BIMI International Medical Inc. - Annual Report: 2018 (Form 10-K)

NF ENERGY SAVING CORPORATION

FORM 10-K

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

The Company

As used herein the terms “we”, “us”, “our,” “NF Energy”, “NFEC” and the “Company” means NF Energy Saving Corporation, a Delaware corporation, formerly known as NF Energy Saving Corporation of America, Diagnostic Corporation of America, Global Broadcast Group, Inc., and Galli Process, Inc. These terms also include our subsidiaries, NF Energy Investment Corporation, NF Energy Equipment Limited, Liaoning Nengfa Weiye Energy Technology Company Ltd. (“Nengfa Energy”), a corporation organized and existing under the laws of the Peoples’ Republic of China (“PRC”), and Liaoning Nengfa Tiefa Import & Export Co., Ltd. (“Import & Export Company”), a limited liability corporation organized and existing under the laws of the PRC.

NF Energy was incorporated under the laws of the State of Delaware under the name of Galli Process, Inc. on October 31, 2000 for the purpose of seeking and consummating a merger or acquisition with a business entity organized as a private corporation, partnership, or sole proprietorship. On December 31, 2001, Galli Process, Inc. became a majority owned subsidiary of City View TV, Inc., a Florida corporation (“City View”). On February 7, 2002, Galli Process, Inc. changed its name to Global Broadcast Group, Inc. On March 1, 2002, City View merged into Global Broadcast Group, Inc., which was the surviving entity. On November 12, 2004, the Company changed its name to Diagnostic Corporation of America. On March 15, 2007, we changed our name to NF Energy Saving Corporation of America, and on August 24, 2009, the Company further changed its name to NF Energy Saving Corporation, in both instances to more accurately reflect our new business.

On November 26, 2015, we formed a new company devoting to intelligent products was set up which is named by “Liaoning Nengfa Weiye Smart Valve Technology Co. Ltd”. (“Nengfa Smart Valve”). On March 8, 2017, “Liaoning Nengfa Weiye Smart Valve Technology Co. Ltd was named by “Liaoning Nengfa Tiefa Import and Export Co., Ltd.” in order to make further business activities. Nengfa Energy owns approximately 57% of the shares in Import & Export Company.

For internal restructuring purposes, we formed a 100% owned subsidiary NF Energy Investment Corporation (“NF Investment”) in British Virgin Islands on June 22, 2018, which owns 100% of equity interests of NF Energy Equipment Limited (“NF Equipment”), a company incorporated in Hong Kong on August 6, 2018. 100% of equity interests of Nengfa Weiye were subsequently transferred to NF Equipment. Other than its equity interests in NF Equipment, NF Investment does not own any assets or conduct any operations. Other than its equity interests in Nengfa Weiye, NF Equipment does not own any assets or conduct any operations.

In January 2019, Mr. Yongquan Bi, an existing director and a substantial stockholder of the Company, together with a group of additional investors whose holdings together constituted a majority of the Company’s voting rights, delivered a written consent (the “Written Consent”) to the Company’s registered office in a process which is consistent with the Company’s governing documents. The Written Consent modified the composition of the Board of Directors. Mr. Yongquan Bi was subsequently appointed as the Company’s Chairman of the Board, Chief Executive Officer and President.

The structure of our corporate organization is as follows:

NF Energy Saving Corporation (BIMI)

In February 2019, we announced that the Company’s NASDAQ ticker symbol will be changed from “NFEC” to “BIMI” and also announced our intention, subject to shareholder and regulatory approvals, to change the corporate name of the Company to BOQI International Medical Inc.

On April 11, 2019, we entered into a stock purchase agreement (the “Agreement”) with LASTING WISDOM HOLDINGS LIMITED, a company organized under the laws of the British Virgin Islands, PUKUNG LIMITED, a company organized under the laws of Hong Kong, BEIJING XIN RONG XIN INDUSTRIAL DEVELOPMENT CO., LTD., a company organized under the laws of the PRC, Boqi Zhengji Pharmacy Chain Co., Ltd. (“Boqi Pharmacy”), a company organized under the laws of the PRC, and several additional individual sellers. The rationale of the Agreement is for our company to purchase the pharmacy business of Boqi Pharmacy, as part of our expansion and shift of focus from the energy sector to the pharmacy business. The aggregate purchase price for the shares of Boqi Pharmacy’s parent consists of a cash consideration of RMB 40,000,000 and up to 1,500,000 shares of our common stock. The purchase price is subject to post-closing adjustments (contingent on fair market value of the acquired companies). This transaction is anticipated to close during the third or fourth quarter of 2019. The Company plans to raise RMB 40,000,000 in equity to fund the acquisition cost.

Business Description

In the last few years, NFEC was dedicated to energy efficiency enhancement in two fields: (1) manufacturing large diameter energy efficient intelligent flow control systems for thermal and nuclear power generation plants, major national and regional water supply projects and municipal water, gas and heat supply pipeline networks; and (2) energy saving technology consulting, optimization design services, energy saving reconstruction of pipeline networks and contractual energy management services for China’s electric power, petrochemical, coal, metallurgy, construction, and municipal infrastructure industries.

NFEC has received many awards and honors from China’s regulators, professional associations and international organizations, including the ISO 9001:2008 certification from Det Norske Veritas Management System, the Liaoning Provincial Government’s Award of Innovative Enterprise with Best Investment Return Potentials, the Special Industrial Contribution Award of the ESCO Committee of China Energy Conservation Association, and the “Contract-abiding and credit enterprise” Award by the Liaoning State Local administrative bureau for industry and commerce. NFEC was awarded of “Hi-tech enterprise” by Liaoning Technology bureau in 2013.

In 2019, we decided to shift our focus so that our business will be mainly engaged in the sale of medicines and other health-related commodities through the development of a marketing network. We intend to focus on sales of prescription drugs, explore new retail opportunities (in addition to the acquisition of Boqi Pharmacy), and enter new rural areas. Through the expansion of pharmacy stores, acquisitions of businesses in the medical industry and franchise development, we intend to continue to build core competencies such as specialized services. We are committed to the pharmaceutical retail industry and to transforming the company into a technology-driven health service platform. We also intend to continue to actively explore domestic and international financing opportunities.

Products and Services

At present, our products and services include:

•        Providing large-diameter smart flow control devices for China’s electric power generation, water supply, heating supply and gas supply industries.

•        Providing the equipment related to desulfurization, denitration and dust removal for China’s electric power generation, metallurgy, petrochemical, steel, cement and heating supply industries.

•        Providing consulting services, such as energy efficiency optimization design, energy consuming equipment retrofit and engineering, equipment maintenance and services, energy management based on Energy Performance Contracts for China’s industrial enterprises.

In 2019, we plan to expand our products and services into the healthcare industry, providing both Chinese and Western medicines, as well as Chinese herbal medicines, health equipment, health foods, general foods, personal care products and daily necessities.

Production and Sales of Energy Saving Flow Control Equipment

Our current principal business is the production and sales of energy-saving flow control equipment and intelligent flow control equipment. This business accounts for the majority of the Company’s current revenues.

The transportation of water, gas, oil, and heat to end users is dependent on various kinds of pipelines and pipe networks. In the case of water pipelines, such systems are also used for public health and safety, and waste and flood control.

We believe that he key to conserve energy and provide for an efficient pipeline transportation process is the valve and the flow control equipment. Having unique technology in this field, the Company has obtained four patents and holds fourteen utilization model patents in China for flow control devices, especially in the area of the bidirectional seal zero revelation installation system with its special characteristics. Using valves of this type can result in a 20% reduction in energy consumption for customers compared to traditional valves. The reduced energy consumption thereby increases the efficiency of the pipeline system. It is widely used in the fields of electric power, hydro power, petroleum, and natural gas. The Company’s super intelligent flow-control device was awarded “Number One Energy Saving Valve of China” by the Chinese Energy Conservation Association. Our products are exported to the United States, Russia, Turkey, Italy, Bulgaria, South Korea, Vietnam, India, Thailand, South Africa, Iraq, and Afghanistan.

Another main business is the energy saving technology engineering and service, the Company intends to continue to develop comprehensive energy conservation and energy reduction equipment and services, and to pursue research development and improved manufacturing of flow control and clean energy related equipment.

Healthcare Products

We plan to expand our operations and focus on becoming a provider of healthcare products. We intend to build up a professional team to take advantage of the market and investment opportunities in China. In April 2019, we entered into a definitive agreement to acquire Boqi Pharmacy. Our plans, subject to obtaining additional financing, also include increasing our investment in medical services and scaling up our recently acquired medical business. At the same time, we intend to follow the group company operation mode and seek new medical service acquisition opportunities with respect to general hospitals, specialist hospitals, specialist chain stores and third-party medical centers in areas such as the Bohai Bay Economic Zone and the Yangtze River Delta in China.

Patents and Technology

Nengfa Energy currently has been issued four invention patents and has applied for fourteen utility model patents in the PRC. In addition to patent protection, we also rely on the confidentiality of our operations, proprietary know-how and business secrets. Although we do not have formal agreements with our employees, we do consider our employees’ work to be proprietary and owned by the Company. Where necessary, we will take steps to protect our intellectual property interests under the laws of the PRC. There can be no assurance that we will be able to enforce our rights if they are improperly taken by our employees or adopted by our competitors outside of sanctioned use and royalty agreements with the Company.

Certain of our service offerings will not be patentable or otherwise be capable of being registered as intellectual property. Therefore, the Company will rely solely on such services being proprietary. As such the Company will have to rely on the services being more advanced or better than its competitors’ offerings or rely on trade secret laws and protections. Such protections in the PRC are considered rather weak and are difficult if not impossible to enforce. Consequently, it may be possible for our competitors to obtain our information and to copy, adopt or adapt our methods, services and technical aspects to their own business with no assurance that we will be able to prevent them from using the intellectual property in competition with us.

We do not have any significant trademarks in use at this time. As our business develops, we will consider the advantage of developing specific trademarks for our products and services and may register those marks with the PRC government authorities for trademark protection.

