UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-KSB
(Mark
One)
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x
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2007
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o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the transition period from
to
Commission
file number 000-50155
NF
ENERGY SAVING CORPORATION OF AMERICA
(Name
of Small Business Issuer in its Charter)
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Delaware
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02-0563302
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(State
or Other Jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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21-Jia
Bei Si Dong Road, Tie Xi Qu
Shenyang,
P. R. China 110021
(Address
of Principal Executive Offices)
(8624)
2560-9750
(Issuer’s
Telephone Number)
Securities
registered under Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange
on
which registered
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None
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Not
Applicable
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Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, par value $.001 per share
(Title
of Class)
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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 x No o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes o No x
The
Registrant’s revenues for its most recent fiscal year ended on December 31,
2007: $10,336,449.
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.)
As
of
March 11, 2008 there were 33,227,328 shares of common stock, $0.001 par value
per share, of the registrant outstanding. The aggregate market value of the
voting stock held by non-affiliate of the registrant as of March 11, 2008 was
$2,002,292 based
upon the most recent close price for such Common Stock on said date ($.27).
For
purposes of this computation, all executive officers, directors and 10%
stockholders were deemed affiliates. Such a determination should not be an
admission that such executive officers, directors or 10% stockholders are
affiliates. On March 11, 2008, there were 33,227,328 shares of the
Registrant’s Common Stock issued and outstanding, of which approximately
7,415,899 shares were held by non-affiliates.
Transitional
Small Business Disclosure Format (check
one): o Yes x No
The
number of shares of common stock outstanding as of March 11, 2008:
33,227,328
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
The
discussion contained in this 10-KSB under the Securities Exchange Act of 1934,
as amended, (the "Exchange Act") contains forward-looking statements that
involve risks and uncertainties. The issuer's actual results could differ
significantly from those discussed herein. These include statements about our
expectations, beliefs, intentions or strategies for the future, which we
indicate by words or phrases such as "anticipate," "expect," "intend," "plan,"
"will," "we believe," "the Company believes," "management believes" and similar
language, including those set forth in the discussion under "Description of
Business," including the "Risk Factors" described in that section, and
"Management's Discussion and Analysis or Plan of Operation" as well as those
discussed elsewhere in this Form 10-KSB. We base our forward-looking statements
on information currently available to us, and we assume no obligation to update
them. Statements contained in this Form 10-KSB that are not historical facts
are
forward-looking statements that are subject to the "safe harbor" created by
the
Private Securities Litigation Reform Act of 1995.
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Page
Number
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Item 1
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5
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Item 2
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22
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Item 3
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22
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Item 4
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23
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Item 5
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23
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Item 6
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25
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Item 7
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34
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Item 8
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34
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Item 8A
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35
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Item 8B
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35
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Item 9
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35
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Item 10
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38
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Item 11
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40
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Item 12
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42
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Item 13
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43
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Item 14
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44
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The
Company
As
used
herein the terms "we", "us", "our," the “Registrant,” “NFES” and the "Company"
means, NF Energy Saving Corporation of America, a Delaware corporation, formerly
known as Diagnostic Corporation of America, Global Broadcast Group, Inc., Galli
Process, Inc. These terms also refer to our subsidiary corporation, Liaoning
Nengfa Weiye Energy Technology Corporation Ltd. (“Nengfa Energy”), formerly
known as Liaoning Nengfa Weiye Pipe Network Construction and Operation Co.
Ltd.,
a corporation organized and existing under the laws of the Peoples’ Republic of
China (“Neng Fa”) acquired in November 2006.
NF
Energy
Saving Corporation of America was incorporated under the laws of the State
of
Delaware in the name of Galli Process, Inc. on October 31, 2000 for the
purpose of seeking and consummating a merger or acquisition with a business
entity organized as a private corporation, partnership, or sole proprietorship.
On December 31, 2001, Galli Process, Inc. became a majority owned
subsidiary of City View TV, Inc., a Florida corporation (“City View”). On
January 31, 2002, Galli Process, Inc. changed its name to Global Broadcast
Group, Inc. On March 1, 2002, City View merged into Global Broadcast Group,
Inc., which was the surviving entity. On November 3, 2004, the Company
changed its name to Diagnostic Corporation of America. On March 15, 2007, we
changed our name to NF Energy Saving Corporation of America to more accurately
reflect our business after a stock exchange transaction with Neng Fa. Our
principal place of business is 21-Jia Bei Si Dong Road, Tie Xi Qu, Shenyang,
P.
R. China 110021. Our telephone number is (8624)
2560-9750.
On
November 15, 2006, we executed a Plan of Exchange ("Plan of Exchange"), between
and among us, Neng Fa, the shareholders of Neng Fa (the "Neng Fa Shareholders")
and Gang Li, our Chairman and Chief Executive Officer ("Mr. Li").
Pursuant
to and at the closing of the Plan of Exchange, which occurred on November 30,
2006, we issued the Neng Fa Shareholders 12,000,000 shares of our common stock,
or 89.4% of our then outstanding common stock, in exchange for all of the shares
of capital stock of Neng Fa owned by the Neng Fa shareholders. Immediately
upon
the closing, Neng Fa became our 100% owned subsidiary, and we ceased all of
our
current remaining operations and adopted and implemented the business plan
of
Neng Fa.
On
September 5, 2007 we established a new sales company “Liaoning Nengfa Weiye Tie
Fa Sales Co., Ltd” (“Sales Company”), a limited liability corporation organized
and existing under the laws of the Peoples’ Republic of China. The sales company
is a subsidiary 99% owned by Neng Fa. The sales company will market and sell
the
Company’s valve products in China.
On
January 31, 2008 to better reflect our energy technology business we changed
the
name of our 100% own subsidiary “Liaoning Nengfa Weiye Pipe Network Construction
and Operation Co. Ltd” to “Liaoning Nengfa Weiye Energy Technology Company Ltd.”
(Nengfa Energy). Nengfa Energy’s area of business include research and
development, processing , manufacturing, and marketing and
distribution of valves, actuating device and pipe fittings; manufacturing,
marketing and distribution of energy equipment, wind power equipment and
fittings; energy saving technical reconstruction; and energy saving technology
consulting services.
The
structure of our corporate organization is as follows:
Business
Description
Neng
Fa
specializes in energy technology business. We provide energy saving technology
consulting, optimization design services, energy saving reconstruction of
pipeline networks and contractual energy management services for China’s
utility, metallurgy, petrochemical, coal, construction, and municipal
infrastructure development industries. We are also engaged in the manufacturing
and sales of large-diameter low pressure valves. At present, our valve business
holds a leading position in China. Our Company has the Det Norske Veritas
Management System Certificate that certifies our products conform to the
Management System Standard ISO9001:2000. We have been a member of Chicago
Climate Exchange since 2006. In 2007 Neng Fa received contracts for three
sections of the prominent project “Redirect the water from the Rivers in the
South to the North Middle Section Jingshi Section Water Supply Engineering
Project”.
Our
main
development directions in the future include the expansion of our capabilities
for technology consulting and production of equipment and pipe network for
building energy efficient infrastructures for municipalities, to provide
comprehensive technology solutions for regional energy conservation and emission
reduction, and to conduct research and development and the manufacturing of
equipment and fittings for wind power plants.
