BIMI International Medical Inc. - Quarter Report: 2019 June (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 June 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 files). 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 June 30, 2019, the registrant had 8,073,289 shares of common stock, par value $.001 per share, issued and 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 INCOME

(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

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NF Energy Saving Corporation (the “Company” or “NFEC”) was incorporated in the State of Delaware in the name of Galli Process, Inc. on October 31, 2000. On February 7, 2002, the Company changed its name to “Global Broadcast Group, Inc.” On November 12, 2004, the Company changed its name to “Diagnostic Corporation of America.” On March 15, 2007, the Company changed its name to “NF Energy Saving Corporation of America.” On August 24, 2009, the Company further changed its name to “NF Energy Saving Corporation.” Since March 7, 2012, the common stock is traded on the Nasdaq Capital Market.

On January 1, 2019, the Company transferred its 100% equity interest in Liaoning Nengfa Weiye Energy Technology Co., Ltd. to NF Energy Equipment Limited (“NF Equipment”). NF Equipment, a Hong Kong limited liability company is 100% owned by NF Energy Investment Corporation (“NF Investment”), a wholly-owned subsidiary of the Company. NF Investment is a British Virgin Island limited liability company. Other than its equity interest in NF Equipment, NF Investment does not own any assets or conduct any operations.

The Company, through its subsidiaries, mainly operates in the energy technology business in the People’s Republic of China (the “PRC”). The Company specializes in the provision of energy saving technology consulting, optimization design services, energy saving reconstruction of pipeline networks and contractual energy management services to China’s electric power, petrochemical, coal, metallurgy, construction, and municipal infrastructure development industries. The Company also engages in the manufacturing and sales of the energy-saving flow control equipment. .

Description of subsidiaries

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

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had an accumulated deficit of $7,872,792 and negative working capital of $9,315,789 as of June 30, 2019, and incurred a net loss of $1,425,693 for the six months ended June 30, 2019. In addition, the Company continues to generate operating losses and has a cash outflow from its operations. Management believes that these factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months.

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

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

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

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

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

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

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

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in restricted cash account on the Company’s unaudited interim condensed consolidated balance sheet. The Company’s restricted cash balance is related to a contract performance guarantee bond. The balance of restricted cash was $179,814 and $179,496 as of June 30, 2019 and December 2018, respectively.

Accounts receivable are recorded at the invoiced amount, do not bear interest and are due within contractual payment terms, generally 30 to 90 days from shipment. Credit is granted based on evaluation of a customer’s financial condition, the customer credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 90 days are reviewed individually for collectability. At the end of each period, the Company specifically evaluates individual customer’s financial condition, credit history, and the current economic conditions to monitor the progress of the collection of accounts receivables. The Company will consider the allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. For those receivables that are past due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of June 30, 2019 and December 31, 2018, the allowance for doubtful accounts was $11,486,827 and $11,327,271, respectively.

Under the terms of its contracts with customers, the Company offers its customers a free product warranty on a case-by-case basis, depending upon the type of customer and the nature and size of the infrastructure project. The warranty is usually for 12 months. Under such arrangements, a portion of the project contract value, usually 5-10%, is withheld by the customer as a retention. The Company records this portion of the project contract value as retention receivable. As of June 30, 2019 and December 31, 2018, the allowance for doubtful accounts relating to retentions receivable was $938,940 and $942,376, respectively.

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

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

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

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

Construction in progress is stated at cost, which includes acquisition of land use rights, cost of construction, purchases of plant and equipment and other direct costs attributable to the construction of a manufacturing facility in Yinzhou District Industrial Park, Tieling City, Liaoning Province, PRC. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction.

In accordance with the provisions of ASC Topic 360, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as property, plant and equipment held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to its estimated future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. During the three and six months ended June 30, 2019, the Company reported an impairment loss of $25,071 and $25,071 from its incomplete construction project, respectively. There was no impairment loss reported during the comparable periods in 2018.