Markets and Customers

The transport of water and fluid energy, such as oil, gas, steam and hot water depends on pipelines. The intelligent flow control devices supplied by NF Energy are an important part in the fluid energy transportation systems. According to “one belt and road initiative”, China plans to invest 4 trillion yuan in the next 5 to 10 years into water conservancy projects, the average annual investment is 400 billion yuan, and the investment relating to valves is approximately 40 billion yuan per year. Since it was founded in 2006, the Company has supplied its products to many projects of this national water works, including the middle and northern Guangxi Xijiang River Water Diversion Project, Shenzhen Water Supply Project, Shanghai Water Diversion Project, and the 7 urban water supply projects in Liaoning Province, three curved water diversion projects in Dandong, and other major domestic water diversion projects. We believe that we have the best industry performance in water supply projects so as to be awarded as “king of butterfly valve” in water diversion industry. At the same time, we also provide flow control devices and equipment for supercritical thermal power plants and ultra-supercritical coal-fired power plants as well as domestic hydro power generation market which are dominated by China’s state-owned five big power groups. More than 80% of the Company’s annual revenues come from these markets and customers.

In connection with its work on the water diversion project and some of the power plant projects, the Company has a preferred provider agreement with Nengfa Weiye Tieling Valve Joint Stock Co., Ltd. (“Tieling Valve”) under which Nengfa Energy is the preferred provider of the valves and other related flow control equipment that Tieling Valve requires in its own work on the water diversion project. The agreement is in the manner of a right of first refusal whereby Tieling Valve is obliged to offer supply opportunities to Nengfa Energy within its scope of product offerings and expertise, but Tieling Valve is not prohibited from developing other supply arrangements. Tieling Valve and Nengfa Energy have agreed to cooperate to develop and market their respective technologies, equipment, products and services for their respective and mutual benefit, and will work together to examine and expand their respective businesses. Under the agreement, each party retains full right to their respective intellectual property. The agreement terminates in 2021, but by its terms will automatically extend for additional one year terms unless notice of termination is given by one party to the other at least six months prior to the then termination date.

We intend to operate in the pharmaceutical market upon our acquisition of Boqi Pharmacy. According to the Chinese National Bureau of Statistics, in 2018, the per capita consumption expenditure of the national residents was RMB 19,853 yuan. After deducting the price factor, the actual increase was 6.2%, an increase of 0.8 percentage points over the same period of the previous year. From the perspective of the service consumption structure of residents, the per capita medical expenditure on healthcare was RMB1,685 yuan, an increase of 16.1%. In terms of population structure, the aging population continues to deepen. The proportion of people aged 65 and over has increased by 0.5 percentage points. Affected by factors such as expansion and population migration, the proportion of urban population in China

increased by 1.06 percentage points from the end of 2017, an increase of RMB 17.9 million. Benefiting from the increasing demand for medical consumption of residents, the aging of the population, the effect of the “two-child” policy, and the steady improvement of urbanization, the demand for consumer medicine is still stable, laying a solid foundation for continued growth of the pharmaceutical industry.

With the gradual advancement of medicines, prescription outflows will become another major driver of the development of the retail pharmacy industry. The “Notice on Printing and Distributing the 13th Five-Year Plan for Deepening the Reform of the Medical and Health System” (Guo Fa [2016] No. 78) states: “To promote the separation of medical treatment and medicines, medical institutions should prescribe according to the generic name of the drug and take the initiative to provide to the patients, do not limit the outflow of prescriptions. Exploring the multi-channel drug purchasing mode of outpatients in hospitals, patients can purchase drugs from retail pharmacies by prescription.

We believe that adjusting the market structure will make retail pharmacies an important channel for drug sales and pharmaceutical services to patients. In the entire pharmaceutical industry chain, retail pharmacies connect the upstream pharmaceutical preparation production department and downstream patients. We further believe that the growth opportunities expected from increased prescriptions will become a driving force for the development of the retail pharmacy industry.

Currently, the top 100 pharmaceutical retailers in China accounts for 30.8% of the total retail market. This is far below the target set in the Chinese government’s “13th Five-Year Plan”, which forecasts “the annual sales of top 100 pharmaceutical retail operators will account for more than 40% of the total retail sales market”. The top ten retail companies accounted for only 16.8% of the market share, far below the development level of the pharmaceutical market in the US and Japan. In 2017, the number of chain pharmacy companies decreased by 200 compared with 2016. The growth rate of chain enterprises has been negative in the past three years. In 2015-2017, the number of stores in the top 100 and top 10 chain pharmacies accounted for more than gradually climbing. Drawing on the development process of foreign retail pharmacies, the increase in concentration generally occurs after the separation of medicines. China’s pharmaceutical separation reform has been fully launched since 2015, the concentration of retail pharmacy industry has increased rapidly, the speed of mergers and acquisitions of listed companies has accelerated, and the regional integration effect has gradually been reflected, showing a trend of relying on strong and leading enterprises to be strong.

Boqi Pharmacy’s marketing and sales strategy also relies on the use of exclusive agents throughout China who act as marketing agents and after sale service providers. Boqi Pharmacy currently has 23 exclusive distributing agents national wide. At certain times each year, Boqi Pharmacy provides and organizes training sessions for these agents and their personnel. These sessions provide Boqi Pharmacy with a valuable opportunity to gather feedback and to foster an exchange of technical ideas.

Raw Materials

The major raw materials for our production of our flow control devices are stainless steel, steel, copper and rubber parts. We source our materials locally in China. Nengfa Energy is located in Liaoning Province which is China’s largest production base for iron and steel. We have stable long term supply arrangements for our principal raw material suppliers based on long standing business relationships. Since we are located close to the suppliers of many of our essential raw materials, we believe that we enjoy price and transportation cost advantages over our competitors and competing users. Through our advanced technology and our management of raw materials, we believe that we are able to manage and improve our consumption rates of the raw materials we use in production, which results in lower operating expense and extension of our inventories.

Boqi Pharmacy’s pharmaceutical and medical device suppliers mainly include national large-scale pharmaceutical and medical device manufacturing companies and wholesale pharmaceutical companies. Among the national large-scale pharmaceutical and medical device manufacturing suppliers are Shanghai Pharmaceutical (Group) Co., Ltd., China Pharmaceutical Group Corporation, Guangzhou Pharmaceutical Group Co., Ltd., Tianjin Pharmaceutical Group Co., Ltd., Shandong Dong’e Ejiao Group Co., Ltd., Harbin Pharmaceutical Group Co., Ltd. and other large pharmaceutical companies. Among the wholesale pharmaceutical companies are China National Pharmaceutical Group Corporation, China Resources Pharmaceutical Group Co., Ltd., Shanghai pharmaceutical Group Co., Ltd., Jointown Pharmaceutical Group Co., Ltd., Guangzhou Pharmaceutical Co., Ltd. and Nanjing Pharmaceutical Co., Ltd and other mega wholesalers of drug and medical devices.

Regulatory Compliance

The Company’s products are subject to regulatory standards and enforcement codes which typically require that these products meet stringent performance criteria. Standards are established by industry testing and certification organizations such as the Ministry of Industry and Information Technology of China, the American Society of Mechanical Engineers (A.S.M.E.), the Canadian Standards Association (C.S.A.), the Japanese Standards Association (J.S.A.), the International Association of Plumbing and Mechanical Officials (I.A.P.M.O.), Factory Mutual (F.M.), and Underwriters Laboratory (U.L.). These standards are incorporated into state and municipal plumbing and heating, building and fire protection codes in China.

We maintain stringent quality control and testing procedures at our manufacturing facility in order to manufacture products in compliance with code requirements. Our production management is certified to conform to the ISO 9001 standards by the Det Norske Veritas Management System.

According to the “Administrative Measures for Pharmaceutical Business Licenses” and other relevant regulations in China, we will need to obtain qualification certificates for the Operations of the company, its subsidiaries and the pharmacy stores. The qualification certificates mainly include the “Quality Management Certificate for Pharmaceutical Administration” (GSP Certificate), “Pharmaceutical Business License”, “Food Business License”, “Medical Device Business License”, “Medical Agency Practice License”, etc.

The pharmacy stores directly operated by Boqi Pharmacy have all obtained the “Pharmaceutical Business License” and the “Pharmaceutical Management Quality Management Certificate”. At the same time, 30 stores have obtained the “Internet Drug Information Service Qualification Certificate” and 25 stores have obtained the “Medical Device Network Sales Record”. These business qualifications have been renewed or renewed in a timely manner according to the relevant laws and regulations.

Seasonality

Our management believes that our operations are not currently subject to seasonal influences.

Competition

The Company believes it holds a leading position in the super diameter energy efficient flow control system market in China. The Company has an extensive competitive advantage over Chinese domestic manufactures in this field. Other manufactures that are focusing on the development of different and smaller valve products may enter this field. Our major potential competitor in this field is China Valve Technology.

In the other areas of the Company’s business, there are many different competitors with differing focuses and strengths. To some extent, boilers and furnaces are specialized to particular industries and output requirements. This specialization engenders specialization in the design, manufacture and installation of new equipment and retrofit solutions. Therefore, there are many engineering and manufacturing companies that focus on certain types of boilers and furnaces resulting in a relatively fragmented market for these services. The same is true for the retrofit and reconstruction of other industrial systems for improved energy efficiency, as well as for the localized projects for energy conservation and biomass utilization, and similar projects. Therefore, the competition that the Company faces tends to be localized companies with no dominant players at this time.

Boqi Pharmacy is one of the pharmaceutical retailers with a wide distribution network in China. As of December 31, 2018, its marketing network covered 9 provincial markets and nearly 20 prefecture-level cities (urban areas). In 65% of the region, Boqi Pharmacy has established a well-developed online and offline distribution network and a more efficient logistics system in the relevant regions. At the same time, it has strengthened its market share in the terminal market through the combination of endogenous growth and outreach mergers and acquisitions. In recent years, the number of company stores has maintained an annual growth rate of nearly 30%.

We plan to compete based on our ability to address a wide spectrum of solutions in our various market areas. We believe our competitive advantages result from our patented technologies, our strategic relationships with engineering companies, our marketing and our business relationships. We plan to continue to expand these aspects of our business to further grow our core businesses and provide solutions for the energy savings and green energy projects. We intend to participate actively in the government sponsored projects and government contracting.