Products
and Services
Our
current products and services include energy saving technology consulting,
optimization design services, energy saving reconstruction of pipeline networks
and contractual energy management services for China’s utility, metallurgy,
petrochemical, coal, construction, and municipal infrastructure development
industries and the manufacturing and sales of energy-saving valves, intelligent
valves, and low-voltage large-diameter valves.
1.
Energy Saving Reconstruction Projects
1.1
Energy-saving
reconstruction of industrial boilers and cogeneration
China’s
industrial boilers are mainly coal-fired boilers. They represent 95% of the
total boilers. The boilers are mainly layer combustion. Clockwise rotation
chain
boilers account for 60% of the total boilers. These boilers have the following
problems; small capacities, inferior qualities, auxiliary equipment not matched
properly, coal category used not matching the design, and being older equipment.
These problems caused low thermal efficiency, only about 60-70%, 20% lower
than
the international standards. Neng Fa reconstructs the old boiler through a
variety of technologies as follows:
(1)
Transformation of the old boiler by circulating fluidized bed combustion
technology
Circulating
fluidized bed boiler has many advantages. They can combust low quality coal.
They have higher thermal efficiency. Its ash residue can be used as building
materials. According to the customers’ request, pulverized coal-fired boiler and
clockwise rotation chain grate boiler can be reconstructed into circulating
fluidized bed boiler using circulating fluidize combustion
technology.
(2)
Reconstruction of control system
Transformation
of the control system helps to maintain the boiler in the best running
state.
(3)
Reconstruction of coal feeding unit
Reconstruction
of coal feeding unit results in higher permeability of the coal seam in the
boiler for the full combustion of the coal.
(4)
Reconstruction of the combustion system
By
adding
combustion-supporting materials or transforming ventilation system of the
boiler, it improves the efficiency of coal combustion
(5)
Reclaiming discharged energy from industrial waste
In
order
to ensure the life and operating efficiency of the boiler, boilers in the
running process need to regularly and systematically eliminate the waste that
come with the water. We can recover at least 90% the heat emitted with the
waste
water for customers, by installing heat recovery equipment.
(6)
Reclaiming residual heat from boiler
Utilizing
technology to reclaim and utilize the residual heat of coal-burning boiler
and
the residual heat of the boiler that use natural gas and petroleum
products.
1.2
Energy-saving
reconstruction of steam thermal system
(1)
Recovery of condensed water
(2)
Eliminate the leakage losses of steam trap valve
(3)
Improve heat preservation system and eliminate leakage losses
1.3
Energy-saving
reconstruction of motor drive system
China’s
motor drive system power consumption accounted for 2/3 of total electricity
consumption of the country. About 90% of the motors are AC asynchronous motors.
We can reconstruct the motor drive system, especially for variable load fans
and
pumps through frequency conversion and speed regulation technology.
1.4
Green
Lighting Project
China’s
lighting power consumption accounted for about 12% of the overall power
consumption. Energy technology improves the green lighting project by renewing
the lighting power supply, rational distribution of lamps, improving the quality
of power supply and on-demand control.
1.5
Energy-saving
reconstruction of industrial cave and furnace
China’s
industrial furnace are located mainly in the iron and steel, metallurgy,
building materials, machinery manufacturing, chemical industry and other high
energy consumption enterprises. Their energy consumption accounts for about
10%
of China’s total energy consumption. Half of the enterprises have backward
technology, outdated equipment, and experiencing serious waste of energy. Our
company using our existing technology can reconstruct furnace’s structure, its
heat source system, combustion system, and control system.
1.6
Recovery
of residual heat in industry
Our
company helps China’s industrial enterprises, such as steel, metallurgical,
petrochemical, coal, power, chemical industry and high energy consumption
enterprises to recover and utilize a variety of residual heat (waste water,
etc.).
The
above
energy-saving technological transformation measures have considerable economic
benefits after their implementation. Furthermore our company’s project
management team has 10 years of successful operational experience in
energy-saving reconstruction projects.
2.
Production and sales of energy saving valves
The
second line of business that accounts for a large proportion of the Company’s
revenue is the production and sales of energy-saving valves, intelligent valves,
and low-voltage large-diameter valves.
(1)
Low-Voltage, Large-Diameter Valves (LL Valves)
These
valves are driven hydraulically and, under normal conditions, open and close
at
an average speed of 10m per minute. In abnormal circumstances such as a power
failure or accident, the plate adapts to open or close in a two-stage process
of
“quick” or “slow”, depending upon the demands of the situation. This type of
valve is suited to pumped sewage and hydro-technical systems.
(2)
Liquid-Control Flow-Checking Butterfly Valves
This
system is controlled wholly by liquid, a process which reduces its energy
consumption. The electrical components of this system are controlled by a
computer which delivers a digital display and remote signal providing for a
higher accuracy of control. This valve utilizes a double eccentric structure
which ensures good secure sealing, low friction, and longevity.
(3)
Vacuum Butterfly Valves
This
valve combines the strengths of two technologies - the single stage vacuum
valve
of Kryston of the U.S.A. and the two stage vacuum valve of the Masakazu Company
of Japan. This product meets the demand of the local market and replaces any
formerly imported technologies. The vacuum butterfly valve is the key component
to the pneumatic water supply system of a power station as the cutter between
condenser and small compressor.
(4)
Flow-Regulating Valves
This
valve controls the media flow in pipelines so as to regulate the pressure
difference of throttling flow and back-pressure, to maximize flow status, and
to
reduce gas erosion. Its control system is compact and highly sensitive. It
provides for a complete operations display and anti-disturbance component and
high automation. This valve system provides continuous feedback signals
indicating the piston’s actual position.
(5)
Hydro
Turbine Liquid-Control Butterfly Valves
Currently
in research and development, this will be one of the largest valves in China,
situated in the hydro power station in Fujian Ningde Hongkou Hydropower Station.
Its technology combines a finite analysis method and CAD design tools to
optimize its reliability. This valve controls the media flow and pressure in
pipelines. It is a key technological component in the control of flow to
hydropower turbines.
In
2008
the Company plans to develop the following two additional business lines:
comprehensive energy conservation and emission reduction services for
municipalities and research and development and manufacturing of wind power
equipment.
3.
Comprehensive energy conservation and emission reduction services for
municipalities
China
State Council in its 11th Five-Year Plan for 2005 to 2010 has set energy
conservation and emission reduction targets to be achieved by local governments
and industries. According
to China’s 11th
five
year plan, there will be a large investment in energy saving in the amount
of no
less than $1 trillion RMB during the 11th
five
year planning period. Chinese government recently issued the Provisional
Measures for Administration of the Financial Reward Capital for the Innovation
of Energy-Saving Technology. Chinese government will reward enterprises
according to the total savings from their energy-saving technology projects.
Central government has set aside 7 billion RMB to support top 10 key energy
saving projects. An important outcome of these regulations is that energy
conservation and emission reduction will be important criteria in evaluating
the
performance of the leaders of local governments and large state own enterprises.
Government and enterprise leaders are now motivated to undertake energy
conservation and emission reduction projects to achieve their required
targets.
Our
municipal comprehensive energy conservation and emission reduction projects
focus on comprehensive energy conservation and emission reduction planning
and
project implementation for an entire city. These plans will be carried out
by
city energy auditing, energy conservation planning and using energy management
contract (EMC) model to achieve efficient energy supply for the entire city.
