BIMI International Medical Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ____________

Commission File Number: 000-50155

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such fi les). Yes ☐ No ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 10, 2019, the registrant had 9,073,289 shares of common stock, par value $.001 per share, issued and paid for, 500,795 shares reserved for potential issuance and 9,073,289 shares outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the condensed consolidated financial statements

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements

Until October 2, 2019, the Company, through its subsidiaries, mainly operated in the energy technology business in the People’s of Republic of China (the “PRC”). On October 2, 2019, the Company acquired Boqi Zhengji Pharmacy Chain Co., Ltd. (“Boqi Pharmacy”), a China-based pharmacy chain company with both directly operated stores and franchisees. The Company’s energy technology business includes 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 energy-saving flow control equipment.

Description of subsidiaries

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

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.

As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had an accumulated deficit of $8,417,261 and negative working capital of $9,344,148 as of September 30, 2019 and incurred a net loss of $1,973,382 for the nine months ended September 30, 2019. Since 2014 the Company has generated operating losses and has incurred cash outflows from its operations. Management believes these factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months.

The Company acquired Boqi Pharmacy in the third quarter of 2019 to diversify its business improve its financial position and cash flows. While we expect to continue making acquisitions and strategic alliances as part of our long-term business strategy, we there can be no assurance that the Company can realize the full benefits from any acquisitions such as increased revenue or enhanced financial position. Such acquisitions, if any, could adversely affect our consolidated financial statements.

The continuation of the Company as a going concern through the next twelve months is dependent upon (1) the continued financial support from its stockholders or external financing. Management believes the existing stockholders will provide the additional cash to meet with the Company’s obligations as they become due, and (2) further implement management’s business plan to extend its operations and generate sufficient revenues and cash flow to meet its obligations. While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be neither any assurance to that effect, nor any assurance that the Company will be successful in securing sufficient funds to sustain its operations.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. Management believes that the actions presently being taken to obtain additional funding and implement its strategic plan provides the opportunity for the Company to continue as a going concern.

These accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and reflected the activities of NFEC and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.

The unaudited interim condensed consolidated financial information as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K/A for the fiscal year ended December 31, 2018 previously filed with the SEC on September 6, 2019.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited condensed consolidated financial position as of September 30, 2019 and its unaudited condensed consolidated results of operations for the three and nine months ended September 30, 2019 and 2018, and its unaudited condensed consolidated cash flows for the nine months ended September 30, 2019 and 2018, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the fiscal year or any future periods.

In preparing these consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and revenues and expenses during the years reported. Actual results may differ from these estimates.

Certain prior period amounts have been reclassified to conform to the current period presentation.

Cash and cash equivalents consist primarily of cash in readily available checking and saving accounts. Cash equivalents consist of highly liquid investments that are readily convertible to cash and that mature within three months or less from the date of purchase. The carrying amounts approximate fair value due to the short maturities of these instruments.

Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in a restricted cash account on the Company’s unaudited interim condensed consolidated balance sheet. The Company’s restricted cash balance is related to a contract performance guarantee bond. The balance of restricted cash was $180,525 and $179,496 as of September 30, 2019 and December 2018, respectively.

Accounts receivable are recorded at the invoiced amount, do not bear interest and are due within contractual payment terms, generally 30 to 90 days from shipment. Credit is granted based on evaluation of a customer’s financial condition, the customer credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 90 days are reviewed individually for collectability. At the end of each period, the Company specifically evaluates individual customer’s financial condition, credit history, and the current economic conditions to monitor the progress of the collection of accounts receivables. The Company will consider the allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. For those receivables that are past due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of September 30, 2019 and December 31, 2018, the allowance for doubtful accounts was $11,017,242 and $11,327,271, respectively.

Retention receivable is the amount of receivables withheld by a customer based upon 5-10% of the contract value, until a product warranty expires. The warranty period is usually 12 months. As of September 30, 2019 and December 31, 2018, the allowance for doubtful accounts was $900,777 and $942,376, respectively.

Inventories are stated at the lower of cost or market value (net realizable value), cost being determined on a weighted average method. Costs include material, labor and manufacturing overhead costs. The Company reviews historical sales activity quarterly to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of September 30, 2019 and December 31, 2018, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

Property, plant and equipment are stated at cost less accumulated depreciation and impairment, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

Expenditures for repairs and maintenance are expensed as incurred. When assets have been retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.

All lands in the PRC are owned by the PRC government. Under applicable law, the PRC government may sell the right to use the land for a specified period of time. Thus, the Company’s land purchases in the PRC are considered to be leaseholds and are stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreement on a straight-line basis, which is 50 years and will expire in 2059.