Research and Development

Our historical research and development activities have been focused on the development of new flow control devices or new production technologies. Our research and development expenses include the materials and labor costs, application fees for patents and significant improvements to existing products. We incurred $56,189 and $73,238 of research and development expenses in 2018 and 2017, respectively. In future, we plan devote more resources to research and development and plans to acquire businesses with research and development capabilities.

Employees

As of December 31, 2018, we had 81 employees including 52 technical staff working in our subsidiaries located in China. We believe we have a good relationship with our employees.

Others

Our internet website address is http://www.nfenergy.com. Through our website, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, proxy statement and registration statements, and all of our insider Section 16 reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission, or SEC. These SEC reports can be accessed through the “Investors” section of our website. The information on our website is not incorporated by reference into this annual report.

ITEM 1A. RISK FACTORS

Investors should carefully consider the following risk factors, in addition to other information included in this annual report, in evaluating NF Energy Saving Corporation and our business. If any of the following risks occur, our business, financial condition and operating results could be materially adversely affected.

Risks Related to Our Business

Our losses in 2018 and need to refinance our outstanding debt raise doubt as to whether we can continue as a going concern.

As of December 31, 2018, we had an accumulated deficit of $6.4 million and a working capital deficit of $10.5 million. These factors among others indicate that we may be unable to continue as a going concern, particularly in the event that we cannot generate revenues, obtain additional financing and/or obtain profitable operations. As such, there is substantial doubt as to our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty and if we cannot continue as a going concern, your investment in us could become devalued or worthless.

We have had a history of losses and our future levels of sales and ability to achieve profitability are unpredictable.

As of December 31, 2018, we had an accumulated deficit of $6.4 million and net loss of approximately $17 million for the year ended December 31, 2018. For the comparable periods, we had a net loss of $1,578,000 in 2017, $1,818,000 in 2016, $969,400 in 2015, and $617,300 in 2014. Our ability to maintain and improve future levels of sales and profitability depends on many factors, which include:

•        delivering products in a timely manner;

•        successfully implementing our business strategy;

•        increased demand for existing products; and

•        controlling costs.

There can be no assurance that we will be able to meet our challenges and continue to be profitable in the future or that the level of historic sales will continue in the future.

We are undertaking a large number of business initiatives at the same time, including exploring opportunities to expand into the healthcare industry in China. If these initiatives are not successful, they may have a negative impact on our results of operations.

We are undertaking a large number of new business initiatives at the same time in order to support our future growth. For example, we expect that our acquisition of Boqi Pharmacy will close later in 2019. Boqi Pharmacy is engaged in retailing medical products through its pharmacy chain stores which is different from our traditional operations and such operations may expose us to operational risks. There can be no assurance that we will successfully scale Boqi Pharmacy, or that our offerings will be attractive to consumers in our market.

Furthermore, we can provide no assurances that we will be successful in our new business initiatives. In addition, developing and testing new and multiple business opportunities and strategies often requires knowledge in areas of expertise that may be new to our organization and may require significant time of our management and resources. For example, Boqi Pharmacy extends our business into an area where we have had limited historical operating and management experience and where low margins and high customer expectations can put pressure on results and performance.

Expanding our business will also require that we develop management expertise in new markets and regulatory regimes, and an inability to adapt our business quickly and efficiently to support our international expansion could materially adversely affect our financial condition and results of operations. We can provide no assurances that we will be successful in expanding our operations into any new businesses and product lines.

Any new businesses we enter may also expose us to additional laws, regulations and risks, including the risk that we may incur ongoing operating expenses in such businesses in excess of revenues, which could harm our financial condition and results of operations. The financial profile of any such new businesses may be different than our current financial profile, which could affect our financial performance and the market price for our common stock.

We may incur significant costs for any new initiative before we realize any corresponding revenue with respect to such initiative. In addition, we may incur costs as we revise, restructure or discontinue existing product categories or business offerings in favor of pursuing new initiatives or retail concepts. The introduction of excellent and new assets requires significant investments by us and outside investors, and we anticipate that will experience some painful period. To the extent that these new business opportunities do not generate sufficient revenue to recoup the cost of developing and operating such new concepts, our results of operations could be materially adversely affected.

In addition, we are continuing a number of new initiatives to improve the operations of our business, including ongoing refinements to our management structure and organizational design. Some of the improvements we are pursuing include simplifying the management structure and optimizing the organizational design will affect our financial results from quarter to quarter.

Given the large number of organizational initiatives we are pursuing, as well as the complexity and untested nature of many of these efforts, there can be no certainty that we will be successful in executing on these initiatives including changes to our organizational design and management structure. We may not experience the operational or financial benefits we expect these improvements to generate and we may face unanticipated costs related to pursuing these initiatives such as personnel turnover, management distraction, or compliance and quality control risks, any of which could have a material adverse effect on our financial condition or results of operations.

All of the foregoing risks may be compounded due to various factors including the economic downturn in China. If we fail to achieve the intended results of our current business initiatives, or if the implementation of these initiatives is delayed or abandoned, diverts management’s attention or resources from other aspects of our business or costs more than anticipated (including, as a result of personnel turnover or compliance and control risks), we may experience inadequate return on investment for some or all such business initiatives, which could have a material adverse effect on our financial condition or results of operations.

We have experienced significant fluctuations in our business during the last several years, and high levels of growth may not be achieved in future periods and may not generate a corresponding improvement in our results of operations.

We have experienced significant fluctuations in the growth rate of our business during the last several years. We may continue to experience wide fluctuations in quarter-to-quarter performance, not only because the rate of sales growth

in some quarters may be slower than in prior periods but also because we may experience some quarters that have growth rates that are higher than prior periods. We are currently engaged in a number of initiatives to support the growth and expansion of our business.

While we anticipate that these initiatives will support the growth of our business, costs and timing issues associated with pursuing these initiatives can negatively affect our gross margins in the short term and may amplify fluctuations in our growth rate from quarter to quarter depending on the timing and extent of our realization of the costs and benefits of such initiatives.

There can be no assurance that these efforts will be successful or that we will not encounter other operational difficulties that may have a material negative impact on growth and profitability. In addition, these initiatives may have near-term material negative impacts on growth and profitability as we incur costs or pursue strategies that may not contribute to our profits and margins until future periods, if at all.

Some factors affecting our business, including macroeconomic conditions and policies and changes in legislation, are not within our control. In prior periods, our results of operations have been adversely affected by weakness in the overall economic environment in China.

In addition, our rates of revenue growth and comparable brand revenue growth have sharply fluctuated from quarter to quarter over the last three years and we expect volatility in the rates of our growth to continue in future quarterly periods. Unique factors in any given quarter may affect period-to-period comparisons in our revenue and comparable brand revenue growth, including;

•        the overall economic and general retail sales environment, including the effects of uncertainty or stock market volatility on consumer spending;

•        our ability to collect our accounts receivable;

•        consumer preferences and demand;

•        our ability to efficiently source and distribute products;

•        changes in our product offerings and the introduction, and timing thereof, of introduction of new products and new product categories; and

•        our competitors introducing similar products.

Due to these factors, our results for any quarter are not necessarily indicative of the results that we may achieve for a full fiscal year. Our results of operations may also vary relative to corresponding periods in prior years. We may take certain pricing, merchandising or marketing actions that could have a disproportionate effect on our business, financial condition and results of operations in a particular quarter or selling season, and as a result we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and cannot be relied upon as indicators of future performance.

Other future developments in our business could also result in material changes in our operating costs. We cannot assure you that we will succeed in offsetting any such expenses with increased efficiency or that cost increases associated with our business will not have an adverse effect on our financial results.

We require a significant amount of cash to satisfy our debt obligations. If we fail to generate sufficient cash flow from operations, we may need to renegotiate or refinance our debt, obtain additional financing, postpone capital expenditures or sell assets.

We depend mainly on cash generated by continuing operating activities to make payments on our debt. We cannot assure you that we will generate sufficient cash flow from operations to make the scheduled payments on our debt. Our ability to meet our debt obligations will depend on whether we can successfully implement our business strategy, as well as on economic, financial, competitive and technical factors.

Some of the factors are beyond our control, such as economic conditions in the markets where we operate or intend to operate, changes in our customers’ demand for products that we sell, and pressure from existing and new competitors. Also, because certain of our loans bear interest at floating rates, we are susceptible to an increase in interest rates.

If we cannot generate sufficient cash flow from operations to make scheduled payments on our debt obligations, we may need to renegotiate the terms of our debt, refinance our debt, obtain additional financing, delay planned capital expenditures or sell assets.

If our lenders decline to renegotiate the terms of our debt in these circumstances, the lenders could declare all amounts borrowed and all amounts due to them under the agreements due and payable.

Our debt obligations may hinder our growth and put us at a competitive disadvantage.

Our debt obligations require us to use a substantial portion of our operating cash flow to repay the principal and interest on our loans. This reduces funds available to grow and expand our business, limits our ability to pursue business opportunities and makes us more vulnerable to economic and industry downturns. The existence of debt obligations and covenants also limits our ability to obtain additional financing on favorable terms.

Due to restrictions in our loan agreements, we may not be able to operate our business as we desire.

Our loan agreements contain a number of conditions and limitations on the way in which we can operate our business, including limitations on our ability to raise debt, sell or acquire assets.

The restrictions in our loan agreements may force us to pursue less than optimal business strategies or forgo business arrangements, which could have been financially advantageous to our shareholders and us. Our failure to comply with the restrictions contained in our loan agreements could lead to a default under the terms of these agreements.

We may expand our business through acquisitions that could result in diversion of resources and extra expenses. This could disrupt our business and adversely affect our financial condition.

In April 2019, we entered into an agreement to acquire Boqi Pharmacy. We may expand our services through additional acquisitions. The negotiation of acquisitions, investments or joint ventures, as well as the integration of acquired or jointly developed businesses, could divert our management’s time and resources. There can be no assurance that we will be able to consume this acquisition or successfully integrate and manage future acquisitions, if they occur.