The
goals of these plans are to reduce per unit energy consumption and green house
gas emission. This will be a win-win for China, its municipalities and the
businesses.
Nengfa
Energy has successful experience in energy project management in China. In
2008,
the Company will engage in developing comprehensive energy conservation and
emission reduction projects for municipalities.
4.
Equipment Manufacturing for Wind Power Plants
Due
to
the shortage of energy resources worldwide and China being one of the largest
energy consuming countries, Chinese government in its 11th
five
year plan of 2006 emphasized the development of wind power among energy resource
development. In 2006, China has suddenly become the world’s fifth largest wind
power generation market. China’s tremendous demand for wind power generation has
led to a global shortage of wind power equipment components. The backlog of
orders will not be filled until 2012. At present the demand greatly exceeds
the
supply in the wind power equipment components market. Chinese wind power
equipment manufacturers are trying to occupy this market now. Those
manufacturers that are well capitalized and have sufficient capacity and
cutting-edge technology, and are able to provide superior service will enjoy
a
tremendous growth in China.
Our
company’s current products are international wind power equipment component
market’s mainstream products, such as 1.5MW wind power equipment system (the
hub, forward engine room foundation, bearing seat, and the principal axle).
Our
products in research and development stage include 1.5 MW and GW200 lines of
wind power equipment systems.
Seeing
a
tremendous growth potential for manufacturing wind power equipment components,
Nengfa Energy will concentrate its efforts in research, development and
manufacturing the wind power equipment components. The Company expects that
these manufacturing projects will generate good returns for our investors.
Starting
in 2008, the Company will emphasize the following three business lines: the
production and sales of energy-saving valves, intelligent valves, and
low-voltage large-diameter valves; comprehensive energy conservation and
emission reduction service for municipalities; and equipment manufacturing
for
wind power plants
Customers
and Markets
Our
customers are mainly concentrated in the utility, metallurgy, petrochemical,
coal, construction, and city infrastructure industries in China. Our largest
customer, Nengfa Weiye Tieling Famen Co., Ltd. (a related party of the Company)
accounted for approximately $4,536,777 and $2,971,183 in revenues, or 43% and
56%, of our total net revenues in 2007 and 2006 respectively. Our second largest
customer is Huludao Xinye Co. Ltd. It is a large Chinese company producing
metallurgical products and it is publicly traded on a main exchange in China.
In
2007, we provided technology consulting services and reconstruction for revenue
of $1,113,225, about 11% of our total net revenues in 2007.
Marketing
and Sales
Marketing
strategy for energy saving reconstruction business
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(1)
|
Participate
in government organization’s energy conservation and emission reduction
meetings. Through government or industry association to participate
in
government organized energy saving conferences to meet potential
energy
equipment suppliers and to establish relations with Chinese large
and
medium size high energy consumption enterprises to learn the energy
saving
needs of these enterprises. We will also participate directly in
the
consulting and reconstruction services of energy conservation projects
organized by government
bureaus.
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|
(2)
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Participate
directly in the bidding of customer projects to obtain energy saving
reconstruction contracts.
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(3)
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Use
commissions and agents system to obtain energy saving reconstruction
contracts.
|
Marketing
strategy for product sales
Direct
sales
We
will
use bids or customer direct orders to obtain product sales business. We will
establish good relationship and after sales service with existing customers.
We
received a large amount of business from existing customers.
Sales
through commissioned agents
Using
this business model, our company will sign marketing and sales agreements with
agents who are responsible for specific projects’ marketing and sales
activities. The service areas will be different because customer’s geographical
areas.
Profit
Models
Nengfa
Energy’s profit models for energy-saving reconstruction projects include the
following:
(1)
Energy
planning –
diagnosis and consultation services: municipal energy planning, and energy
auditing for industrial enterprises and buildings.
(2)
Energy reconstruction projects: mainly for industrial enterprises and buildings;
(3)
Sales
of energy accessory equipment
(4)
CDM/CCX
greenhouse gas emission rights trading (Nengfa Energy is a member of the Chicago
weather trading association)
Raw
Materials
The
major
raw materials for our production are pig iron, steel, copper, and plastic.
In
2007 the prices for all the raw materials we need for our production increased
significantly. The price for pig iron had the greatest increase in price of
68%
and it continues to increase. Due to the increase in price of the raw materials,
we also raised the selling prices of our products. In addition we hope that
through increased labor production efficiency and lowering administrative costs
and other methods to lower the impact of price increases in raw materials on
our
profits. We hope to continue develop high technology new products to guarantee
our company’s product profitability.
Code
Compliance
Products
representing a majority of our sales are subject to regulatory standards and
code enforcement which typically require that these products meet stringent
performance criteria. Standards are established by such industry test and
certification organizations as Ministry of Mechanical and Electronic Engineering
of China, the American Society of Mechanical Engineers (A.S.M.E.), the Canadian
Standards Association (C.S.A.), the Japanese Standards Association (J.S.A.),
the
International Association of Plumbing and Mechanical Officials (I.A.P.M.O.),
Factory Mutual (F.M.), and Underwriters Laboratory (U.L.). These standards
are
incorporated into state and municipal plumbing and heating, building and fire
protection codes.
We
maintain stringent quality control and testing procedures at each of our
manufacturing facilities in order to manufacture products in compliance with
code requirements. Our products are certified to conform to the ISO 9001
standards by the Det Norske Veritas Management System.
Competition
The
domestic and international markets for industrial valves and energy saving
industry are intensely competitive and require us to compete against some
companies possessing greater financial, marketing and other resources than
ours.
We have a leading position in valve production in China. We plan to use
marketing and new high technology product development to increase our products’
competitiveness on the market. We have successful experience in managing
large
energy saving projects and we strive to be a leader in comprehensive energy
saving projects for municipalities and government organized large public
projects. Based on our technical expertise and our leading position in valve
manufacturing we plan to build our capabilities to meet the tremendous needs
in
the wind power equipment and components market in China.
Employees
As
of
December 31, 2007, there are 327 employees including 44 administrative personnel
working in our subsidiaries located in China.
Reports
to Security Holders
The
Company is not required to deliver an annual report to security holders and
will
not voluntarily deliver a copy of the annual report to security holders. If
the
Company should choose to create an annual report, it will contain audited
financial statements. The Company intends to file all of its required
information with the SEC. The Company plans to file its 10-KSB, 10-QSB, and
all
other forms that are or may become applicable with the SEC.
The
public may read and copy any materials that are filed by the Company with the
SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C.
20549. The Public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The statements and forms
filed by the Company with the SEC have been filed electronically and are
available for viewing or copy on the SEC maintained Internet site that contains
reports, proxy and information statements, as well as other information
regarding issuers that file electronically with the SEC. The Internet address
for this site can be found at http://www.sec.gov.
The
Company has identified the risk factors facing the Company. These risk factors
may cause the Company’s performance, events to be significantly different from
the forecasts in this report or news or other disclosures. These factors may
create negative impact on the Company’s revenues, returns and operating results.
Investors should be aware of these risk factors.