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

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

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

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

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

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

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

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

Under the terms of its contracts with customers, the Company offers its customers a free product warranty on a case-by-case basis, depending upon the type of customer and the nature and size of the infrastructure project. The warranty is usually for 12 months. Under such arrangements, a portion of the project contract value, usually 5-10%, is withheld by the customer as a retention. The Company records this portion of the project contract value as retention receivable. As of June 30, 2019 and December 31, 2018, the Company reported retentions receivable, net of $7,022 and $65,529, respectively.

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

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

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

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

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

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

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payments arrangements related to the acquisition of goods and services from both employees and nonemployees. For public companies, the amendments are effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but no earlier than a company’s adoption date of ASC 606. The Company does not believe that the adoption of ASU 2018-07 will have a material impact on the Company’s consolidated financial statements.

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

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

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, the Company incurred a bad debt expense of $138,784 and $1,454,386 for its doubtful accounts in accounts receivable for the three months ended June 30, 2019 and 2018, respectively, and $155,128 and $1,454,386 for its doubtful accounts in accounts receivable for the six months ended June 30, 2019 and 2018, respectively.

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

As of June 30, 2019 and December 31, 2018, inventories consisted of the following:

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

Finished goods are expected to be delivered to the customer in the next twelve months.

Prepayments and other receivables present the amount the Company advanced to suppliers for purchase of materials or goods, prepayment to service providers, reimbursement for business related expenses of employees and the security deposit for the Boqi Pharmacy acquisition. The table below set forth the balances as of June 30, 2019 and December 31, 2018.

On April 20, 2019, the Company issued 500,000 shares of its common stock, valued at $2,040,000, as a security deposit for an acquisition. See Note 13 to the financial statements for more information.

Management evaluates the recoverable value of these balances periodically according to the Company’s policy of credit and allowance for doubtful accounts. For the three and six months ended June 30, 2019, the Company reserved for the doubtful accounts in its prepayments and other receivables of $2,182 and $2,182, respectively. No allowance expense was reserved for doubtful accounts for the three and six months ended June 30, 2018.

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Property, plant and equipment consisted of the following:

Depreciation expense for the three months ended June 30, 2019 and 2018 were $230,212 and $230,569, respectively.

Depreciation expense for the six months ended June 30, 2019 and 2018 were $467,045 and $463,385, respectively.

Land use right consisted of the following:

Amortization expenses for the three months ended June 30, 2019 and 2018 were $15,139 and $16,181, respectively.

Amortization expenses for the six months ended June 30, 2019 and 2018 were $30,431 and $32,412, respectively.

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

Short-term bank borrowings consist of the following:

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

For the three months ended June 30, 2019 and 2018, the Company reported interest expenses of $129,929 and $108,904, respectively.

For the six months ended June 30, 2019 and 2018, the Company reported interest expenses of $219,905 and $197,580, respectively.

Accounts payable, trade-related parts

As of June 30, 2019 and December 31, 2018, the Company reported trade payables of $398,033 and $416,547, respectively, due to Liaoning Bainianye New Energy Utilization Co., Ltd., (“Bainianye New Energy”), a company directly controlled by Ms. Li Hua Wang (the Company’s former Chief Financial Officer) and Mr. Gang Li (the Company’s former Chief Executive Officer and one of the Company’s current directors). The trade payable is unsecured, interest-free and has no fixed repayment term. During the three and six months ended June 30, 2019, the Company did not have inventory purchase transaction with Bainianye New Energy.

Amount Due to related parties

As of June 30, 2019, the total amount due to related parties was $2,203,822, which amount included:

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

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Amount due from related parties

As of June 30, 2019 the Company reported $1,155,073 due from Nengfa Weiye Tieling Valve Joint Stock Co., Ltd. (“Tieling Joint Stock”), which holds 43% of equity interests of Nengfa Tiefa Import & Export, which amount was free from interest and due on demand. There was no amount due from related parties as of December 31, 2018.

Other payables and accrued liabilities consisted of the following:

As of June, 30, 2019 and December 31, 2018, the Company reported $1,170,763 and $879,780 as payables that are in dispute including payables of $880,000 and $290,000 that were incurred in 2018 and 2019, respectively.