Furthermore, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity which existed prior to the acquisitions or otherwise perform as expected. The occurrence of any of these events could harm our business, financial condition or results of operations.

We may not be successful in achieving the potential benefits of the acquisition of the business operations of Boqi Pharmacy.

In April 2019, the Company entered into an agreement to acquire Boqi Pharmacy. The transaction is expected to close later in 2019. This acquisition is subject to a variety of risks that could seriously harm our business, financial condition, results of operations, and share price. These risks include, among others:

•        incurrence of unexpected expenses associated with acquisition and integration of the acquired business into our Company;

•        difficulties in the assimilation and integration of the acquired operations, personnel, technologies, products, and information systems;

•        diversion of management’s attention from other business concerns;

•        contractual disputes;

•        potential loss of key employees;

•        incompatible business cultures;

•        difficulties in implementing and maintaining uniform standards, controls and policies;

•        the impairment of relationships with employees and customers as a result of integration of new personnel; and

•        potential inability to retain, integrate and motivate key management, marketing, technical sales and customer support personnel.

We may be unable to generate sufficient cash flow from operations or obtain financing in the future to support our operations and expansion.

Having access to sufficient operating funds and capital funds for expansion will affect our ability to execute our business plan. We finance our business mainly through internally generated funds, short-term bank loans and, from time to time, selling equity securities to raise additional capital. There is no guarantee that we will always have internal funds available for our future development or that we will be able to raise capital from investor financing and loans granted by investors and financial institutions in the future. In addition, there may be delays in the process of selling our securities, which may require us to cut back on our operations or expansion activities. Our access to debt or equity financing depends on the investors’ and banks’ willingness to lend to and invest in us, our financial condition and on general conditions in the capital markets. We may not be able to secure additional sources of financing on commercially acceptable terms, if at all. Any shortfall in our cash flow and capital needs may result in our having to curtail our business plans or have an adverse effect on our financial condition.

We believe that we need to raise additional capital for the expansionary elements of our business plan, which financing may not be available or available on terms favorable to us.

We will need to raise additional capital from outside sources for the purchase of Boqi Pharmacy and other anticipated acquisitions. We cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. One possible impediment to raising capital is the tightening credit policies of the Chinese banks and the continued effects of tightening in the global credit markets. If we cannot raise additional capital on acceptable terms, we may not be able to develop or enhance our products or services, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. We cannot be sure that we will be able to secure all the financing we will require, or that it will be available on favorable terms. If we are unable to obtain any necessary additional financing, we will be required to substantially curtail our approach to implementing our business objectives. Additional financing may be debt, equity or a combination of debt and equity. If equity is used, it could result in significant dilution to our shareholders.

There can be no assurance that we will not be classified as a passive foreign investment company (a “PFIC”).

Based upon our current and projected income, assets and activities, there can be no assurance that we will not be classified as such in the future. Such classification may have materially adverse tax consequences for our U.S. shareholders. One method of avoiding such tax consequences is by making a “qualified electing fund” election for the first taxable year in which the Company is a PFIC. However, such an election is conditioned upon our furnishing our U.S. shareholders annually with certain tax information. We do not presently prepare or provide such information, and such information may not be available to our U.S. shareholders if we are subsequently determined to be a PFIC. You are advised to consult with your own tax advisor regarding the particular tax consequences related to the ownership and disposition of our Ordinary Shares under your own particular factual circumstances.

We are subject to the risks of any growing enterprise, any one of which could limit our growth and our product and market development.

Our operating history makes it difficult to predict how our businesses will develop and where the Company will find success. This is especially true in respect of our expansion into areas other than flow valve technology and their design, sales and installation. Accordingly, we face all of the risks and uncertainties encountered by companies in similar stages of development, such as: (i) uncertain and continued market acceptance for our product extensions and our services; (ii) the evolving nature of the wind energy equipment industry in the PRC, where significant consolidation may occur, leading to the formation of companies which may be better able to compete with us than is currently the case; (iii) the fragmented nature of the boiler and furnace business which may limit our ability to

penetrate the market and provide comprehensive solutions on a sufficiently wide basis to make the business profitable; (iv) changing competitive conditions, technological advances or customer preferences could adversely affect the sales of our products or services; (v) maintaining our competitive position in the PRC and competing with Chinese and international companies, many of which have longer operating histories and greater financial resources than us; (vi) continuing to offer commercially successful products to attract and retain a larger base of direct customers and ultimate users; (vii) maintaining effective control of our costs and expenses; and (viii) retaining our management and skilled technical staff and recruiting additional key employees.

If we are not able to meet the challenges of building our businesses and managing our growth, the likely result will be slower growth, lower margins, additional operational costs and lower income.

Efforts to protect our intellectual property rights and to defend against claims against us can increase our costs and will not always succeed. Any failures could adversely affect our sales and results of operations or restrict our ability to conduct our business.

Intellectual property rights are important to many aspects of our business. We actively pursue patent protection in our flow valve business, and we expect to pursue intellectual property rights in our other business endeavors as we develop unique solutions to business demands. We, however, may be unable to obtain protection for our intellectual property. Even if protection is obtained, competitors may raise legal challenges to our rights or illegally infringe on our rights, including through means that may be difficult to prevent, detect or defend. In addition, because of the rapid pace of technological change and the confidentiality of patent applications in some jurisdictions, competitors may be issued patents from applications that were unknown to us prior to issuance. The patents of others could reduce the value of our commercial or pipeline of products or, to the extent they cover key technologies on which we have unknowingly relied, require that we seek to obtain licenses at a financial cost to us or cease using the technology, no matter how valuable the patents may be to our business. We cannot assure you we would be able to obtain such licenses on acceptable terms. Also, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of our and the proprietary rights of others. There is a risk that the outcome of such litigation will not be in our favor. Such litigation may be costly and may divert management attention as well as expend other resources which could otherwise have been devoted to our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover such costs from other parties. The occurrence of any of the foregoing may harm our business, results of operations and financial condition.

Finally, implementation of PRC intellectual property-related laws has historically been limited, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries, which increases the risk that we may not be able to adequately protect our intellectual property.

We derive a substantial part of our revenues from several major customers, therefore if we lose any of these customers or they reduce the amount of business they do with us in the future, our revenues may be affected

During the year ended December 31, 2018, we generated 60% of our revenues from our top 10 customers. These customers may not maintain the same volume of business with us in the future. If we lose any of these customers or they reduce the amount of business they do with us, our revenues may be materially and adversely affected. Although we have a strategic partnership with our largest customer and a preferred provider agreement with our first largest customer until 2021, there can be no assurance that these customers will continue to provide the current level of demand or will not seek to modify or terminate their respective agreements.

Our technology may not satisfy the changing needs of our customers.

With any technology, including the technology of our current and proposed products, there are risks that the technology may not successfully address our customers’ needs. Certain of our product offerings in relation to the wind energy equipment will be new for the Company. While we have already established successful relationships with our customers, their needs may change or vary. This may affect the ability of our present or proposed products to address all of our customers’ ultimate technology needs in an economically feasible manner.

We may not be able to keep pace with rapid technological changes and competition in our industry.

While we believe that we have hired or engaged personnel and outside consultants who have the experience and ability necessary to keep pace with advances in technology, and while we continue to seek out and develop “next generation” technology through our research and development efforts, there is no guarantee that we will be able to keep pace with technological developments and market demands in this evolving industry and market. In addition, our industry is competitive in various aspects. Although we believe that we have developed strategic relationships to best penetrate the Chinese market, we face competition from other manufacturers of products similar to our products and services. Some of these companies have significant advantages over us with respect to their products, marketing and services, and their financial resources and customer relationships.

We may experience high accounts receivable balances from time to time, which may have an adverse effect on our operating profitability and cash flow and financing needs.

In the past, most of our customers made payments in accordance with the agreed payment terms in a timely manner. However, since late 2018, some of our customers requested extended payment terms and those receivables are now outstanding for over one year. Although some of these customers are large state-owned corporations, in view of current economic situation in China and limited subsequent collections, we determined to accrue significant allowances against those receivables. As of December 31, 2018, we reported $14.7 million of allowances for doubtful accounts. As a result, we will have to obtain outside financing and our operating expenses will increase. Extension of the accounts receivable period may also result in reduced collections, which will adversely affect our operations and profitability.

To the extent that we depend on government projects, our business is dependent on government policy and, to some extent, government funding and government contracts.

Although we do not characterize our business as a government contractor, some aspects of our business are indirectly dependent on government policy, government funding, and government contracts. For example, the South to North Water Diversion Project is largely a government funded project, and our customers are contractors with the government. Similarly, our energy-saving projects and adjustments of our products and services are dependent on the policies issued by the government. As a consequence, it is possible that our requirements based on the products and services to be provided will be diminished resulting in a decrease in our revenue. Much of the pollution control and green industries are dependent on government policy to implement societal improvements. Our business has a number of aspects that are dependent on the government and our products, services and revenues are dependent on policies that can change if the government officials determine to redirect attention and investment to other aspects of society and industrial development.

Additionally, as a number of our customers are dependent on the government for their revenues through the provision of products and services on government contracts or government funded projects, there may be delays in our receiving payment for our products and services.

Fluctuation in the availability and cost of our raw materials may have an adverse effect on our operations and results of operations.

A portion of the inventory of raw materials and parts may be affected by fluctuations in the availability of the items and the price. Such things may include steel, electronic components, power systems, paints and welding rods. We do not generally have long term supply contracts with our suppliers, but rely on long standing relationships. To the extent that we are not able to obtain the required materials and parts necessary to enable us to fabricate our products, or we are required to pay more for such items, then there could be an adverse effect on our operations and our results of operations.

We may be unable to effectively manage our planned growth.

As we expand our business into several different areas of energy savings and green industry, we will need to manage our growth effectively, which may entail devising and effectively implementing business plans, training and managing our growing workforce, managing our costs, and implementing adequate control in our reporting systems in a timely manner. We may not be able to successfully manage our growth. Our failure to do so could affect our success in executing our business plan and adversely affect our revenues, profitability and results of operations.

Our operations are vulnerable to natural disasters or other events.