In accordance with the provisions of ASC Topic 360, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as property, plant and equipment held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to its estimated future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets.

Under ASC 606, Revenue from Contracts with Customers, 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:

Cost of revenue consists primarily of material costs, direct labor, depreciation, and manufacturing overhead, which are directly attributable to the manufacture of products and the rendering of services or projects. Shipping and handling costs, associated with the distribution of finished products to customers, are borne by the customers.

ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying condensed consolidated statement of stockholders’ equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

Income taxes are determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

For the nine months ended September 30, 2019 and 2018, the Company did not incur any interest and penalties associated with tax positions. As of September 30, 2019, the Company did not have any significant unrecognized uncertain tax positions.

The Company conducts the majority of its business in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by a foreign tax authority.

Under the terms of the contracts, the Company offers its customers a free product warranty on a case-by-case basis, depending upon the type of customer, nature and size of the infrastructure projects. Under such arrangements, a portion of the project contract value, usually 5-10% of contract value is retained by the customer, and the warranty period is usual 12 months. The Company records this portion of project contract value retained by the customer as retention receivable. As of September 30, 2019 and December 31, 2018, the Company reported $25,590 and $65,529, respectively, as retention receivable net of any allowance that the management estimate it was more likely can’t be received as the expiration of the warranty period.

The Company calculates net loss per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statement of operations.

The reporting currency of the Company is the United States Dollar (“US$”). The Company’s subsidiaries in the PRC maintain their books and records in their local currency, the Renminbi Yuan (“RMB”), which is the functional currency as being the primary currency of the economic environment in which these entities operate.

In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective period:

Contributions to retirement plans (which are defined contribution plans) are charged to general and administrative expenses in the accompanying consolidated statements of operation as the related employee service is provided.

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. For the three and nine months ended September 30, 2019 and 2018, the Company operated in one reportable operating segment in the PRC.

The carrying value of the Company’s financial instruments (excluding short-term bank borrowing and convertible promissory notes): cash and cash equivalents, accounts and retention receivable, prepayments and other receivables, accounts payable, income tax payable, amounts due to related parties other payables and accrued liabilities approximate their fair values because of the short-term nature of these financial instruments.

Management believes, based on the current market prices or interest rates for similar debt instruments, the fair value of its obligation under its finance lease and short-term bank borrowing approximate the carrying amount.

The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

In January 2017, the Financial Accounting Standard Board (“FASB”) issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard, which will be effective for the Company beginning in the first quarter of fiscal year 2020, is required to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.

In August 2018, the FASB issued Accounting Standard Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including, among other changes, the consideration of costs and benefits when evaluating disclosure requirements. For public companies, the amendments are effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting guidance will have on the Company’s financial statements and footnote disclosures.

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be adopted upon the effective date for us beginning July 1, 2020. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, the Company reversed a bad debt expense of $154,109 and reported bad debt expenses of $23,557 for its doubtful accounts for the three months ended September 30, 2019 and 2018, respectively, and reported bad debt expenses of $4,745 and $2,169,687 for its doubtful accounts for the nine months ended September 30, 2019 and 2018, respectively.

As of September 30, 2019 and December 31, 2018, the Company reported its retention receivable as follow:

The Company reversed a bad debt expense of $12,190 and $15,916 for the three months and nine months ended September 30, 2019, respectively. For the three months and nine months ended September 30, 2018, the Company did not report a bad debt expense with respect to its retention receivable.

Inventories consisted of the following:

For the three and nine months ended September 30, 2019 and 2018, no allowance for obsolete inventories was recorded by the Company.

Prepayments and other receivables present the amount the Company advanced to suppliers for the purchase of materials or goods, prepayment to service renders, advances to employees for ordinary business purposes and prepayment for acquisitions. As of September 30, 2019, such amounts also included the initial issuance of shares of Company common stock for the purchase of Boqi Pharmacy. The table below sets forth the balances as of September 30, 2019 and December 31, 2018.

Management evaluates the recoverable value of these balances periodically in accordance with the Company’s policy of credit and allowances for doubtful accounts. For the three and nine months ended September 30, 2019, the Company reversed an allowance of the doubtful accounts of $66,214 and $64,032. There was no allowance expense reserved or reversed for doubtful accounts for the three and nine months ended September 30, 2018.

Property, plant and equipment consisted of the following:

Depreciation expense for the three months ended September 30, 2019 and 2018 were $204,229 and $184,199, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 were $671,274 and $647,584, respectively.