On August 1, 2018, one of NF Energy’s suppliers filed a lawsuit against NF Energy for an outstanding payable of approximately RMB 6 million, or approximately $880,000. Until the date of this report, both parties have not reached any agreement or settlement.

On January 10, 2019, one of NF Energy’s suppliers filed a lawsuit against NF Energy for an outstanding payable of approximately of RMB 700,000, and the law suit was settled by both parties on April 8, 2019. NF Energy was obligated to pay the supplier approximately RMB 710,000 or approximately $100,000.

On April 22, 2019, one of NF Energy’s suppliers filed a lawsuit against NF Energy for an unpaid outstanding payable of RMB 1,278,181.8. On May 4, 2019, the parties entered into a court-supervised settlement where NF Energy agreed to pay the supplier approximately RMB 1.26 million or approximately $190,000 in total.

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

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

On April 11, 2019, the Company entered into a stock purchase agreement (the “Agreement”) with Lasting Wisdom Holdings Limited, a company organized under the laws of the British Virgin Islands, Pukung Limited, a company organized under the laws of Hong Kong, Beijing Xin Rong Xin Industrial Development Co., Ltd., a company organized under the laws of the PRC, Boqi Zhengji Pharmacy Chain Co., Ltd. a company organized under the laws of the PRC (“Boqi Pharmacy”) and several additional individual sellers listed in the Agreement whereby the Company will purchase 100% of equity interests of Lasting Wisdom Holdings Limited (the “Shares”). In accordance with the Agreement, the total purchase price for the Shares is RMB 40 million plus 1.5 million shares of the Company’s common stock. The purchase price is subject to post-closing adjustments (contingent on fair market value of the acquired companies). On May 14, 2019, the Company issued 500,000 shares of its common stock, valued at $2,040,000, to the shareholders of Lasting Wisdom Holdings Limited as a security deposit for the acquisition, and the closing of this acquisition is subject to the result of the final evaluation of the target company. As the date of this report, the acquisition has not closed.

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

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

The Company is exposed to the following concentrations of risk:

For the three and six months ended June 30, 2019, the customers who represented more than 10% of the Company’s revenues and its outstanding accounts receivable as of the balance sheet date are presented as follow:

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

For the six months ended June 30, 2019, revenues contributed from customers located outside of the PRC accounted for $472,232 or approximately 52% of total revenues. For the six months ended June 30, 2018, all customers were located in the PRC.

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

For the three and six months ended June 30, 2018, no vender accounted for 10% of the Company’s purchases.

Financial instruments that are potentially subject to credit risk consist principally of trade receivables. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

NF ENERGY SAVING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

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

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

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

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

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” means, NF Energy Saving Corporation, a Delaware corporation and its wholly-owned subsidiaries..

OVERVIEW

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.

GOING CONCERN

As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had an accumulated deficit of $7,872,792 and negative working capital of $9,315,789 as of June 30, 2019, and incurred a net loss of $1,425,693 for the six months ended June 30, 2019. In addition, the Company continues to generate operating losses and has a cash outflow from its operations. Management believes these factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months.

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

RESULTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

REVENUES

Revenues were $333,690 and $912,402 for the three and six months ended June 30, 2019, respectively, as compared to $564,339 and $711,418 for the corresponding period in 2018. Total revenues decreased by $230,649 or 40.87% for the three months ended June 30, 2019 and increased by $200,984 or 28.25% for the six months ended June 30, 2019, respectively, as compared to the same period in 2018. The increase in total revenue for the six months ended June 30, 2019 is mainly due to the Company’s revenues from the overseas market which contributed $425,405 in revenues during the first quarter of 2019, but revenues from this market declined significantly to $46,827 for the three months ended June 30, 2019. This resulted in a decrease in total revenues for the three months ended June 30, 2019 as compared to the corresponding period in 2018. For the three and six months ended June 30, 2018 the Company had no revenues from the oversea market.