Our operating income may be reduced by natural disasters, in locations where we own and/or operate significant manufacturing facilities or are working on significant projects. Some types of losses, such as from earthquake, severe winter storms and environmental hazards, may be either uninsurable or too expensive to justify insuring against. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in any particular property, as well as any anticipated future revenue from such property.

Our products may contain defects, which could adversely affect our reputation and cause us to incur significant costs.

Despite numerous testing and quality controls, defects may be found in existing or new products. Any such defects could cause us to incur significant return and exchange costs, re-engineering costs, divert the attention of our engineering personnel from product development efforts, and cause significant customer relations and business reputation problems. Any such defects could force us to undertake a product recall program, which could cause us to incur significant expenses and could harm our reputation and that of our products. If we deliver products with defects, our credibility and the market acceptance and sales of our products could be harmed.

Our business could be subject to environmental liabilities.

We use certain hazardous substances in our operations. Currently we do not anticipate any material adverse effect on our business, revenues or results of operations, as a result of compliance with Chinese environmental laws and regulations. However, the risk of environmental liability and charges associated with maintaining compliance with environmental laws is inherent in the nature of our business, and there is no assurance that material environmental liabilities and compliance charges will not arise in the future.

We have limited business insurance coverage in China

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not have any business liability or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.

Because our funds are held in banks in the PRC that do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.

Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. A portion of our assets are in the form of cash deposited with banks in the PRC, and in the event of a bank failure, we may not have access to our funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.

We substantially depend on a few key personnel who, if not retained, could cause declines in productivity and operational results and loss of our strategic guidance, all of which would diminish our business prospects and value to investors.

Our success depends to a large extent upon the continued service of a few executive officers and key employees, including, Mr. Yongquan Bi, our Chairman, Chief Executive Officer and President. The loss of the services of one or more of our key employees would have an adverse effect on us and our PRC operating subsidiaries, as these individuals play a significant role in developing and executing our overall business plan and maintaining customer relationships and proprietary technology systems. While none of our key personnel is irreplaceable, the loss of the services of any of these individuals would be disruptive to our business. We believe that our overall future success depends in large part upon our ability to attract and retain highly skilled managerial and marketing personnel. There is no assurance that we will be successful in attracting and retaining such personnel on terms acceptable to the Company or the employee. Inadequate personnel will limit our growth, and will be seen as a detriment to our prospects, leading potentially to a loss in value for investors.

We are controlled by a small group of our existing stockholders, whose interests may differ from other stockholders.

Our Chairman, Chief Executive Officer and President, Mr. Yongquan Bi, beneficially, together with a group of investors, owns approximately 51% of the outstanding shares of our common stock and is our largest single stockholder. Accordingly these stockholders acting together will have significant influence in determining the outcome of any corporate transaction or other matter submitted to the stockholders for approval, including mergers, consolidations, the sale of all or substantially all of our assets, election of directors and other significant corporate actions. They will also have significant influence in preventing or causing a change in control. In addition, without the consent of these stockholders, we may be prevented from entering into certain transactions which may be beneficial to our other stockholders. The interests of these stockholders may differ from the interests of the other stockholders.

Anti-Takeover Effects of proposed Amended and Restated Certificate of Incorporation and By-laws

We are contemplating adopting provisions to our certificate of incorporation and by-laws that may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that other shareholders might similarly consider in their best interest, including any attempt that might result in receipt of a premium over the market price for stockholders’ shares of common stock. We intend to seek shareholder approval of such amendments in the near future. These provisions may include:

Classified Board.    Such amendments may provide that our board of directors will be divided into three classes of directors, with the classes as nearly equal in number as possible. As a result, approximately one third of our board of directors will be elected each year. The classification of directors will have the effect of making it more difficult for stockholders to change the composition of our board. Our amended and restated certificate of incorporation may also provide that, subject to any rights of holders of preferred stock to elect additional directors under specified circumstances, the number of directors will be fixed exclusively pursuant to a resolution adopted by our governing body.

Action by Written Consent;    Special Meetings of Stockholders. Such amendments may provide that stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting. Our amended and restated certificate of incorporation and by-laws may also provide that, except as otherwise required by law, special meetings of the stockholders can only be called by the Executive Committee (or, if it does not then-exist, the board of directors), the chairman, vice chairman or executive chairman of the board or the chief executive officer, or at the request of holders representing a majority of the total voting power of our issued and outstanding common stock, voting together as a single class. Except as described above, stockholders may not be permitted to call a special meeting or to require the board of directors to call a special meeting.

We are responsible for the indemnification of our officers and directors.

The DGCL and our Bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against costs and expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. Consequently, we may be required to expend substantial funds to satisfy these indemnity obligations. Any payment in respect of these indemnification rights could have an adverse effect on our cash flow and our results of operations.

If we fail to implement effective internal controls required by the Sarbanes-Oxley Act of 2002, or remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.

Section 404 of the Sarbanes-Oxley Act of 2002 requires management of public companies to develop and implement internal controls over financial reporting and evaluate the effectiveness thereof. A material weakness is a deficiency or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual interim financial statement will not be prevented or detected on a timely basis. Due to the Company’s limited resources, we currently do not have accounting personnel with extensive experience in maintaining books and records and preparing financial statements in accordance with US GAAP which could lead to untimely identification and resolution of accounting matters inherent in the Company’s financial transactions in accordance with US GAAP.

Any failure to complete our assessment of our internal controls over financial reporting, to remediate any material weaknesses that we may identify, including the one identified above, or to implement new or improved controls, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Inadequate disclosure controls and procedures and internal controls over financial reporting could also cause investors to lose confidence in our public disclosures and reported financial information, which could have a negative effect on the trading price of our common stock.

Risks Related to Our Company’s Common Stock

Trading volume of our common stock has fluctuated from time to time, which may make it difficult for investors to sell their shares at times and prices that investors feel are appropriate.

To date, the trading volume of our common stock has fluctuated. Generally, lower trading volumes adversely effects the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock.

The Nasdaq Capital Market imposes listing standards on our common stock that we may not be able to fulfill, thereby leading to a possible delisting of our common stock. We are currently facing such risk.

As a listed Nasdaq Capital Market company, we are subject to rules covering, among other things, certain major corporate transactions, the composition of our Board of Directors and committees thereof, minimum bid price of our common stock and minimum stockholders’ equity. The failure to meet the Nasdaq Capital Market requirements may result in the de-listing of our common stock from the Nasdaq Capital Market, which could adversely affect the liquidity and market price thereof.

We have not timely filed its reports in 2019, including this Form 10-K. On August 16, 2019, the Company received a notification letter from NASDAQ stating that, because the Company’s Form 10-Q for the period ended June 30, 2019 has not been filed, the Company is not in compliance with NASDAQ’s Listing Rules for continued listing. The Company at the time has not yet filed its Annual Report on Form 10-K for the period ended December 31, 2018 nor Form 10-Q for the period ended March 31, 2019, and the Company is not in compliance with Nasdaq Listing Rule 5250(c)(1). Nasdaq Listing Rule 5250(c)(1) requires listed companies to timely file all required periodic financial reports with the SEC. The letter reiterates that the Company has been granted an exception until August 30, 2019 to file its delinquent Form 10-K for the period ended December 31, 2018 and Form 10-Q for the period ended March 31, 2019 and until September 16, 2019, to file its Form 10-Q for the period ended June 30, 2019. As a result of the additional delinquency, NASDAQ requested that the Company submit an update to its original plan no later than August 30, 2019 as to how to regain compliance with respect to the filing requirement.

If our common stock were to be de-listed, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our common stock is de-listed, broker-dealers have certain regulatory requirements imposed upon them, which may discourage broker-dealers from effecting transactions in our common stock, further limiting the liquidity thereof. These factors could result in lower prices for shares of our common stock and/or limit an investor’s ability to execute a transaction. In addition delisting from Nasdaq could also greatly impair our ability to raise additional necessary capital through equity or debt financing, and could lead to significant dilution to our stockholders caused by our issuing equity in financing or other transactions at a price per share significantly below the then market price.

We believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance.

The price for our common stock may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products and media reports by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends

in our markets or general economic conditions. The volatile price of our stock makes it difficult for investors to predict the value of our investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance.

In addition, the stock market in general has experienced extreme price and volume fluctuations that may have been unrelated and disproportionate to the operating performance of individual companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.

Because we have not paid dividends, investors will not realize any income from an investment in our common stock unless and until investors sell their shares at profit.

We have not paid dividends on our common stock in 2018 or 2017, and we do not anticipate paying any dividends in the near future. Investors will only realize income on an investment in our stock in the event they sell or otherwise dispose of their shares at a price higher than the price they paid for their shares. Such a gain would result only from an increase in the market price of our common stock, which is uncertain and unpredictable.

The payment of any future dividends will be at the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, the success of our business activities, general financial condition, future prospects, general business conditions and such other factors as our Board of Directors may deem relevant.

Risk Related to Doing Business in China

Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.

All of our business operations are currently conducted in the PRC, under the jurisdiction of the PRC government. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

On March 8, 2018, U.S. President Donald Trump proposed a further 25% tariffs, the equivalent of $50 billion on Chinese goods. In response, on April 4, 2018, China released a tariff list of 25% on $50 billion of US imports. The U.S. government imposed a 25% tariff on $50 billion of Chinese imports in July and August 2018, respectively, to be followed by a 10% tariff on $200 billion of Chinese goods in September 2018. On August 23, 2019, the U.S. government announced the plan for two tariff increases in retaliation for China’s imposing additional tariffs of 5% to 10% on $75 billion of U.S. imports earlier that day.

There is no guarantee that more measures will be introduced, and if these trade policies come into force and the scope of them is further expanded, the volume of China-U.S. import and export trade would drop significantly, which will lead to deterioration in economic conditions of both countries and decrease of business and official activities between both countries.

Unprecedented rapid economic growth in China may increase our costs of doing business, and may negatively impact our profit margins and/or profitability.

Our business depends in part upon the availability of relatively low-cost labor and materials. Rising wages in China may increase our overall costs of production. In addition, rising raw material costs, due to strong demand and greater scarcity, may increase our overall costs of production. If we are not able to pass these costs on to our customers in the form of higher prices, our profit margins and/or profitability could decline

We may suffer currency exchange losses if the RMB depreciates relative to the US Dollar.