Risk
Related to Our Business
We
face intense competition and, if we are not able to respond to competition
in
our markets, our revenues may decrease
Competitive
pressures in our markets could adversely affect our competitive position,
leading to a possible loss of market share or a decrease in prices, either
of
which could result in decreased revenues and profits. We encounter intense
competition in all areas of our business. To remain competitive, we will need
to
invest continually in manufacturing, marketing, customer service and support
and
our distribution networks. We may not have sufficient resources to continue
to
make such investments and we may be unable to maintain our competitive position.
In addition, we anticipate that we may have to reduce the prices of some of
our
products to stay competitive, potentially resulting in a reduction in the profit
margin for, and inventory valuation of, these products. Some of our competitors
are based in foreign countries and have cost structures and prices in foreign
currencies.
Reductions
or interruptions in the supply of raw materials and increases in the costs
of
raw materials could reduce our profit margins and adversely affect our ability
to meet our customer delivery commitments
We
require substantial amounts of raw materials, including pig iron, steel, copper
and plastic and substantially all of the raw materials we require are purchased
from outside sources. The availability and costs of raw materials may be subject
to curtailment or change due to, among other things, new laws or regulations,
suppliers’ allocations to other purchasers, interruptions in production by
suppliers and changes in exchange rates and worldwide price and demand levels.
We typically do not enter into long-term supply agreements. Additionally,
approximately 32% of our total purchasing is from one vendor. If there is an
interruption in delivery, this could have a negative effect on our financial
results. Our inability to obtain adequate supplies of raw materials for our
products at favorable costs, or at all, could have a material adverse effect
on
our business, financial condition or results of operations by decreasing our
profit margins and by hindering our ability to deliver products to our customers
on a timely basis. During 2007, the costs of many of these raw materials were
at
the highest levels that they have been in many years. We may continue to
experience further cost increases of these materials. If we are not able to
reduce or eliminate the effect of these cost increases through lowering other
costs of production or successfully implementing price increases to our
customers, such cost increases from our vendors could continue to have a
negative effect on our financial results.
Implementation
of our marketing strategies may not be successful, which could affect our
ability to increase our revenues or our
profitability.
We
created a new Sales Company Liaoning Nengfa Weiye Tie Fa Sales Co., Ltd. to
market and sell our valve products. We expected to increase our revenues and
profitability and expand our markets through the implementation of our marketing
strategies. We cannot be certain that we will be able to successfully implement
our marketing strategies. In particular, we expect that management will continue
to devote a significant amount of time and effort in 2008 to improve the
operational results, including improvements in our profitability, customer
satisfaction and revenue growth rate. If we are not successful in implementing
these improvements, our financial results may be negatively
affected.
If
we fail to establish and maintain strategic relationships, the market acceptance
of our services, and our profitability, may suffer
To
offer
services to a larger customer base, our direct sales force depends on strategic
partnerships and marketing alliances to obtain customer leads and referrals.
If
we are unable to maintain our existing strategic relationships or fail to enter
into additional strategic relationships, we will have to devote substantially
more resources to the marketing of our products and services. We would also
lose
anticipated customer introductions and co-marketing benefits. Our success
depends in part on the success of our strategic partners and their ability
to
market our products and services successfully. In addition, our strategic
partners may not regard us as significant for their own businesses. Therefore,
they could reduce their commitment to us or terminate their respective
relationships with us, pursue other partnerships or relationships, or attempt
to
develop or acquire services that compete with our services. Even if we succeed
in establishing these relationships, they may not result in additional customers
or revenues.
If
we experience delays in introducing new products or if our existing or new
products do not achieve or maintain market acceptance and regulatory approvals,
our revenues and our profitability may decrease.
Our
failure to develop new and innovative products or to custom design existing
products could result in the loss of existing customers to competitors or the
inability to attract new business, either of which may adversely affect our
revenues. Our industry is characterized by:
|
·
|
intense
competition;
|
|
·
|
changes
in specifications required by our customers, plumbing codes and/or
regulatory agencies;
|
|
·
|
technically
complex products; and
|
|
·
|
constant
improvement to existing products and introductions of new
products.
|
We
believe our future success will depend, in part, on our ability to anticipate
or
adapt to these factors and to offer, on a timely basis, products that meet
customer demands and the requirements of codes and/or regulatory agencies.
The
development of new technology enhanced products is a complex and uncertain
process requiring the anticipation of technological and market trends. We may
experience design, manufacturing, marketing or other difficulties, such as
an
inability to attract a sufficient number of experienced engineers that could
delay or prevent our development, introduction, approval or marketing of new
products or enhancements and result in unexpected expenses. Such difficulties
could cause us to lose business from our customers and could adversely affect
our competitive position; in addition, added expenses could decrease the
profitability associated with those products that do not gain market
acceptance.
If
we cannot continue operating our manufacturing facilities at current or higher
utilization levels, our results of operations could be adversely
affected.
The
equipment and management systems necessary for the operation of our
manufacturing facilities may break down, perform poorly or fail, resulting
in
fluctuations in our ability to manufacture our products and to achieve
manufacturing efficiencies. We operate a number of manufacturing facilities,
all
of which are subject to this risk, and such fluctuations at any of these
facilities could cause an increase in our production costs and a corresponding
decrease in our profitability. We also have a vertically-integrated
manufacturing process. Each segment is dependent upon the prior process and
any
breakdown in one segment will adversely affect all later components.
Fluctuations in our production process may affect our ability to deliver
products to our customers on a timely basis. Our inability to meet our delivery
obligations could result in a loss of our customers and negatively affect our
business, financial condition and results of operations.
Third
parties may infringe our intellectual property and we may expend resources
enforcing our rights or suffer competitive injury.
We
rely
on a combination of patents, copyrights, trademarks, trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
our proprietary rights. We may be required to spend resources to monitor and
police our intellectual property rights. If we fail to successfully enforce
our
intellectual property rights, our competitive position could suffer, which
could
harm our operating results. We have been limited from selling products from
time-to-time because of existing patents.
The
loss of a major customer could have an adverse effect on our results of
operations.
Our
largest customer, Nengfa Weiye Tieling Famen Co., Ltd., a related party of
the
Company ("Famen"), accounted for approximately $4,536,777, or 43%, of our total
net sales for the year ended December 31, 2007. Our customers generally are
not obligated to purchase any minimum volume of products from us and are able
to
terminate their relationships with us at any time. In addition, increases in
the
prices of our products could result in a reduction in orders for our products
from Famen and other customers. A significant reduction in orders from, or
change in terms of contracts with, Famen or other significant customers could
have a material adverse effect on our future results of operations.
We
may be unable to effectively manage our growth
We
will
need to manage our growth effectively, which may entail devising and effectively
implementing business plans, training and managing our growing workforce,
managing our costs, and implementing adequate control in our reporting systems
in a timely manner. We may not be able to successfully manage our growth. Our
failure to do so could affect our success in executing our business plan and
adversely affect our revenues, profitability and results of
operations.
If
we fail to successfully manage our planned expansion of operations, our growth
prospects will be diminished and our operating expenses could exceed budgeted
amounts
Our
ability to offer our services in an evolving market requires an effective
planning and management process. We have expanded our operations rapidly since
inception, and we intend to continue to expand them in the foreseeable future.