Product Revenues

Product revenues are derived principally from the sale of self-manufactured products relating to energy saving flow control equipment. Product revenues were $214,935 and $772,174, or 64.41% and 84.63% of total revenues, respectively, for the three and six months ended June 30, 2019, as compared to $406,193 and 497,989, or 71.97% and 69,99% of total revenues, respectively, for the corresponding period in 2018. Product revenues decreased by $191,258 or 47.09%, for the three months ended June 30, 2019 as compared to the corresponding period in 2018; Product revenues increased by $274,185 or 55.06% for the six months ended June 30, 2019 as compared to the corresponding period in 2018. The fluctuation of product revenues was mainly the result of revenues from an oversea market as discussed above.

Service Revenues

Service revenues are derived principally from energy saving technical services and product collaboration processing services. Service revenues were $118,755 and $140,228, or 35.59% and 15.37% of total revenues, respectively, for the three and six months ended June 30, 2019, as compared to $158,146 and $213,429, or 28.07% and 30.01% of total revenues, respectively, for the corresponding period in 2018. Service revenues decreased by $39,391 and $73,201, or 24.91% and 34.30% as compared to the comparable periods in 2018. The decrease in service revenue was primarily due to reduced demands in the PRC for such service.

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 $319,172 and $749,848 for the three and six months ended June 30, 2019, as compared to $272,548 and $388,190 for the corresponding period in 2018, an increase of $46,624 and 361,658, or approximately 17.11 and 93.17% as compared to the corresponding periods in 2018. The increase in cost of revenues was primarily due to the increase in total revenues from products with lower gross margin rates, combined with increasing procurement costs of inventories and labor costs.

The overall gross profit for the Company was $14,518 and $162,554, or 4.35% and 17.82%, of total revenues, for the three and six months ended June 30, 2019, respectively as compared to $291,791 and $323,228, or 51.70% and 45.43% of total revenues, for the corresponding periods in 2018, respectively.

Cost of Products Revenues

Total cost of products was $181,663 and $601,204 for the three and six months ended June 30, 2019, as compared to $132,464 and $210,995 for the corresponding period in 2018, an increase of $49,199 and $390,209, or approximately 37.14% and 184.94%. This increase is primarily due to the increase in product revenue from products with lower gross margin rates, combined with increasing procurement costs of inventories and labor costs.

The gross profit of the products revenues for the Company was $33,272 and $170,970, or 15.48% and 21.14%, of product revenues, for the three and six months ended June 30, 2019, respectively, as compared to $273,729 and $286,994, or 67.39% and 57.63% of product revenues for the same period in 2018. The decline in gross profit and gross profit margin is due to a decline in selling prices and an increase in cost of revenues.

Cost of Services Revenues

The cost of services revenues was $137,509 and $148,644 for the three and six months ended June 30, 2019, as compared to $140,084 and $177,195 for the corresponding period in 2018, a decrease of $2,575 and $28,551, or approximately 1.84% and 16.11%. This decrease is primarily due to the decrease in service revenue.

The gross loss for the Company with respect to service revenues was $18,754 and $8,416, or 15.79% and 6.00%, of services revenues, for the three and six months ended June 30, 2019, respectively, as compared to the gross profit of services revenues of $18,062 and $36,234, or 11.42% and 16.98 of service revenues for the three and six months ended June 30, 2018.

Operating Expenses

Total operating expenses were $726,940 and $1,248,456 for the three and six months ended June 30, 2019, as compared to $1,835,440 and $2,283,570 for the corresponding period in 2018, a decrease of $1,108,500 and $1,035,114, or approximately 60.39% and 45.33%. The decrease in operating expenses were primarily due to the decrease in general and administrative expenses, which was partly offset by the increase in selling and marketing expenses.

Selling and Marketing Expenses

Selling and marketing expenses were $48,851 and $86,724 for the three and six months ended June 30, 2019, as compared to $7,449 and $16,389 for the corresponding period in 2018, an increase of $41,402 and $70,335, or 555.81% and 429.16%. The increase is primarily due to the marketing expenses incurred to expand foreign sales.

General and Administrative Expenses

General and administrative expenses were $678,089 and $1,161,732 for the three and six months ended June 30, 2019, as compared to $1,827,991 and $2,267,181 for the corresponding period in 2018, a decrease of $1,149,902 and $1,105,449, or 62.91% and 48.76%. The decrease in general and administrative expenses were primarily due to the decrease in allowances for doubtful accounts of trade receivables of approximately $1.4 million, which was offset by an increase in expenses related to Company’s efforts to improve day-to-day compliance with regulatory requirements following the transition in management of the Company.