Land use right consisted of the following:

Amortization expenses for the three months ended September 30, 2019 and 2018 were $14,728 and $15,166, respectively.

Amortization expenses for the nine months ended September 30, 2019 and 2018 were $45,159 and $47,578, respectively.

The estimated amortization expense on the land use right in the next five years and thereafter is as follows:

Short-term bank borrowings consist of the following:

For the three months ended September 30, 2019 and 2018, the Company reported interest expenses of $133,929 and $92,897, respectively. For the nine months ended September 30, 2019 and 2018, the Company reported interest expenses of $352,942 and $290,477, respectively.

On September 27, 2019 the Company enter into an agreement with Power Up Lending Group Ltd (“Power Up” or the “Holder”) to sell a convertible note (the “Note”) of the Company to Power Up (the “Agreement”). The Note was issued at par value with a term of 12 month, carrying 6% annual interest and convertible into shares of the Company’s common stock. According to the Agreement, the Holder, at its option, has the right from time to time, and at any time on or prior to the later of (i) the Maturity Date and (ii) the date of payment of a default amount, each in respect of the remaining outstanding principal amount of this Note to convert all or any part of the outstanding and unpaid principal amount of the Note into fully paid and non-assessable shares of common stock of the Company.. The conversion price shall equal 65% of the Market Price of the common stock. The Market Price means the average of the lowest two (2) trading prices for the common stock during the fifteen (15) trading day period ending on the last complete trading day prior to the conversion date. The conversion price is subject to adjustment for stock splits, stock dividends and rights offerings by the Company. As of the date of this report, 500,795 shares of the Company’s common stock had been reserved for potential conversion under the Note.

Upon evaluation, the Company determined that the Agreement contains an embedded beneficial conversion feature which met the definition of Debt with Conversion and Other Options under Accounting Standards Codification topic 470 (“ASC 470”). According to ASC 470, an embedded beneficial conversion feature present in a convertible instrument shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. An amount of $139,942 was allocated to the beneficial conversion feature (“BCF”) at issuance date of the Note and is being amortized over the life of the Note. In addition, $7,650 of issuance costs and $3,000 reimbursement to the Holder is being amortized over the life of the Note. During the three months ended September 30, 2019, $1,239 was amortized to expense. The balances of the Note was represented as following:

Additionally, the Company accounted for the embedded conversion option liability in accordance with Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument. The initial fair value of the embedded conversion option liability associated with the Note was valued using the Black-Scholes model. The assumptions used in the Black-Scholes option pricing model are as follows:

The value of the conversion option liability underlying the convertible promissory note at September 30, 2019 was $142,074. The Company recognized a loss from the increase in the fair value of the conversion option liability in the amount of $2,132 during the three months ended September 30, 2019, representing the change in fair value.

Accounts payable, trade-related parts

As of September 30, 2019 and December 31, 2018, the Company reported trade payables of $386,879 and $416,547, respectively, due to Liaoning Bainianye New Energy Utilization Co., Ltd., (“Bainianye New Energy”), a company directly controlled by Ms. Lihua Wang (the Company’s former Chief Financial Officer) and Mr. Gang Li (the Company’s former Chief Executive Officer and one of the Company’s current directors). These trade payables arose from the Company’s prior year inventory purchases. During the three and nine months ended September 30, 2019, the Company did not enter into any inventory purchase transaction with Bainianye New Energy。

Amount Due to related parties

As of September 30, 2019, the total amount due to related parties was $2,464,568, including:

As of December 31, 2018, the total amount due to related parties was $918,033, including:

Loan to related party

During the first quarter of 2019, Nengfa Weiye Tieling Valve Joint Stock Co., Ltd. (“Tieling Joint Stock”), which owns 43% of the equity interests of our 57%-owned subsidiary, Nengfa Tiefa Import & Export, borrowed $1,161,458 from the Company (the “Tieling Loan”) with the understanding that the loan would be repaid within one (1) year. Tieling Joint Stock repaid $540,294 of the Tieling Loan during the third quarter of 2019. As of September 30, 2019, $601,951 remained outstanding. The loan is free from interest and due on demand.

Other payables and accrued liabilities consisted of the following:

As of September 30, 2019 and December 31, 2018, the Company reported $1,130,886 and $879,780 as payables in dispute, which included:

On August 1, 2018, one of NF Energy’s suppliers filed a lawsuit against NF Energy in the PRC for an outstanding payable of approximately RMB 6 million, or approximately $856,000. As of the date of this report, the parties have not reached any agreement or settlement.