This rapid growth places significant demand on our managerial and operational
resources and our internal training capabilities. In addition, we plan to
increase our total work force. This growth will continue to substantially burden
our management team. To manage growth effectively, we must:
|
a.
|
Implement
and improve our operational, financial and other systems, procedures
and
controls on a timely basis.
|
|
b.
|
Expand,
train and manage our workforce, particularly our sales and marketing
and
support organizations.
|
We
cannot
be certain that our systems, procedures and controls will be adequate to support
our current or future operations or that our management will be able to handle
such expansion and still achieve the execution necessary to meet our growth
expectations. Failure to manage our growth effectively could diminish our growth
prospects and could result in lost opportunities as well as operating expenses
exceeding the amount budgeted.
We
may be unable to maintain internal funds or obtain financing in the
future
Adequate
financing is one of the major factors, which can affect our ability to execute
our business plan in this regard. We finance our business mainly through
internal funds or raising equity funds. There is no guarantee that we will
always have internal funds available for future developments or we will not
experience difficulties in obtaining investor financing and loans granted by
financial institutions in the future. In addition, there may be a delay in
equity fundraising activities. Our access to obtain debt or equity financing
depends on the banks’ willingness to lend and on conditions in the capital
markets, and we may not be able to secure additional sources of financing on
commercially acceptable terms, if at all.
We
may need to raise additional capital that may not be available on terms
favorable to us, if at all
We
may
need to raise additional capital in the future, and we cannot be certain that
we
will be able to obtain additional financing on favorable terms, if at all.
If we
cannot raise additional capital on acceptable terms, we may not be able to
develop or enhance our services, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements. To fully realize
our business objectives and potential, we may require additional financing.
We
cannot be sure that we will be able to secure the financing we will require,
or
that it will be available on favorable terms. If we are unable to obtain any
necessary additional financing, we will be required to substantially curtail
our
approach to implementing our business objectives. Additional financing may
be
debt, equity or a combination of debt and equity. If equity is used, it could
result in significant dilution to our shareholders.
Our
operations and growth prospects may be significantly impeded if we are unable
to
retain our key personnel or attract additional key personnel, particularly
since
experienced personnel and new skilled personnel are in short
supply
Competition
for key personnel is intense. As a small company, our success depends on the
service of our executive officers, and other skilled managerial and technical
personnel, and our ability to attract, hire, train and retain personnel. There
is always the possibility that certain of our key personnel may terminate their
employment with us to work for one of our competitors at any time for any
reason. There can be no assurance that we will be successful in attracting
and
retaining key personnel. The loss of services of one or more key personnel
could
have a material adverse effect on us and would materially impede the operation
and growth of our business.
Our
operations are vulnerable to natural disasters or other events
Our
operating income may be reduced by natural disasters, in locations where we
own
and/or operate significant manufacturing facilities. Some types of losses,
such
as from earthquake, severe winter storms and environmental hazards, may be
either uninsurable or too expensive to justify insuring against. Should an
uninsured loss or a loss in excess of insured limits occur, we could lose all
or
a portion of the capital we have invested in any particular property, as well
as
any anticipated future revenue from such property.
We
have limited business insurance coverage in China
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. As a result,
we do
not have any business liability or disruption insurance coverage for our
operations in China. Any business disruption, litigation or natural disaster
might result in substantial costs and diversion of resources.
We
are controlled by a small group of our existing stockholders, whose interests
may differ from other stockholders
Our
Chief
Executive Officer, Mr. Gang Li, beneficially owns approximately 62.15% of the
outstanding shares of our common stock and is our largest stockholder. Our
Chief
Executive Officer, together with our other executive officers and members of
our
Board of Directors, beneficially own approximately 77.69% of the outstanding
shares of our common stock. Accordingly these stockholders acting together
will
have significant influence in determining the outcome of any corporate
transaction or other matter submitted to the stockholders for approval,
including mergers, consolidations, the sale of all or substantially all of
our
assets, election of directors and other significant corporate actions. They
will
also have significant influence in preventing or causing a change in control.
In
addition, without the consent of these stockholders, we may be prevented from
entering into transactions that could be beneficial to us. The interests of
these stockholders may differ from the interests of the other
stockholders
Risks
Related to Our Company’s Common Stock
Future
sales of our common stock could adversely affect our stock
price
If
our
shareholders sell substantial amounts of our common stock in the public market,
the market price of our common stock could be adversely affected. In addition,
the sale of these shares could impair our ability to raise capital through
the
sale of additional equity securities.
We
are listed on the OTC Bulletin Board, which can be a volatile
market
Our
common stock is quoted on the OTC Bulletin Board, a NASD sponsored and operated
quotation system for equity securities. It is a more limited trading market
than
the NASDAQ Small Cap, and timely and accurate quotations of the price of our
common stock may not always be available. Investors may expect trading volume
to
be low in such a market. Consequently, the activity of only a few shares may
affect the market and may result in wide swings in price and in
volume.
Trading
of our common stock is limited, which may make it difficult for investors to
sell their shares at times and prices that investors feel are
appropriate
Trading
of our common stock has been extremely limited. This adversely effects the
liquidity of our common stock, not only in terms of the number of shares that
can be bought and sold at a given price, but also through delays in the timing
of transactions and reduction in security analysts’ and the media’s coverage of
us. This may result in lower prices for our common stock than might otherwise
be
obtained and could also result in a larger spread between the bid and asked
prices for our common stock.
There
is a limited market for our common stock and an active trading market for our
common stock may never develop
Trading
in our common stock has been limited and has been characterized by wide
fluctuations in trading prices,
due to many factors that may have little to do with a company’s operations or
business prospects.
Because
it may be a “penny stock,” it will be more difficult for shareholders to sell
shares of our common stock
In
addition, our common stock may be considered a “penny stock” under SEC rules
because it has been trading on the OTC Bulletin Board at prices lower than
$1.00. Broker-dealers who sell penny stocks must provide purchasers of these
stocks with a standardized risk-disclosure document prepared by the SEC. This
document provides information about penny stocks and the nature and level of
risks involved in investing in the penny-stock market. A broker must also give
a
purchaser, orally or in writing, bid and offer quotations and information
regarding broker and salesperson compensation, make a written determination
that
the penny stock is a suitable investment for the purchaser, and obtain the
purchaser’s written agreement to the purchaser. Broker-dealers also must provide
customers that hold penny stocks in their accounts with such broker-dealers
a
monthly statement containing price and market information relating to the penny
stock. If a penny stock is sold to investors in violation of the penny stock
rules, investors may be able to cancel the purchase and get the money back.
The
penny stock rules may make it difficult for investors to sell their shares
of
our stock, and because of these rules, there is less trading in penny stocks.
Moreover, many brokers simply choose not to participate in penny-stock
transactions. Accordingly, investors may not always be able to resell shares
of
our common stock publicly at times and at prices that investors feel are
appropriate.
The
market price of our common stock has been and will likely continue to be
volatile. The price of our common stock may fluctuate significantly, which
may
make it difficult for stockholders to sell shares of our common stock when
desired or at attractive prices
The
market price of our common stock has been volatile and is likely to continue
to
be so. During 2006, the trading price of our common stock ranged from a low
of
$.51 per share to a high of $10.5 per share. During 2007, the trading price
of
our common stock ranged from a low of $.20 per share to a high of $.75 per
share. On March 21, 2007, the closing price of our common stock was $.11 per
share.