Our reporting currency is the US Dollar. However, substantially all of our revenues are denominated in RMB. In July 2005, China changed its exchange rate regime by establishing a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The RMB is no longer officially pegged to the US dollar, and the exchange rate will have some flexibility. Despite fluctuations in the exchange rate in 2016, the floating exchange rate regime is stable. If the RMB depreciates relative to the US Dollar, our revenues as expressed in our US Dollar financial statements will decline in value and if the RMB appreciates relative to the US Dollar, our revenues as expressed in our US Dollar financial statements will increase in value. There are very limited hedging transactions available in China to reduce our exposure to exchange rate fluctuations. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure, if at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into US Dollars.

Labor laws in the PRC may adversely affect our results of operations.

On January 1, 2008, the PRC government promulgated the Labor Contract Law of the PRC, or the New Labor Contract Law. The New Labor Contract Law imposes greater liabilities on employers and significantly impacts the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations to be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost effective manner, thus materially and adversely affecting our financial condition and results of operations.

Governmental control of currency conversion may affect the value of your investment

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all our revenues in RMB. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. However, approval from the SAFE or its local branch is required where RMB is to be converted into foreign currency and can be remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.

The PRC legal system embodies uncertainties which could limit the legal protections available to us and you, or could lead to penalties on us.

The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC Government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past 25 years has significantly enhanced the protections afforded to various forms of foreign investment in mainland China. Our PRC operating subsidiary, Nengfa Energy, a wholly foreign-owned enterprises (“WFOEs”), is subject to laws and regulations applicable to foreign investment in the PRC in general and laws and regulations applicable to WFOEs in particular.

It may be difficult to enforce any civil judgments against us or our board of directors or officers, because most of our operating and/or fixed assets are located outside of the United States.

Although we are incorporated in the State of Delaware, all of our operating and fixed assets are located in the PRC. As a result, it may be difficult for investors to enforce judgments outside the United States obtained in actions brought against us in the United States, including actions predicated upon the civil liability provisions of the federal securities laws of the United States or of the securities laws of any state of the United States. In addition, our directors and officers (principally based in the PRC) and all or a substantial portion of their assets are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon those directors and officers, or to enforce against them or us judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States or of the securities laws of any state of the United States. We have been advised by our PRC counsel that, in their opinion, there

is doubt as to the enforceability in the PRC, in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated solely upon the federal securities laws of the United States or the securities laws of any state of the United States.

Because our assets are located overseas, shareholders may not receive distributions that they would otherwise be entitled to if we were declared bankrupt or insolvent.

Because all of our assets are located in the PRC, they may be outside of the jurisdiction of U.S. courts to administer if we are the subject of an insolvency or bankruptcy proceeding. As a result, if we declared bankruptcy or insolvency, our shareholders may not receive the distributions on liquidation that they would otherwise be entitled to if our assets were to be located within the U.S., under U.S. Bankruptcy law.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

In 2008, the Company was approved by the local government to construct a manufacturing facility for energy-saving products and equipment in Yinzhou District Industrial Park, Tieling City, Liaoning Province, PRC. Total estimated construction cost of a new manufacturing facility will be approximately $24 million. It covers an area of 81,561 sq. m acres.

The first phase of construction project was completed and began its operations in December 2012. The second phase of construction project was completed in 2013 and received the approval of fire security by the local authority in March 2014. The property ownership certificate relating to the completed construction was approved at the end of November, 2016. The cost of construction has been transferred to property, plant and equipment by the end of 2017 upon the granting of property ownership certificate from the local authority.

ITEM 3. LEGAL PROCEEDINGS

On April 22, 2019, one of NF Energy’s suppliers filed a lawsuit against NF Energy for unpaid outstanding payable of RMB 1,278,181.8. On May 24, 2019, the parties entered into a court-supervised settlement where NF Energy agreed to pay the supplier RMB 1.26 million in total.

ITEM 4. MINE SAFTEY DISCLOSURE

Not applicable.

PART II

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Dividend Policy

Our common stock trades under the symbol “BIMI” on the Nasdaq Capital Market. The number of stockholders of record of our common stock as of August 15, 2019 was 1,352. This number excludes stockholders whose stock is held in nominee or street name by brokers.

No dividends have been declared or paid on our common stock. We do not currently anticipate that we will pay any cash dividends on our common stock in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

Not Applicable.

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.

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

On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605, Revenue Recognition. The adoption had no material impact on the Company’s consolidated financial statements and there was no adjustment to the beginning retained earnings on January 1, 2018.

Under ASC 606, revenue is recognized when control of the promised goods and services is transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods and services, net of value-added tax. The Company determines revenue recognition through the following steps:

•        Identify the contract with a customer;

•        Identify the performance obligations in the contract;

•        Determine the transaction price;

•        Allocate the transaction price to the performance obligations in the contract; and

•        Recognize revenue when (or as) the entity satisfies a performance obligation.

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.

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:

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.

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.

At December 31, 2018 and 2017, the Company had no benefit or penalties regarding its income taxes. As of December 31, 2018, there are no 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.

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.

RESULTS OF OPERATIONS

Year Ended December 31, 2018 compared to Year Ended December 31, 2017

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 $6,542,232 and $8,508,173 for the years ended December 31, 2018 and 2017, respectively. Total revenues decreased by $1,965,941 or 23%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. The decrease in total revenue was due to the economic slowdown in China which had an adverse effect on product demand.

Product Revenues

Product revenues are derived principally from the sale of self-manufactured products and energy saving flow control equipment. Product revenues were $6,362,724 and $8,267,174 for the years ended December 31, 2018 and 2017, respectively. Product revenues for the year ended December 31, 2018 decreased by $1,904,450 or 23%, compared to the year ended December 31, 2017. The decrease in product revenue was due to the economic slowdown in China which had an adverse effect on product demand.

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 $179,508 and $240,999 for the years ended December 31, 2018 and 2017, respectively, a decrease of $61,491 or 26%.

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 $6,082,878 and $7,591,659 for the years ended December 31, 2018 and 2017, respectively. The total cost of revenues decreased by $1,508,781 or 20% for the year ended December 31, 2018 compared to the year ended December 31, 2017. The decrease in cost of revenues was primarily due to the decrease in revenues.

The overall gross profit for the Company was $459,354 and $916,514, or 7% and 10.77%, of total revenues, for the years ended December 31, 2018 and 2017, respectively.

Cost of Products

Total cost of product revenues was $5,960,475 and $7,378,113 for the years ended December 31, 2018 and 2017, respectively. The cost of products decreased by $1,417,638 or 19% for the year ended December 31, 2018 compared to the year ended December 31, 2017. The decrease in cost of products was primarily due to the decrease in revenues

The gross profit for products was $402,249 and $889,061, and the gross profit margin was 6% and 10.75% for the years ended December 31, 2018 and 2017, respectively.

Cost of Service Revenues

Total cost of service revenues was $122,403 and $213,546 for the years ended December 31, 2018 and 2017, respectively. The cost of service revenues decreased by $91,143 or 43% for the year ended December 31, 2018 compared to the year ended December 31, 2017. The gross margin for services was $57,105 and $27,453, or 32% and 11.39%, for the years ended December 31, 2018 and 2017, respectively.

Operating Expenses

The total operating expenses were $16,253,087 and $2,111,585 or 248% and 24.81% of revenues, for the years ended December 31, 2018 and 2017, respectively. The total operating expenses increased by $14,141,502 or 670% for the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase of operating expenses is mainly due to a $14,736,277increase in bad debt allowances. These bad debts are mainly attributable to our customers’ failure to collect on their own receivables. Our customers are primarily power plants. Because the Chinese government has recently strengthened its environmental protection measures, many power plants suffered greatly and can’t collect on their invoices for projects. We believe that if we sued these customers, we would be unable to collect on a wining judgment. Due to the economic downturn in China, we are facing higher credit risks and challenges in collecting outstanding receivables from our customers.

The Company is highly aware the risk of default, and as a result, we actively monitor accounts receivable. In the past, most of our customers made payments in accordance with the agreed payment terms in a timely manner. However, since late 2018, some of our customers requested extended payment terms and those receivables are now outstanding for over one year. Although some of these customers are large state-owned corporations, in view of current economic situation in China and limited subsequent collections, we determined to accrue significant allowances against those receivables. As of December 31, 2018, we reported $14.7 million of allowances for doubtful accounts.

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 separately reports 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.

The Company is highly aware the risk of default, and as a result, we actively monitor accounts receivable. In past years, most of our customers made payments in accordance with the agreed payment terms in a timely manner. However, since late 2018, some of our customers requested extended payment terms and those receivables are now outstanding for over one year. Although some of these customers are large state-owned corporations, in view of current economic situation in China and limited subsequent collections, we determined to accrue significant allowances against those receivables. As of December 31, 2018, we reported $14,736,278 of allowances for doubtful accounts.

We offer 12 months of product warranty on a case-by-case basis without charge, depending upon the type of customers, nature and size of the infrastructure projects. Under such arrangements, a portion of the project contract balance (usually 5-10% of contract value) is withheld by a customer from 12 to 24 months, until the product warranty has expired.

Investing activities

For the years ended December 31, 2018 and 2017, we did not use cash in investing activities.

On April 11, 2019, we entered into an Agreement with LASTING WISDOM HOLDINGS LIMITED, a company organized under the laws of the British Virgin Islands, PUKUNG LIMITED, a company organized under the laws of Hong Kong, BEIJING XIN RONG XIN INDUSTRIAL DEVELOPMENT CO., LTD., a company organized under the laws of the PRC, Boqi Pharmacy and several additional individual sellers. The rationale of the Agreement is for our company to purchase the pharmacy business of Boqi Pharmacy, as part of our expansion and shift of focus from the energy sector to the pharmacy business. The aggregate purchase price for the shares of Boqi Pharmacy’s parent consists of cash consideration of RMB 40,000,000 and up to 1,500,000 shares of our common stock. The purchase price is subject to post-closing adjustments (contingent on fair market value of the acquired companies). This transaction is anticipated to close during the third or fourth quarter of 2019. The Company plans to raise RMB 40,000,000 in equity to fund the acquisition cost.