On January 10, 2019, one of NF Energy’s suppliers filed a lawsuit against NF Energy in the PRC for an outstanding payable of approximately RMB 700,000. The law suit was settled on April 8, 2019 and NF Energy was obligated to pay the supplier approximately RMB 710,000, or approximately $93,000. To date, the Company has paid RMB 50,000, or approximately $7,143, in connection with the settlement.

On April 22, 2019, one of NF Energy’s suppliers filed a lawsuit against NF Energy in the PRC for an outstanding payable of RMB 1,278,181.8. On May 4, 2019, the parties entered into a court-supervised settlement where NF Energy agreed to pay the supplier approximately RMB 1.26 million, or approximately $182,000 in total. To date, the Company has not made any payment in connection with the settlement.

The Company is authorized to issue 50,000,000 shares of common stock, $0.001 par value. As of September 30, 2019 and December 31, 2018, it had 8,073,289 shares and 7,573,289 shares of common stock outstanding, respectively.

On March 12, 2018, the Company issued 500,000 shares of its common stock, at the price of $1.00 per share for aggregate consideration of $500,000, to Mr. Yongquan Bi, our Chairman and Chief Executive Officer.

On April 11, 2019, the Company entered into a stock purchase agreement (the “Agreement”) with Lasting Wisdom Holdings Limited, a company organized under the laws of the British Virgin Islands, Pukung Limited, a company organized under the laws of Hong Kong, Beijing Xin Rong Xin Industrial Development Co., Ltd., a company organized under the laws of the PRC, Boqi Pharmacy and several additional individual sellers listed in the Agreement whereby the Company agreed to purchase 100% of the equity interests of Lasting Wisdom Holdings Limited (the “Shares”). In accordance with the Agreement, the total purchase price for the Shares is RMB 40 million plus 1.5 million shares of the Company’s common stock (the “Purchase Price”), which is based on an initial appraisal of the fair market value of the acquired company of RMB 100 million. The Purchase Price is subject to post-closing adjustments (contingent on a final appraisal of the fair market value of the acquired company). On April 20, 2019, the Company issued 500,000 shares of its common stock, to the five shareholders of Lasting Wisdom Holdings Limited as an initial payment and an additional 1,000,000 shares of common stock were issued to the shareholders of Lasting Wisdom Holdings Limited on October 2, 2019. The cash portion of the consideration has not been paid as yet.

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. The dilutive effect of potential common shares outstanding is included in diluted net loss per share. The following table sets forth the computation of basic and diluted net loss per share for the three and nine months ended September 30, 2019 and 2018:

Under the PRC Law, the Company’s subsidiaries are required to make appropriations to their statutory reserves based on after-tax net earnings and determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory reserve should be at least 10% of the after-tax net income until the reserve is equal to 50% of the registered capital. The statutory reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation.

The Company is exposed to the following concentrations of risk:

For the three months ended September 30, 2019, no customer accounted for more than 10% of the Company’s revenues.

For the nine months ended September 30, 2019, the customers who accounted for than 10% of the Company’s revenues and its outstanding accounts receivable as of the balance sheet date are presented as follow:

For the three and nine months ended September 30, 2018, the customers that accounted for 10% or more of the Company’s revenues and its outstanding accounts receivable balances as at balance sheet date, are presented as follows:

For the nine months ended September 30, 2019, revenues contributed from customers located outside of the PRC accounted for $467,179 or approximately 52% of revenues. For the nine months ended September 30, 2018, all of the Company’s customers were located in the PRC.

For the three and nine months ended September 30, 2019, the vendors who accounted for 10% or more of the Company’s purchases and its outstanding balances as at balance sheet dates, are presented as follows:

For the three and nine months ended September 30, 2018, no vendor accounted for 10% of the Company’s purchases.

Financial instruments that are potentially subject to credit risk consist principally of trade receivables. Since the late 2018, the Company had enhanced its credit evaluation process to monitor credit risk in its trade receivables. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The significant drop of write-offs from 2018 to 2019 indicates the result of the enhanced credit evaluation process.

As the Company has no significant interest-bearing assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.

The Company manages interest rate risk by varying the issuance and maturity dates of fixed rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. As of September 30, 2019 and December 31, 2018, short-term bank borrowings and convertible promissory notes were at fixed rates.

The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates against US$, the value of RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.

The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

The Company’s operations in the PRC are subject to special considerations. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.

On October 14, 2019, we entered into an $83,000 convertible note with Power Up. The note was issued at a discounted value of $80,000 with a term of 12 month, carrying 6% annual interest and convertible into shares of the Company’s common stock.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Report.