The
price
for our common stock may fluctuate in response to a number of events and
factors, such as quarterly variations in operating results, announcements of
technological innovations or new products and media reports by us or our
competitors, changes in financial estimates and recommendations by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable to us, and news reports relating to trends in
our
markets or general economic conditions. The volatile price of our stock makes
it
difficult for investors to predict the value of our investment, to sell shares
at a profit at any given time, or to plan purchases and sales in advance.
We
will not be able to control many of these factors, and we believe that
period-to-period comparisons of our financial results will not necessarily
be
indicative of our future performance
In
addition, the stock market in general has experienced extreme price and volume
fluctuations that may have been unrelated and disproportionate to the operating
performance of individual companies. These broad market and industry factors
may
seriously harm the market price of our common stock, regardless of our operating
performance.
Because
we have not paid and do not plan to pay dividends, investors will not realize
any income from an investment in our common stock unless and until investors
sell their shares at profit
We
did
not pay dividends on our common stock in 2007, and we do not anticipate paying
any dividends in the near future. Investors should not rely on an investment
in
our stock if they require dividend income. Further, investors will only realize
income on an investment in our stock in the event they sell or otherwise dispose
of their shares at a price higher than the price they paid for their shares.
Such a gain would result only from an increase in the market price of our common
stock, which is uncertain and unpredictable.
We
intend to retain all of our earnings for use in our business and do not
anticipate paying any cash dividends in the near
future
The
payment of any future dividends will be at the discretion of the Board of
Directors and will depend upon a number of factors, including future earnings,
the success of our business activities, general financial condition, future
prospects, general business conditions and such other factors as our Board
of
Directors may deem relevant.
Risk
Related to the People’s Republic of China
All
of
our current prospects and deals are generated in Mainland China; thus all of
our
revenues are derived from our operations in the PRC. Accordingly, our business,
financial condition, results of operations and prospects are subject, to a
significant extent, to economic, political and legal developments in the
PRC.
Political,
economic and social policies of the PRC government could affect our
business.
All
of
our business, operating assets, fixed assets and operations are located in
China, and all of our revenues are derived from our operations in China.
Accordingly, our business may be adversely affected by changes in political,
economic or social conditions in China, adjustments in PRC government policies
or changes in laws and regulations.
The
economy of China differs from the economies of most countries belonging to
the
Organization for Economic Cooperation and Development in a number of respects,
including: structure, level of government involvement; level of development;
level of capital reinvestment; growth rate; control of foreign exchange; and
methods of allocating resources.
Since
1949, China has been primarily a planned economy subject to a system of
macroeconomic management. Although the PRC government still owns a significant
portion of the productive assets in China, economic reform policies since the
late 1970s have emphasized decentralization, autonomous enterprises and the
utilization of market mechanisms. We cannot predict the future effects of the
economic reform and macroeconomic measures adopted by the PRC government on
our
business or results of operations. Furthermore, the PRC government has begun
to
pay more attention to social issues in recent years and has promulgated or
may
promulgate additional laws or regulations in this area, which could affect
our
business in China. For example, in July 2007, the PRC government issued the
new
Employment Contract Law, effective from January 1, 2008, providing more
employment protection to employees in China. We believe that this will enhance
our general staff moral and loyalty. At the same time, however, we may incur
additional staff costs in the future.
Restrictions
on currency exchange may limit our ability to utilize our revenues
effectively
Substantially
all of our revenues and operating expenses are denominated in RMB. The RMB
is
currently freely convertible under the “current account”, which includes
dividends, trade and service related foreign exchange transactions, but not
under the “capital account”, which includes foreign direct
investment.
Currently,
our China-based subsidiaries may purchase foreign exchange for settlement of
“current account transactions”, including payment of dividends, without the
approval of the State Administration for Foreign Exchange (or SAFE). Our
China-based subsidiaries may also retain foreign exchange in its current account
(subject to a ceiling approved by the SAFE) to satisfy foreign exchange
liabilities or to pay dividends. However, the relevant PRC governmental
authorities may limit or eliminate our ability to purchase and retain foreign
currencies in the future.
Since
a
significant amount of our future revenues will be in the form of RMB, the
existing and any future restrictions on currency exchange may limit our ability
to utilize revenue generated in RMB to fund our business activities outside
China, if any, or expenditures denominated in foreign currencies.
Foreign
exchange transactions under the capital account are still subject to limitations
and require approvals from the SAFE. This could affect our China-based
subsidiaries’ ability to obtain foreign exchange through debt or equity
financing, including by means of loans or capital contributions from
us.
We
may suffer currency exchange losses if the RMB depreciates relative to the
US
Dollar
Our
reporting currency is the US Dollar. However, substantially all of our revenues
are denominated in RMB. In July 2005, China reformed its exchange rate regime
by
establishing a managed floating exchange rate regime based on market supply
and
demand with reference to a basket of currencies. The RMB is no longer pegged
to
the US dollar and the exchange rate will have some flexibility. Hence,
considering the floating exchange rate regime, if the RMB depreciates relative
to the US Dollar, our revenues as expressed in our US Dollar financial
statements will decline in value. On May 19, 2007, the People’s Bank of
China announced a policy to expand the maximum daily floating range of RMB
trading prices against the U.S. dollar in the inter-bank spot foreign exchange
market from 0.3% to 0.5%. While the international reactions to the RMB
revaluation and widening of the RMB’s daily trading band have generally been
positive, with the increased floating range of the RMB’s value against foreign
currencies, the RMB may appreciate or depreciate significantly in value against
the U.S. dollar or other foreign currencies in the long term, depending on
the
fluctuation of the basket of currencies against which it is currently valued.
In
addition, there are very limited hedging transactions available in China to
reduce our exposure to exchange rate fluctuations. While we may decide to enter
into hedging transactions in the future, the availability and effectiveness
of
these hedges may be limited and we may not be able to successfully hedge our
exposure, if at all. In addition, our currency exchange losses may be magnified
by PRC exchange control regulations that restrict our ability to convert RMB
into US Dollars.
Changes
in PRC Corporate Income Tax Law may affect our effective tax for 2008 and
beyond
In
March
2007, the Chinese government enacted the Corporate Income Tax Law, and
promulgated related regulations, which were effective January 1, 2008. The
Corporate Income Tax Law, among other things, imposes a unified income tax
rate
of 25% for both domestic and foreign invested enterprises. The previous income
tax laws and rules, which stipulated income tax rates for domestic and foreign
invested enterprises at different rates, expired upon the effectiveness of
the
Corporate Income Tax Law.
The
Corporate Income Tax Law provides a five-year transitional period for those
entities established before March 16, 2007, which enjoyed a favorable
income tax rate of less than 25% under the previous income tax laws and rules,
to gradually change their rates to 25%. In addition, the Corporate Income Tax
Law provides grandfather treatment to allow foreign invested enterprises to
continue to enjoy their unexpired tax holiday under the previous income tax
laws
and rules.
The
Corporate Income Tax Law also imposes a 10% withholding income tax for dividends
distributed by a foreign invested enterprise to its immediate holding company
outside China, which were exempted under the previous income tax laws and rules.
A lower withholding tax rate will be applied if there is a tax treaty
arrangement between mainland China and the jurisdiction of the foreign holding
company. Holding companies in Hong Kong, for example, will be subject to a
5%
rate. All of these foreign invested enterprises will be subject to the
withholding tax on January 1, 2008. Since we intend to reinvest our earnings
to
further expand our businesses in mainland China, we do not intend to declare
dividends in the foreseeable future. Accordingly, as of December 31, 2007,
we
have not recorded any withholding tax on the retained earnings of our foreign
invested subsidiary in China.