Financing activities

For the year ended December 31, 2018, net cash provided by financing activities was $211,264, including repayments of $1,058,258 of bank demand notes and $6,047,190 of short-term bank borrowing. In addition, we also received financial funding of $769,522 from our related parties, proceeds of $6,047,190 from short-term bank borrowing and $500,000 from sales of our common stock.

For the year ended December 31, 2017, the Company repaid $6 million of short-term bank loan and received proceeds of $7 million (Equivalent to RMB 40,000,000) from SPD Bank, due March 19, 2018, interest payable monthly, 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.

NF ENERGY SAVING CORPORATION
CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

NF ENERGY SAVING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements.

NF ENERGY SAVING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

The accompanying notes are an integral part of these consolidated financial statements.

NF ENERGY SAVING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial statements.

NF ENERGY SAVING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

The accompanying notes are an integral part of these consolidated financial statements.

NF ENERGY SAVING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

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.

On November 26, 2015, we formed a new company devoting to intelligent products was set up which is named by “Liaoning Nengfa Weiye Smart Valve Technology Co. Ltd”. (“Nengfa Smart Valve”). On March 8, 2017, “Liaoning Nengfa Weiye Smart Valve Technology Co. Ltd was named by “Liaoning Nengfa Tiefa Import and Export Co., Ltd.” in order to make further business activities. Nengfa Energy owns approximately 57% of the shares in Import & Export Company.

For internal restructuring purposes, we formed a 100% owned subsidiary NF Energy Investment Corporation (“NF Investment”) in British Virgin Islands on June 22, 2018, which owns 100% of equity interests of NF Energy Equipment Limited (“NF Equipment”), a company incorporated in Hong Kong on August 6, 2018. 100% of equity interests of Nengfa Weiye were subsequently transferred to NF Equipment. Other than its equity interests in NF Equipment, NF Investment does not own any assets or conduct any operations. Other than its equity interests in Nengfa Weiye, NF Equipment does not own any assets or conduct any operations.

The Company, through its subsidiaries, mainly operates in the energy technology business in the People’s 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

NFEC and its subsidiaries are hereinafter referred to as (the “Company”).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On December 24, 2018, the Company was notified that HKCM CPA & Co. (Predecessor firm: HKCMCPA Company Limited) (“HKCMCPA”) has resigned as the Company’s principal independent accountant.

HKCMCPA reported on the Company’s financial statements for the fiscal years ended December 31, 2016 and December 31, 2017. During the Company’s two most recent fiscal years, and subsequently up to the date of resignation, there were no disagreements between the Company and HKCMCPA on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements that, if not resolved to HKCMCPA’s satisfaction, would have caused HKCMCPA to make reference to the subject matter of the disagreement in connection with its report issued in connection with the audit of the Company’s financial statements.

None of the reportable events described under Item 304(a)(1)(v)(A)-(D) of Regulation S-K occurred within the Company’s last two fiscal years nor subsequently up to the date of dismissal.

HKCMCPA’s audit report on the Company’s financial statements for the fiscal year ended December 31, 2017 contained no adverse opinion or disclaimer of opinion and HKCMCPA’s audit report on the Company’s financial statements for the fiscal year ended December 31, 2016 contained no adverse opinion or disclaimer of opinion.

The Company provided HKCMCPA with a copy of the disclosure before its filing with the SEC, providing HKCMCPA with the opportunity to furnish the Company with a letter addressed to the SEC stating whether it agrees with the disclosures made in the filing.

On December 26, 2018, NF Energy’s board of directors ratified Centurion ZD CPA & Co as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2018. During each of the Company’s two most recent fiscal years and through the date of this report, neither the Company nor anyone on its behalf consulted with ZD CPA & Co regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, (ii) the type of audit opinion that might be rendered on the Company’s financial statements by ZD CPA & Co, in either case where written or oral advice provided by ZD CPA & Co would be an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issues or (iii) any matter that was either the subject of a disagreement or a reportable event (as described in Item 304(a)(1)(iv) or Item 304(a)(1)(v) of Regulation S-K, respectively).

On April 16, 2019, our board of directors resolved to dismiss Centurion ZD CPA & Co. as our independent accountants, which dismissal was communicated to Centurion ZD CPA & Co. on April 17, 2019.

Centurion ZD CPA & Co. has not rendered any reports on any of our financial statements. since it was engaged by us on December 26, 2018. Therefore, Centurion ZD CPA & Co. has neither provided any adverse opinion or qualifications on our financial statements nor had a disagreement with the Company since their engagement on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements that, if not resolved to Centurion ZD CPA & Co.’s satisfaction, would have caused Centurion ZD CPA & Co. to make reference to the subject matter of the disagreement in connection with the audit of the Company’s financial statements.

None of the reportable events described under Item 304(a)(1)(v)(A)-(D) of Regulation S-K occurred within period of the engagement of Centurion ZD CPA & Co. up to the date of dismissal.

We provided Centurion ZD CPA & Co. with a copy of this report prior to its filing with the SEC. Centurion ZD CPA & Co. has provided a letter to us, dated April 30, 2019 and addressed to the SEC.

On April 16, 2019, we engaged HHC as our independent registered public accounting firm for our fiscal year ended December 31, 2019. The decision to engage HHC as our independent registered public accounting firm was approved by our board of directors.

During the two most recent fiscal years and through the date of this report, we have not consulted with HHCregarding any of the following:

1.      the application of accounting principles to any specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements;

2.      the type of audit opinion that might be rendered on the Company’s financial statements by HHC, LLP, in either case where written or oral advice provided by HHC, LLP would be an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issues; or

3.      any matter that was either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K and the related instructions thereto) or a reportable event (as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K).

There were no disagreements with any of our independent registered public accounting firms during the fiscal years ended December 31, 2017 and 2018.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2018. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2018, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective, based on the material weaknesses defined below.

(b) Management’s Annual Report on Internal Control over Financial Reporting

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive officer and principal financial officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•        Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

•        Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with management authorization; and

•        Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on this assessment, our management concluded that, as of December 31, 2018, our internal control over financial reporting is not effective.

In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses at December 31, 2018:

•        Due to the Company’s limited resources, the Company does not have accounting personnel with extensive experience in maintaining books and records and preparing financial statements in accordance with US GAAP which could lead to untimely identification and resolution of accounting matters inherent in the Company’s financial transactions in accordance with US GAAP.

MANAGEMENT’S REMEDIATION PLAN

While management believes that the Company’s financial statements previously filed in the Company’s SEC reports have been properly recorded and disclosed in accordance with US GAAP, based on the control deficiencies identified above, we have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:

The Company is currently looking for an outside consultant with considerable public company reporting experience and breadth of knowledge of US GAAP to provide more training in connection with the preparation and review of its financial statements to the employees.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the exemption provided to issuers that are neither “large accelerated filers” nor “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

(c) Changes in Internal Controls

No change in our internal control over financial reporting occurred during the last fiscal quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

The persons listed below are the current officers and directors of the Company as of the filing date of this report. Our directors are elected at the annual meeting of shareholders, or may be appointed by the Board to fill an existing vacancy, and hold office for one year and until their successors are elected and qualified. Our officers are appointed by the Board of Directors and serve at the pleasure of the Board. We have not entered into any employment agreements with our executive officers.

Mrs. Zhang Tingting is a first cousin of Mr. Yongquan Bi.

Yongquan Bi has been a director in the Company since his election in May 2018 and has been the Company’s chairman and CEO since February 2019. He was the founder, and the Chairman of the Board of the Boqi Group since 2009. He is the Chairman of the board of BIQI International Holdings Corp (NASDAQ: BIQI) and the Chairman of the board of Recon Technology, Ltd. (NASDAQ: RCON). In 2015, Mr. Bi participated in the senior class of investment and financing of Chinese enterprises in Tsinghua University. Mr. Bi has more than 15 years of industry experience in the financial sector.

Zhang Tingting was appointed as CFO in March 2019. She has been in the financial management business for 14 years, with 11 years of experience as a finance manager and 6 years as a financial controller. From 2008 to 2012, Mrs. Tingting was the financial manager of Dalian Xinjuhui Automobile Sales Co., Ltd. From 2013 to 2016, Mrs. Zhang Tingting was the deputy Director of Finance, Dalian Changjin Materials Co., Ltd. From 2016 to present, Mrs. Zhang Tingting was the Financial Officer of Boqi Xinhai Group. Mrs. Tingting holds a B.A. degree from Dalian University.

Tiewei Song was elected to the Board of Directors on May 18, 2018. Mr. Song is currently serving for Shenyang Langzi Investment Management Co., Ltd. as both the president and director, positions which he has held since 2012. From 1999 to 2008, Mr. Song was the executive director and president of Liaoning Jiachang Group. From 2008 to 2013, Mr. Song was the chief representative of German Varengold Bank in the Chinese region. Mr. Song is a senior corporate executive with rich experience in capital operation and business management, he and has been committed to studying capital operation architecture and successfully carried on the strategic planning for many companies which led to more opportunities for their development. In addition, Mr. Song has unique views and practical methods in capital operation with his full understanding in operational rule of global capital market, and is especially good at resolving the difficulties in the operation of the company through use of capital means. Mr. Song graduated from Peking University with a bachelor degree and a master degree in mathematics.

Ju Li has served on the Company’s board since January 2019. He has rich and extensive financial investment and enterprise management experience. Mr. Li previously worked at Amtex GmbH and at Mercatura Cosmetics Biotech Tech AG. From March 2009 to February 2015, Mr. Li was the general manager of Asia Pacific at Varengold Bank. From April 2015 to February 2017, Mr. Li was the general manager of Asia Pacific at Sensus Asset Management Co., Ltd. Mr. Li holds a B.A. degree from the Bremen University of Applied Sciences,Germany.

Gang Li has served as a director since November 2006. Mr. Li was the director of Technology Innovation Department under the Liaoning Province Planning and Economy Commission as well as the Director of the Economic Operation Department under Liaoning Province Economic and Trade Commission. Mr. Li. graduated from Tianjin University with a bachelor degree in science and a master degree in law.