Certain statements in this Report constitute forward-looking statements. These forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategy, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

As used herein the terms “we”, “us”, “our,” “NFEC” and the “Company” mean, NF Energy Saving Corporation, a Delaware corporation and its wholly-owned subsidiaries.

OVERVIEW

In the last few years, NFEC was engaged in: (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) providing 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.

Since early 2018, NFEC has suffered a significant revenue decrease due to the Chinese government’s shift of focus from traditional energy industry to more environment friendly projects. Most of our customers are in the traditional energy industry which were adversely impacted by the government policy change. As a result, we have accumulated a large quantity of inventories while experiencing severe difficulty in collecting receivables. We are in the process of expanding our customer base to more environment friendly projects, but it may take a long time for us to finally achieve our goals.

In 2019, we decided to shift our focus so that we will be mainly engaged in the sale of pharmaceuticals and other health-related commodities through our acquisition of Boqi Pharmacy, which closed in October 2019. 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 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.

GOING CONCERN

As reflected in the accompanying unaudited condensed consolidated financial statements, the Company incurred a net loss of $1,973,382 for the nine months ended September 30, 2019 and had an accumulated deficit of $8,417,261 and negative working capital of $9,344,148 as of September 30, 2019. In addition, the Company continued to generate operating losses and a cash outflow from its operations. Management believes these factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months.

The continuation of the Company as a going concern through the next twelve months is dependent upon (1) the continued financial support from its stockholders or external financing. Management believes the existing stockholders will provide the additional cash to meet with the Company’s obligations as they become due, and (2) further implement management’s business plan to extend its operations and generate sufficient revenues to meet its obligations. While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be neither no assurances to that effect, nor no assurance that the Company will be successful in securing sufficient funds to sustain the operations.

The Company acquired Boqi Pharmacy in the third quarter of 2019 in an attempt to diversify our operating risks and improve our financial position and cash flows. However, the cash portion for the acquisition of Boqi Pharmacy has not yet been paid and we will also need to continue to support the operation of Boqi Pharmacy. Although the Company plans to fund the final payment of the acquisition and the ongoing operation of Boqi Pharmacy through increased revenue and additional financing from investors, there can be no assurance that our plans will be successfully implemented or that the Boqi Pharmacy acquisition will bring the expected positive impact to our business. We expect to continue making acquisitions and strategic alliances as part of our long-term business strategy. However, there can be no assurance that we can realize the full benefits from such acquisitions, if any, including increased revenue or an enhanced financial position. The acquisitions could adversely affect our operations and consolidated financial position.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. Management believes that the actions presently being taken to obtain additional funding and implement its strategic plan provides the opportunity for the Company to continue as a going concern.

RESULTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

REVENUES

Revenues were $208,402 and $1,120,804 for the three and nine months ended September 30, 2019, respectively, as compared to $1,102,693 and $1,814,111 for the corresponding periods in 2018. Total revenues decreased by $894,291 or 81.10% and $693,307 or 38.22% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods in 2018. The decrease in total revenues for the three and nine months ended September 30, 2019 is mainly due to the decline in demand for the Company’s products and services resulting from changes in the overall market. The company suffered significant revenue decrease due to the Chinese government’s shift of focus from traditional energy industry to more environment friendly projects. Most of our customers are in the traditional energy industry which were adversely impacted by the government policy change. As a result, we have accumulated large quantity of inventories while experiencing severe difficulties in collecting receivables. The Company sold its products to the oversea market in the first quarter of 2019, which accounted for the increase in revenues in that quarter. Revenues from overseas totaled $425,405 during the first quarter of 2019, but declined significantly since then. We reported approximately $54,000 and $8,000 of overseas revenues in the second and third quarters of 2019, respectively.

Product Revenues

Product revenues are derived principally from the sale of self-manufactured products relating to energy saving flow control equipment. Product revenues were $178,599 and $950,773, or 85.70% and 84.83% of total revenues, respectively, for the three and nine months ended September 30, 2019, as compared to $1,052,130 and 1,550,119, or 95.41% and 85.45% of total revenues, respectively, for the corresponding periods in 2018. Product revenues decreased by $873,531 and $599,346, or 83.03% and 38.66%, for the three and nine months ended September 30, 2019 as compared to the corresponding periods in 2018. The decrease in product revenues was mainly due to the decreased demand for the Company’s products. The Chinese government shifted its focus from traditional energy industry to more environment friendly products in 2018. Most of our customers are in the traditional energy industry which were adversely impacted by the government policy change. As a result, we have not been able to sell to our long-term customers as before while experiencing severe difficult in collecting receivables.

