
256,571
|
|
|
|
403,948
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
2,744
|
|
|
$
|
246
|
|
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The following table sets forth the significant
components of the aggregate deferred tax assets of the Company as of December 31, 2017 and 2016:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
|
|
|
|
|
|
United States – current rate
|
|
$
|
1,333,501
|
|
|
$
|
1,123,394
|
|
United States – effect of change in statutory rate
|
|
|
(509,868
|
)
|
|
|
-
|
|
Less: valuation allowance
|
|
|
(823,633
|
)
|
|
|
(1,123,394
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Management
believes that it is more likely than not that the deferred tax assets will not be fully realizable in the future. Accordingly,
the Company provided for a full valuation allowance against its deferred tax assets of $823,633 as of December 31, 2017. In 2017,
the valuation allowance decreased by $299,761, primarily relating to new tax cuts in the local tax regime.
Basic net loss per share is computed using
the weighted average number of common shares outstanding during the year. The dilutive effect of potential common shares outstanding
is included in diluted net loss per share. The following table sets forth the computation of basic and diluted net loss per share
for the years ended December 31, 2017 and 2016:
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(1,578,415
|
)
|
|
$
|
(1,817,579
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic and diluted
|
|
|
7,073,289
|
|
|
|
6,593,016
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – Basic and diluted
|
|
$
|
(0.22
|
)
|
|
$
|
(0.28
|
)
|
|
14.
|
CHINA CONTRIBUTION PLAN
|
Under the PRC Law, full-time employees of its
subsidiaries of the Company in the PRC are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment
insurance and pension benefits through a China government-mandated multi-employer defined contribution plan. These benefits are
required to accrue for, based on certain percentages of the employees’ salaries. The total contributions made for such employee
benefits were $167,640 and $173,699 for the years ended December 31, 2017 and 2016, respectively.
Under the PRC Law the Company’s subsidiaries
are required to make appropriations to the statutory reserve based on after-tax net earnings and determined in accordance with
generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to
the statutory reserve should be at least 10% of the after-tax net income until the reserve is equal to 50% of the registered capital.
The statutory reserve is established for the purpose of providing employee facilities and other collective benefits to the employees
and is non-distributable other than in liquidation.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
|
16.
|
CONCENTRATIONS OF RISK
|
The Company is exposed to the following concentrations of risk:
(a) Major
customers
For the year ended December 31, 2017, one customer
represented more than 10% of the Company’s revenues. This customer accounted for 48% of the Company’s revenues amounting
to $3,807,773 with $8,523,860 of accounts receivable.
For the year ended December 31, 2016 one customer
represented more than 10% of the Company’s revenues. This customer accounted for 98% of the Company’s revenues amounting
to $6,050,695 with $6,856,520 of accounts receivable.
All major customers are located in the PRC.
(b) Major
vendors
For the year ended December 31, 2017, no vendor
was accounted for 10% or more of the Company’s purchases.
For the year ended December 31, 2016, the vendors
who accounted for 10% or more of the Company’s purchases and its outstanding accounts payable balances as at year-end dates,
are presented as follows:
|
|
Year ended December 31, 2016
|
|
|
December 31, 2016
|
|
Vendor
|
|
Purchases
|
|
|
Percentage
of purchases
|
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
Vendor A
|
|
$
|
188,777
|
|
|
|
18
|
%
|
|
$
|
-
|
|
Vendor C
|
|
|
216,060
|
|
|
|
21
|
%
|
|
|
-
|
|
Vendor D
|
|
|
234,019
|
|
|
|
22
|
%
|
|
|
228,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
638,856
|
|
|
|
61
|
%
|
|
|
228,767
|
|
All vendors are located in the PRC.
(c) Credit
risk
Financial instruments that are potentially
subject to credit risk consist principally of trade receivables. The Company believes the concentration of credit risk in its trade
receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company
does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical trends and other information.
(d) Interest
rate risk
As the Company has no significant interest-bearing
assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
The Company’s interest-rate risk arises
from short-term bank borrowings. The Company manages interest rate risk by varying the issuance and maturity dates variable rate
debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. As
of December 31, 2017, short-term bank borrowings were at fixed rates.
NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(e) Exchange
rate risk
The reporting currency of the Company is US$,
to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are
denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may
be affected by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates against US$, the value of RMB revenues
and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments
that expose to substantial market risk.
(f) Economic
and political risks
The Company's operations are conducted in the
PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic
and legal environment in the PRC, and by the general state of the PRC economy.
The Company's operations in the PRC are subject
to special considerations and significant risks not typically associated with companies in North America and Western Europe. These
include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's
results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and
methods of taxation.
|
17.
|
COMMITMENTS AND CONTINGENCIES
|
As of December 31, 2017 and 2016, there were
no commitments and contingencies involved.
In accordance with ASC Topic 855, “
Subsequent
Events
”, which establishes general standards of accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after
December 31, 2017, up through the date was the Company issued the audited consolidated financial statements. During the period,
the Company did not have any material recognizable subsequent events.
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 an independent third party.