LOSS FROM OPERATIONS

As a result of the factors mentioned above, loss from operations was $712,422 and $1,085,902 for the three and six months ended June 30, 2019, as compared to $1,543,649 and $1,960,342 for the corresponding periods in 2018, a decrease of $831,227 and $874,440, or 53.85% and 44.61%. This decrease is primarily due to the decrease in operating expenses, mainly from the bad debt expense of $1.5 million reported in the second quarter of 2018, which was partially offset by increased expenditures for audit and legal services.

OTHER EXPENSE

Other expense for the three and six months ended June 30, 2019 were $170,823 and $339,791, respectively, as compared to $107,877 and $196,223 for the corresponding period in 2018, an increase of $62,946 and $143,568, or 58.35% and 73.17%, respectively. This increase is primarily due to the increase in interest expenses.

As a result, loss before income taxes was $883,245 and $1,425,693 for the three and six months ended June 30, 2019, respectively, as compared to loss before income taxes of $1,651,526 and $2,156,565 for the corresponding periods in 2018, a decrease of $76 8,281 and $730,872, or 46.52% and 33.89%.

INCOME TAX EXPENSE

No income tax expenses were provided for the three and six months ended June 30, 2019, as compared to $98 and $98 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 six months ended June 30, 2019 of $883,245 and $1,425,693, as compared to net losses of $1,651,624 and $2,156,663 for the corresponding periods in 2018, a decrease of $768,379 and $730,970, or 46.52% and 33.89%, respectively. This decrease is primarily due to the decrease in the bad debt expense for the three and six months ended June 30, 2019.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

For the six months ended June 30, 2019, net cash used in operating activities was $26,409. The Company reported a net loss of $1,425,693. Except for the adjustments of non-cash items of depreciation and amortization of $497,476, allowance for doubtful accounts of $157,310 and an impairment loss of $25,071 from construction in progress, we had net operating cash outflow, mainly due to limited collections from our credit sales and an increase in cash paid to suppliers for inventories.

For the six months ended June 30, 2018, net cash provided by operating activities was $100,147. The Company reported net loss of $2,156,663. Except for the adjustments of non-cash items of depreciation and amortization of $495,797 and allowance for doubtful accounts of $1,454,386, that increased our cash-based net loss, a gain on disposal of property increased out operating cash flow of $780. Net operating cash inflow mainly resulted from the increased cash collected from accounts and retention receivable but partially offset by the increase cash payments made for inventory purchases.

The Company will consider an allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. The Company provided for significant allowances of doubtful accounts receivable and retention receivable in 2018, considering the overdue aging, payment history, financial condition of customers and the efforts and estimates of the Company’s management.

Investing Activities

For the six months ended June 30, 2019 net cash used in investing activities was $0.

For the six months ended June 30, 2018, net cash provided by investing activities was $1,540, which from the proceeds of disposal of property, plant and equipment.

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. Until the date of this report, the transaction has not closed.

Financing Activities

For the six months ended June 30, 2019, net cash provided by financing activities was $125,366, including proceeds from a short-term bank borrowing of $5,899,009 and $126,841 of financial funding from our related parties. Cash inflow was partially offset by repayment of a $5,900,484 short-term bank borrowing.

For the six months ended June 30, 2018, net cash used in financing activities was $160,406, including repayments of a $6,282,837 short-term bank borrowing, repayment of $1,099,496 of bank demand notes, and $346,264 of financial funding from our related parties.Net cash inflow included proceeds of $7,068,191 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

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:

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 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.

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 that the adoption of recently issued accounting pronouncements will 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 June 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 additional training to the Company’s employees in connection with the preparation and review of its financial statements.

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 six months ended June 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 $880,000. Until the date of this report, both parties have not reached any agreement or settlement.  

Item 1A. Risk Factors

Not Applicable

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 the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

INDEX TO EXHIBITS

27