Service Revenues

Service revenues are derived principally from providing energy saving technical services and product collaboration processing services. Service revenues were $29,803 and $170,031, or 14.30% and 15.17% of total revenues, respectively, for the three and nine months ended September 30, 2019, as compared to $50,563 and $263,992, or 4.59% and 14.55% of total revenues, respectively, for the corresponding periods in 2018. Service revenues decreased by $20,760 and $93,961, or 41.06% and 35.59%, as compared to the corresponding periods in 2018. The decrease in service revenues was primarily due to reduced demand for such services.

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 manufacturing of products and the rendering of services. Total cost of revenues was $281,014 and $1,030,862 for the three and nine months ended September 30, 2019, as compared to $956,694 and $1,344,884 for the corresponding periods in 2018. Total cost of revenues decreased by $675,680 and $314,022, or approximately 70.63% and 23.35%, as compared to the corresponding periods in 2018. The decrease in cost of revenues was primarily due to the decrease in revenues.

As a result, the Company had a gross loss of $72,612, or 34.84%, of total revenues and a gross profit $89,942, or 8.02%, of total revenues for the three and nine months ended September 30, 2019, respectively, as compared to a gross profit of $145,999, or 13.24%, of total revenues and $469,277, or 25.87%, of total revenues, for the corresponding periods in 2018, respectively.

Cost of Products

The cost of products was $204,845 and $806,049 for the three and nine months ended September 30, 2019, as compared to $937,586 and $1,148,581 for the corresponding periods in 2018, a decrease of $732,741 and $342,532, or approximately 78.15% and 29.82%. This decrease is primarily due to the decrease in product revenues, and an additional cost of approximately $50,000 for a misconducted installment of valves.

As a result, the Company had a gross loss from products revenues of $26,246, or 14.70%, for the three months ended September 30, 2019, and, a gross profit from products revenues $144,724, or 15.22%, for the nine months ended September 30, 2019, respectively, as compared to a gross profit $114,544 or 10.89%, and a gross profit of $401,538 or 25.90%, of product revenues for the corresponding periods in 2018. The decline in gross profit and margin was primarily due to the decline in selling prices and increase in unit costs of revenues.

Cost of Services

The cost of services was $76,169 and $224,813 for the three and nine months ended September 30, 2019, as compared to $19,108 and $196,303 for the corresponding periods in 2018, an increase of $57,061 and $28,510, or approximately 298.62% and 14.52%. This increase is primarily due to the increase in the service costs incurred for maintaining existing products and customers while developing new products and customer base.

As a result, the Company had a gross loss from services revenues of $46,366 and $54,782, or 155.57% and 32.22%, of services revenues, for the three and nine months ended September 30, 2019, respectively, as compared to gross profit from services revenues of $31,455 and $67,689, or 62.21% and 25.64%, of service revenues for the three and nine months ended September 30, 2018.

Operating Expenses

Total operating expenses were $359,307 and $1,607,763 for the three and nine months ended September 30, 2019, as compared to $370,703 and $2,654,273 for the corresponding period in 2018, a decrease of $11,396 and $1,046,510, or 3.07% and 39.43%, as outlined in the sections below.

Selling and Marketing Expenses

Selling and marketing expenses were $33,096 and $119,820 for the three and nine months ended September 30, 2019, as compared to $6,153 and $22,542 for the corresponding period in 2018, an increase of $26,943 and 97,278, or 437.88% and 431.54%. The increase is primarily due to the marketing expenses relating to efforts to expand overseas revenues.

General and Administrative Expenses

General and administrative expenses were $326,211 and $1,487,943 for the three and nine months ended September 30, 2019, as compared to $364,550 and $2,631,731for the corresponding periods in 2018, a decrease of $38,339 and $1,143,788, or 10.52% and 43.46%, respectively. The decrease in general and administrative expenses was primarily due to the decrease in the allowance for doubtful accounts receivable, which was offset in part by an increase of expenses related to the Company’s efforts to improve day-to-day regulatory compliance.

LOSS FROM OPERATIONS

As a result of the factors mentioned above, the Company incurred losses from operations of $431,919 and $1,517,821 for the three and nine months ended September 30, 2019, as compared to losses of $224,704 and $2,185,046 for the corresponding period in 2018, an increase of $207,215, or 92.22%, for the three months ended September 30, 2019 as compare to same period of 2018 and a decrease of $667,225, or 30.53%, for the nine months ended September 30, 2019 as compared to the same period of 2018.