Mia Kuang Ching became an independent Director of the Company in August 2009. He is Chairman of the Audit Committee. Up until December 2, 2011 he was the managing partner of SBA Stone Forest Corporate Advisory (Shanghai) Co., Ltd. From 1992 to 1994 he was Regional Accountant (South Europe) of Singapore Airlines. From 1994 to 1997, he was the Group Financial Controller of Fullmark Pte. Ltd., and responsible for operating in China, Hong Kong, Malaysia and Vietnam. He was in-charge of strategic investment, group financing and mergers and acquisitions. From 1997 to 2000, he was the Chief Accountant of Dalian Container Terminal, a joint venture formed by PSA Corporation of Singapore and the Port of Dalian Authority.

Fengsheng Tan was elected to the Board of Directors on May 18, 2018. From 1997 to 2005 and from 2005 to 2017, he served for Liaoing Asia-Pacific Law Firm and Liaoing New Century law firm as a full time lawyer, respectively. In recent years, he worked on many cases relating to civil and commercial, especially corporate legal affairs, debt disputes, contract disputes, commercial arbitration and other matters so as to accumulate a rich experience. Mr. Tan graduated from the law faculty of Liaoning University and has more than 20 years’ experience as a lawyer.

Changqing Yan was elected to the Board of Directors on May 18, 2018. Mr. Yan is engaged in equity investment, merger, acquisition and reorganization and stock market listing. From 2011 to 2013, Mr. Yan served for Shanghai Jinyongxin Investment Company as the deputy director. From 2013 to 2015, Mr. Yan served for Beijing Liujianfang Technology Company as the capital operational consultant. From 2016 to 2017, Mr. Yan served for Ningpo Shenglada Electric Appliance Co., Ltd. as the deputy director and the secretary of the board. From 2017 to now, Mr. Yan serves for Shanghai Hualing Capital as the deputy director. He has a Chinese lawyer qualification certification and the secretary qualification certification of the board of directors of a listed company.

Audit Committee

The current members of our audit committee are Mia Kuang Ching (Chair), Changquing Yan and Fengsheng Tan, each of whom we believe satisfies the independence requirements of the Securities and Exchange Commission. We believe Mr. Ching is qualified as an audit committee financial expert under the regulations of the SEC by reason of his work experience. Our audit committee assists our Board of Directors in its oversight of:

•        The integrity of our financial statements;

•        Our independent registered public accounting firm’s qualifications and independence; and

•        The performance of our independent auditors.

Code of Ethics

The Company has adopted a code of ethics (the “Code of Ethics”) that applies to the Company’s principal chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Code of Ethics is attached as Exhibit 14.1 hereto. The Code of Ethics is designed with the intent to deter wrongdoing, and to promote the following:

•        Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

•        Full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the SEC and in other public communication made by the Company;

•        Compliance with applicable governmental laws, rules and regulations;

•        The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and

•        Accountability for adherence to the Code.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership

and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, or written representations that no other reports were required, and to the best of our knowledge, Zhang Tingting, Tiewei Song, Ju Li, Fengsheng Tan and Changqing Yan have not filed Forms 3 with the SEC.

Item 11. Executive Compensation

Compensation of Executive Officers

We did not provide any compensation to our executive officers for the years ended December 31, 2018 or 2017.

Compensation of Directors

As at December 31, 2018, we had five non-employee directors, of whom only Mr. Mia Kuang Ching has received compensation, as set forth in the table below. Other non-employee directors received no compensation for their services as directors. Directors who are also employees of the Company and/or its subsidiaries received no additional compensation for their services as directors:

Outstanding Equity Awards

We have not implemented a stock option plan at this time and since inception, we have not issued any stock options, stock appreciation rights or other equity awards to our executive officers. We may decide, at a later date, and reserve the right to, initiate such a plan or plans as deemed appropriate by the Board of Directors.

Pension Benefits

We have not entered into any pension benefit agreements with any of our executive officers or directors. We contribute to the social insurance for our employees each month, which includes pension, medical insurance, unemployment insurance, occupational injuries insurance and housing provision funds in accordance with PRC regulations.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth information regarding beneficial ownership of our common stock as of August 29, 2019 for: (i) each stockholder known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock; (ii) each of our directors; (iii) each of our named executive officers; and (iv) all of our directors and executive officers as a group:

____________

(1)      Pursuant to Rule 13-d-3 under the Securities Exchange Act of 1934, as amended, beneficial ownership of a security consists of sole or shared voting power (including the power to vote or direct the voting) and/or sole or shared investment power (including the power to dispose or direct the disposition) with respect to a security whether through a contract, arrangement, understanding, relationship or otherwise. Unless otherwise indicated, each person indicated above has sole power to vote, or dispose or direct the disposition of all shares beneficially owned.

(2)      This table is based upon information obtained from our stock records. Unless otherwise indicated in the footnotes to the above tables and subject to community property laws where applicable, we believe that each shareholder named in the above table has sole or shared voting and investment power with respect to the shares indicated as beneficially owned.

(3)      Pelaria International Ltd. (“Pelaria”) and Cloverbay International Limited (“Cloverbay”) are the record owners of the stated number of shares. Pelaria and Cloverbay are wholly-owned subsidiaries of Liaoning Nengfa Weiye New Energy Application Co., Ltd. (“Weiye Energy”). Weiye Energy is 80% owned by Gang Li and 20% owned by Lihua Wang. Mr. Li and Ms. Wang are two of the three directors of Weiye Energy, and therefore, effectively share the voting and dispositive authority over the shares.

(4)      Represents the 80% beneficial ownership of the shares of Weiye Energy, described in footnote 3 above.

(5)      Represents the 20% beneficial ownership of the shares of Weiye Energy, described in footnote 3 above.

(6)      Unless as otherwise set forth in the table, the address of each beneficial owner is c/o NF Energy Saving Corporation, 390 Qingnian Avenue, Heping District, Shenyang, Liaoning Province, P. R. China 110015.

Item 13. Certain Relationships and Related Transactions and Director Independence

As of December 31, 2018, the Company reported a trade payable of $416,547 due to Liaoning Bainianye New Energy Utilization Co., Ltd. (“Bainianye New Energy”), directly controlled by Ms. Li Hua Wang (the Company’s former CFO) and Mr. Gang Li (the Company’s former CEO), which was unsecured, interest-free and had no fixed repayment term. During the year ended December 31, 2018, the Company did not have inventory purchase transaction with Bainianye New Energy.

In addition, as of December 31, 2018, the Company reported related party payables of $918,033 mainly due to Ms. Li Hua Wang (the Company’s former CFO) of $606,194, Mr. Haibo Gong (Import & Export Company’s executive director) of $162,463, and Bainianye New Energy of $174,256. The related party payable was for daily operating purpose which isunsecured, interest-free and has no fixed repayment term.

As of December 31, 2017, 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 and Mr. Gang Li (a Company director), which was unsecured, interest-free with no fixed repayment term. Imputed interest on this amount is considered insignificant.

Director Independence

We undertook a review of the independence of our directors and, using the definitions and independence standards for directors provided in the rules of The NASDAQ Stock Market, considered whether any director has a material relationship with us that could interfere with his or her ability to exercise independent judgment in carrying out their responsibilities. As a result of this review, we determined that Mia Kuang Ching, Ju Li, Fengsheng Tan and Changqing Yan were “independent directors” as defined under the rules of The NASDAQ Stock Market.

Item 14. Principal Accountant Fees and Services

The following table represents the aggregate fees billed for professional audit services rendered by our independent auditor, HKCMCPA Company Limited (“HKCMCPA”) for their audit of our annual financial statements during the years ended December 31, 2017, and our independent auditor, HHC LLP (“LLP”) for their audit of our annual financial statements during the years ended December 31, 2018.

Audit fees and other fees of auditors are listed as follows:

Audit Fees. These are fees for professional services for the audit of the Company’s annual financial statements, and for the review of the financial statements included in the Company’s filings on Form 10-Q, and for services that are normally provided in connection with statutory and regulatory filings or engagements. The amount of $120,000 shown for HHC in 2018 related to the audit of the Company’s annual financial statements for the fiscal year ended December 31, 2018. The amount of $19,500shown for HKCMCPA in 2018 related to the review of the financial statements included in the Company’s filings on Form 10-Q for the first, second and third quarters of 2018. The amount of $74,500 shown for HKCMCPA in 2017 related to (i) the audit of the Company’s annual financial statements for the fiscal year ended December 31, 2017, and (ii) the review of the financial statements included in the Company’s filings on Form 10-Q for the first, second and third quarters of 2017.

Audit-Related Fees. These are fees for the assurance and related services reasonably related to the performance of the audit or the review of the Company’s financial statements. There were no audit-related fees billed during the years ended December 31, 2018 or 2017.

Tax Fees. These are fees for professional services with respect to tax compliance, tax advice, and tax planning. There were no tax fees billed during the years ended December 31, 2018 or 2017.

All Other Fees. These are fees for permissible work that does not fall within any of the other fee categories, i.e. Audit Fees, Audit-Related Fees, Tax Fees and allowable working costs. There were no other fees billed during the years ended December 31, 2018 or 2017.

Pre-Approval Policy and Procedures for Audit and Non-Audit Services

The audit committee has the sole and direct responsibility for appointing, evaluating and retaining our independent registered public accounting firm and overseeing their work. All audit services to be provided to us and all non-audit services, other than de minims non-audit services, to be provided to us by our independent auditors must be approved in advance by our audit committee.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements.

For a list of the financial information included herein, see “Index to Financial Statements” on page 49.

(a)(2) Financial Statement Schedules.

All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or Notes thereto.

(a)(3) Exhibits. The list of Exhibits filed as a part of this Form 10-K are set forth on the Exhibit Index immediately preceding such Exhibits and is incorporated herein by this reference.

POWER OF ATTORNEY

Know all persons by these presents, that each person whose signature appears below constitutes and appoints Yongquan Bi and each of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or such person’s substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on August 30, 2019.

INDEX TO EXHIBITS