OTHER EXPENSE

Other expense for the three and nine months ended September 30, 2019 were $115,770 and $455,561, respectively, as compared to $90,171 and $286,394 for the corresponding periods in 2018, an increase of $25,599 and $169,167, or 28.39% and 59.07%, respectively. This increase is primarily due to the increase in interest expenses.

As a result, the Company incurred losses before income taxes of $547,689 and $1,973,382 for the three and nine months ended September 30, 2019, respectively, as compared to losses before income taxes of $314,875 and $2,471,440 for the corresponding periods in 2018, an increase in losses before income taxes of $232,814, or 73.94% for the three months ended September 30, 2019 as compare to the same period of 2018, and a decrease in loss before income taxed of $498,058, or 20.15% for the nine months ended September 30, 2019 as compare to the same period of 2018.

INCOME TAX EXPENSE

No income tax expenses were provided for in the three and nine months ended September 30, 2019, as compared to $16 and $114 for the corresponding periods in 2018.

NET LOSS

As a result of the factors mentioned above, the Company incurred a net loss for the three and nine months ended September 30, 2019 of $547,689 and $1,973,382, as compared to a net loss of $314,891 and $2,471,554 for the corresponding periods in 2018, an increase in net loss of $232,798, or 73.93% for the three months ended September 30, 2019 as compared to the same period of 2018, and a decrease in net loss of $498,172, or 20.16% for the nine months ended September 30, 2019 as compared to the same period of 2018. The fluctuation in net loss reflect changes in the gross profit and operation expenses for the three and nine months ended September 30, 2019 as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2019, we had $65,354 in cash and cash equivalents and had a working capital deficit of ($9,344,148), compared with $17,860 in cash and cash equivalents and a working capital deficit of ($10,458,105) at December 31, 2018. Our existing cash and cash equivalents on hand at September 30, 2019 and the cash flows expected from operations, may not be sufficient to support our operating and capital requirements during the next twelve months. In order to provide our company with additional working capital, we plan to raise a minimum of $5,000,000 from our investors in the next twelve months, in addition to borrowing from banks and other third-party lenders. No assurance can be given that we will be successful in our funding efforts or that such funding will be obtained at favorable rates.

Net cash used in operating activities was $935,967 during the nine months ended September 30, 2019 compared to $738,511 provided by operating activities during the comparable period in 2018. Net cash used in operating activities during the nine months ended September 30, 2019 was primarily a result of the operating loss, increases in inventory and a reduction in current liabilities. Net cash used in investing activities was $571,101 during the nine months ended September 30, 2019 compared to $1,441 provided by investing activities for the comparable period in 2018, mainly related to a related party loan receivable. Net cash provided by financing activities was $1,588,992 during the nine months ended September 30, 2019, mainly related to loans from and advances by our affiliates to support our daily operations, compared to $811,413 used in financing activities during the comparable period in 2018.

Operating Activities

We used $935,967 in our operating activities during the nine months ended September 30, 2019 compared to $738,511 of cash provided from operating activities during the comparable period in 2018. These results were driven by a decrease in the net loss, which unfortunately was offset by additional cash expenditures for our operating expenses. Our net loss (before non-cash adjustments) of almost $2 million for the nine months ended September 30, 2019 decreased by $0.5 million, compared to the comparable period in 2018. However, after making all the non-cash adjustments, our net loss in 2019 actually increased from $0.3 million to $1.3 million. This unusual increase is attributable to a few factors. First of all, a new environment protection policy implemented by the Chinese government in 2018 led to low profit in 2019. Secondly, although our cash spent in inventory purchases decreased $1.4 million due to less customer demand and cost control in our production activities, such decrease was offset by a decrease of $2.7 million in cash collected from our receivables, with a net effect of $ 1.3 million cash outflow. Thirdly, during the nine months ended September 30, 2019, we had unusual additional cash expenditures in our operating expenses, compared to the same period in 2018. For example, (1) we changed our external auditors twice in 2019 which resulted in additional aggregate payments of approximately $300,000 in auditor costs, and (2) in order to expand to overseas market, we had additional cash expenditures $62,000 in sale commission and $51,000 in marketing expenses.

Investing Activities

For the nine months ended September 30, 2019 and 2018 net cash used in investing activities was ($571,101) and $1,441, respectively. During the nine months ended September 30, 2019, we loaned $1,161,458 to one of our related parties and received $540,294 in repayments. In addition, we reported $50,063 and $1,441 in proceeds from the disposal of property, plant and equipment during the nine months ended September 30, 2019 and 2018, respectively.

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 Pharmacy and several additional individual sellers whereby the Company agreed to purchase 100% of the equity interests of Lasting Wisdom Holdings Limited 9 the parent of Boqi Pharmacy (the “Shares”). The rationale behind the transaction is for our company to purchase 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 consists of cash consideration of RMB 40,000,000 and 1,500,000 shares of our common stock. The purchase price is subject to post-closing adjustments (contingent on an appraisal of the fair market value of Boqi Pharmacy). The acquisition closed quartering October 2019. However, the cash portion for the acquisition of Boqi Pharmacy has not yet been paid. The Company plans to fund the final payment of the acquisition through increased revenue and additional financing from investors.

Financing Activities

For the nine months ended September 30, 2019, net cash provided by financing activities was $1,588,992, including proceeds from a short-term bank borrowing of $5,835,897 and $1,591,910 from loans and advances by our affiliates. Cash inflow was offset by repayment of $5,838,815 on a short-term bank borrowing.

For the nine months ended September 30, 2018, net cash used in financing activities was $811,413, including repayments of $6,614,583 on a short-term bank borrowing, and repayment of $1,028,935 of bank demand notes, and $282,478 of financial funding from our related parties; net cash inflow including proceeds of $6,614,583 from a short-term bank borrowing and $500,000 from the issuance of new shares.

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.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any material off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Use of Estimates

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.

Revenue Recognition

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 from Contracts with Customers, 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:

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 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 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.

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.

Recently Issued New Accountings Standard

We do not expect adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation and the identification of a material weakness in internal control over financial reporting described below, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures, as of September 30, 2019, and during the period prior were not effective.

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:

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.

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 .This material weakness was identified by our Chief Executive Officer and Chief Financial Officer and our plans for remediation are described in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2018, which was filed with the SEC on September 6, 2019.

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.

Changes in Internal Control over Financial Reporting

Subject to the foregoing disclosure, there were no changes in our internal control over financial reporting during the nine months ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II ---- OTHER INFORMATION

Item 1. Legal Proceedings.

On August 1, 2018, one of NF Energy’s suppliers filed a lawsuit against NF Energy for an outstanding payable of approximately RMB 6 million, or approximately $856,000. As of the date of this report, the parties have not reached any agreement or settlement.

On January 10, 2019, one of NF Energy’s suppliers filed a lawsuit against NF Energy for an outstanding payable of approximately of RMB 700,000. The lawsuit was settled by both parties on April 8, 2019 and that NF Energy was obligated to pay the supplier approximately RMB 710,000 or approximately $93,000. The company has been paid RMB 50,000 or approximately $7,143 in connection with the settlement.

On April 22, 2019, one of NF Energy’s suppliers filed a lawsuit against NF Energy for an unpaid outstanding payable of RMB 1,278,181.8. On May 4, 2019, the parties entered into a court-supervised settlement where NF Energy agreed to pay the supplier approximately RMB 1.26 million or approximately $182,000 in total. This Company has not made any payment in connection with the settlement.

Item 1A. Risk Factors

We have entered the healthcare industry in China and there is no assurance that we will be successful in this new business. A failure to succeed in this market will have a negative impact on our ability to remain in business.

In October 2019, we acquired Boqi Pharmacy, a PRC company engaged in retailing medical products through its pharmacy chain stores. This activity 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 its offerings will be attractive to consumers in its market. 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. We can provide no assurances that we will be successful in this new business initiative.

Expanding our business will require us to develop management expertise in new markets and regulatory regimes. An inability to adapt our business quickly and efficiently to support our business expansion could materially adversely affect our financial condition and results of operations. The entry into the healthcare industry will expose us to additional laws, regulations and risks, including the risk that we may incur ongoing operating expenses in excess of revenues, which would harm our precarious financial condition and results of operations. 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 and results of operations.

We require a significant amount of cash to satisfy our obligations. If we fail to raise sufficient funds we may be unable to meet our obligations as they come due and may be unable to continue in business.

We have not as yet made the cash payment component of the acquisition price of Boqi Pharmacy. We will need to raise approximately RMB 40 million to complete the acquisition financing and we presently do not have such funds available to us. In the event we are unable to acquire such funds, we may lose our entire investment in Boqi Pharmacy. We will also need additional financing to support the operations and planned growth of Boqi and to make payments on our outstanding debt. We cannot assure you that we will be able to obtain the requisite funding or generate sufficient cash flow from operations to make the scheduled payments on our debt. If our lenders decline to renegotiate the terms of our debt, the lenders could declare all amounts borrowed and all amounts due to them under the agreements due and payable. In such event, we may not be able to continue in business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The list of Exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-Q are set forth on the Exhibit Index immediately preceding such Exhibits and is incorporated herein by this reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned.

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