The
Corporate Income Tax Law emphasizes the requirement of an arm’s length basis for
transfer pricing arrangements between related parties. Also, it requires
enterprises with related party transactions to prepare transfer pricing
documentation which includes the basis for determining pricing, the computation
methodology and detailed explanations. Under a tax inspection by tax
authorities, if our transfer pricing arrangements between the China-based
subsidiaries are judged as tax avoidance, or related documentation does not
meet
the requirements of the Corporate Income Tax Law, our China-based subsidiaries
may be subject to tax adjustments and late payment interest.
Our
China
subsidiary Nengfa Energy being a foreign invested enterprise currently enjoys
a
two year exemption from corporate income tax for 2007-2008 and a reduced
corporate income rate of 15% for the following three years from 2009-2011.
If we
cannot continue to enjoy the unexpired tax holidays and reduced corporate tax
rate or if the withholding tax on dividends is applied to our business, our
effective tax rate will be increased significantly.
The
PRC legal system embodies uncertainties which could limit the legal protections
available to us and you, or could lead to penalties on
us
The
PRC
legal system is a civil law system based on written statutes. Unlike common
law
systems, it is a system in which decided legal cases have little precedential
value. In 1979, the PRC Government began to promulgate a comprehensive system
of
laws and regulations governing economic matters in general. The overall effect
of legislation over the past 25 years has significantly enhanced the protections
afforded to various forms of foreign investment in Mainland China. Our PRC
operating subsidiary, Nengfa Energy, a wholly foreign-owned enterprises
(“WFOEs”), is subject to laws and regulations applicable to foreign investment
in the PRC in general and laws and regulations applicable to WFOEs in
particular. Because of the relatively short period for enacting such a
comprehensive legal system, it is possible that the laws, regulations and legal
requirements are relatively recent, and their interpretation and enforcement
involve uncertainties. These uncertainties could limit the legal protections
available to us and other foreign investors, including you, and may lead to
penalties imposed on us because of the different understanding between the
relevant authority and us. In addition, we cannot predict the effect of future
developments in the PRC legal system, including the promulgation of new laws,
changes to existing laws or the interpretation or enforcement thereof, or the
pre-emption of local regulations by national laws.
It
may be difficult to enforce any civil judgments against us or our board of
directors or officers, because most of our operating and/or fixed assets are
located outside of the United States
Although
we are incorporated in the State of Delaware, most of our operating and fixed
assets are located in the PRC. As a result, it may be difficult for investors
to
enforce judgments outside the United States obtained in actions brought against
us in the United States, including actions predicated upon the civil liability
provisions of the federal securities laws of the United States or of the
securities laws of any state of the United States. In addition, certain of
our
directors and officers (principally based in the PRC) and all or a substantial
portion of their assets are located outside the United States. As a result,
it
may not be possible for investors to effect service of process within the United
States upon those directors and officers, or to enforce against them or us
judgments obtained in United States courts, including judgments predicated
upon
the civil liability provisions of the federal securities laws of the United
States or of the securities laws of any state of the United States. We have
been
advised by our PRC counsel that, in their opinion, there is doubt as to the
enforceability in the PRC, in original actions or in actions for enforcement
of
judgments of United States courts, of civil liabilities predicated solely upon
the federal securities laws of the United States or the securities laws of
any
state of the United States.
Item
2. Description of Property.
Our
main
operation is located at 118 Guang Yu St., Yinzhou District, Tieling City,
Liaoning Province, People’s Republic of China, which is leased from a related
party for a payment of approximately $39,665 per year. The lease is renewed
every year automatically at the expiration date. The leased property covers
a
total area of 113,355 square feet, of which approximately 91,000 square feet
used for factory, and 22,000 square feet used for office. This space is adequate
for our present and planned future operations. No other businesses operate
from
this office.
On
May
21, 2007, a civil complaint Robert
Dawley vs NF Energy Saving Corp. of America, etal.
was
filed in the United States District Court, Middle District of Florida, Orlando,
Civil No. 6:07-cv-872-Orl-18DAB. The complaint faults the defendants in breach
of contract, which was signed by Sam Winer, former Chief Executive Officer,
before the commencement of reverse merger with the current subsidiary. The
case
was dismissed on August 13, 2007 without justice. On October 5, 2007 the
plaintiff filed addendum to complaint Case No. 6:07-cv-872-Orl-19DAB and the
case was authorized by court on November 16, 2007. The plaintiff charges the
Company with breach of contract since March 8, 2006 and seeks a relief of
11,900,000 shares of common stock plus $60,000-120,000 yearly “consultant
income.”
On
March
5, 2008 the Company has filed counterclaim against Dawley and Winer for
$2,000,000. It includes charges of security fraud and breach of warranty by
Winer. The trial was scheduled for October, 2008. Counsel
advised that the October 2008 trial will probably be postponed because of the
new issues raised in the counterclaim.
The
Company plans to fight against the lawsuit aggressively. At this point we do
not
believe that the lawsuit will have a material impact on the Company.
None.
Trading
Market for Common Equity
Our
common stock, $.001 par value, began trading on the OTC Bulletin Board (“OTCBB”)
on December 4, 2004 under the symbol “DGNA.OB”. The new symbol after the
company’s name change to NF Energy Saving Corporation of America is “NFES.OB”.
The following table sets forth the high and low bid prices posted on the OTC
Bulletin Board for our Common Stock for the years ended December 31, 2007
and 2006. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
|
Year
Ended December 31, 2006:
|
High
|
Low
|
|||||
|
3/31/2006
|
$
|
10.50
|
$
|
6.30
|
|||
|
6/30/2006
|
$
|
5.60
|
$
|
3.50
|
|||
|
9/30/2006
|
$
|
2.45
|
$
|
2.45
|
|||
|
12/31/2006
|
$
|
0.51
|
$
|
0.51
|
|||
|
Year
Ended December 31, 2007:
|
High
|
Low
|
|||||
|
3/31/2007
|
$
|
0.51
|
$
|
0.51
|
|||
|
6/30/2007
|
$
|
0.75
|
$
|
0.51
|
|||
|
9/30/2007
|
$
|
0.51
|
$
|
0.2
|
|||
|
12/31/2007
|
$
|
0.65
|
$
|
0.25
|
|||
|
Year
Ended December 31, 2008:
|
High
|
Low
|
|||||
|
3/31/2008
|
$
|
0.60
|
$
|
.11
|
|||
On
October 16, 2006, there was a 1 for 35 reverse split effected.
Number
of Holders
As
of
March 14, 2007, we had 1,663 common shareholders of record.
Dividends
Since
inception of DGNA, we have not paid cash dividends on our common stock. It
is
our present policy not to pay cash dividends and to retain future earnings
to
support our growth. Any payments of cash dividends in the future will be
dependent upon, among other things, the amount of funds available therefore,
our
earnings, financial condition, capital requirements, and other factors which
the
Board of Directors deems relevant.
Securities
Authorized for Issuance Under Equity Compensation
Plans
As
of the
date of this Report, we have not authorized any equity compensation plan, nor
has our Board of Directors authorized the reservation or issuance of any
securities under any equity compensation plan.
Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
|
1.
|
On
September 15, 2006, we consummated a private sale of 29,100,000
shares of our restricted common stock to Mr. Gang Li, pursuant to the
terms and conditions of a Subscription and Stock Purchase Agreement,
dated
September 5, 2006. The aggregate purchase price for the Shares was
$560,000 or approximately $.02 per
share.
|
|
2.
|
On
November 30, 2006, we issued the Neng Fa Shareholders 12,000,000
shares of
common stock of the Company in exchange for all of the shares of
capital
stock of Neng Fa owned by the Neng Fa shareholders, pursuant to Plan
of
Exchange, dated November 15, 2006.
|
|
3.
|
On
December 27, 2006, we issued 17,100,000 shares of our restricted
common
stock to existing shareholders in exchange for conversion of shareholders
loan in the amount of $4,240,506.
|
|
4.
|
On
August 8, 2007, we issued an additional 1,700,000 shares of our restricted
common stock to Mr. Gang Li, our President and Director for a purchase
price of $870,000.
|
The
foregoing transactions were private transactions not involving a public offering
and were exempt from registration provisions of the Securities Act of 1933,
as
amended, or the “Act”, pursuant to Section 4(2) thereof. The sale of the
securities was without the use of an underwriter, and the certificates
representing the shares of common stock bear a restrictive legend permitting
transfer only upon registration or under an exemption from registration under
the Act.
Purchases
of Equity Securities by the Small Business Issuer and Affiliated
Purchasers
We
did
not repurchase any of our outstanding shares during the period covered by this
report.
Transfer
Agent
Our
transfer agent is Guardian Registrar & Transfer, Inc. located at 7951 SW
Sixth Street, Suite 216, Plantation, Florida 33324.
The
following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto included elsewhere in this Report
on
Form 10-KSB. The discussion in this section of this Report on Form 10-KSB
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those discussed herein. Factors
that
could cause or contribute to such differences include, but are not limited
to,
those discussed in this section, those discussed in “Risk Factors” and those
discussed elsewhere in this Report on Form 10-KSB.
FORWARD
LOOKING STATEMENTS
Certain
statements in this report, including statements of our expectations, intentions,
plans and beliefs, including those contained in or implied by "Management's
Discussion and Analysis" and the Notes to Consolidated Financial Statements,
are
"forward-looking statements", within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are
subject to certain events, risks and uncertainties that may be outside our
control. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”,
“will”, and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which
speak only as of the date on which they are made. The Company undertakes no
obligation to update or revise any forward-looking statements. These
forward-looking statements include statements of management's plans and
objectives for our future operations and statements of future economic
performance, information regarding our expansion and possible results from
expansion, our expected growth, our capital budget and future capital
requirements, the availability of funds and our ability to meet future capital
needs, the realization of our deferred tax assets, and the assumptions described
in this report underlying such forward-looking statements. Actual results and
developments could differ materially from those expressed in or implied by
such
statements due to a number of factors, including, without limitation, those
described in the context of such forward-looking statements, our expansion
and
acquisition strategy, our ability to achieve operating efficiencies, our
dependence on network infrastructure, capacity, telecommunications carriers
and
other suppliers, industry pricing and technology trends, evolving industry
standards, domestic and international regulatory matters, general economic
and
business conditions, the strength and financial resources of our competitors,
our ability to find and retain skilled personnel, the political and economic
climate in which we conduct operations and the risk factors described from
time
to time in our other documents and reports filed with the Securities and
Exchange Commission (the "Commission"). Additional factors that could cause
actual results to differ materially from the forward-looking statements include,
but are not limited to: 1) our ability to successfully develop, manufacture
and
deliver our products on a timely basis and in the prescribed condition; 2)
our
ability to compete effectively with other companies in the same industry; 3)
our
ability to raise sufficient capital in order to effectuate our business plan;
and 4) our ability to retain our key executives.
CRITICAL
ACCOUNTING POLICIES
An
appreciation of our critical accounting policies is necessary to understand
our
financial results. These policies may require management to make difficult
and
subjective judgements regarding uncertainties, and as a result, such estimates
may significantly impact our financial results. The precision of these estimates
and the likelihood of future changes depend on a number of underlying variables
and a range of possible outcomes. We applied our critical accounting policies
and estimation methods consistently in all periods presented.
Revenue
recognition
In
accordance with the SEC’s Staff Accounting Bulletin No. 104, Revenue
Recognition,
the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling
price
is fixed or determinable and collectibility is reasonably assured.
(a)
Sale
of products
The
Company derives revenues from the sale of self-manufactured products and
provision of engineering services. The Company recognizes its revenues net
of
related business taxes and value added taxes (“VAT”). The Company is subject to
VAT which is levied on the majority of the products of Neng Fa at the rate
of
17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition
to the invoiced value of purchases to the extent not refunded for export sales.
The
Company recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced
no
product returns and has recorded no reserve for sales returns for the years
ended December 31, 2007 and 2006.
(b)
Service revenue
Service
revenue is primarily derived from energy-saving technical services that are
not
an element of an arrangement for the sale of products. These services are
generally billed on a time-cost plus basis. Revenue is recognized when service
is rendered and accepted by the customers.
(c)
Project revenue
The
Company applies the percentage-of-completion method under SOP 81-1 “Accounting
for Performance of Construction-Type and Production-Type
Contracts”,
to
recognize revenues for energy-saving re-engineering projects that require
significant modification or customization or installation subject to the
customers. The Company records a provision in those instances in which the
Company believes a contract will probably generate a net loss and the Company
can reasonably estimate this loss. If the Company cannot reasonably estimate
the
loss, the Company limits the amount of revenue that the Company recognizes
to
the costs the Company has incurred, until the Company can estimate the total
loss. Advance payments from customers and amounts billed to clients in excess
of
revenue recognized are recorded as receipt in advance. As of December 31, 2007,
all projects were completed and their project revenues were fully
recognized.
(d)
Interest income
Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.
Accounts
receivable
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customer’s current
credit worthiness and the economic environment. As of December 31, 2007 and
2006, the Company has determined that no allowance for doubtful accounts is
necessary.
Inventories
Inventories
are stated at the lower of cost or market (net realizable value), cost being
determined on a weighted average method. Costs include material, labor and
manufacturing overhead costs. The Company quarterly reviews historical sales
activity to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand.
The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of December 31, 2007 and 2006,
the
Company did not record an allowance for obsolete inventories, nor have there
been any write-offs.
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 they become
fully operational and after taking into account their estimated residual
values:
|
Depreciable life
|
Residual value
|
||
|
Plant
and machinery
|
3 – 20
years
|
5%
|
|
|
Furniture,
fixture and equipment
|
5 – 8
years
|
5%
|
Expenditure
for repairs and maintenance is expensed as incurred. When assets have 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.
Stock-based
compensation
The
Company adopts SFAS No. 123 (revised 2004), "Share-Based
Payment"
("SFAS
No. 123R") using the fair value method. Under SFAS No. 123(R), the stock-based
compensation is measured using the Black-Scholes Option-Pricing model on the
date of grant. The fair value of stock-based compensation that are expected
to
vest are recognized using the straight-line method over the requisite service
period.
Income
taxes
The
Company also accounts for income tax using SFAS No. 109 “Accounting
for Income Taxes”,
which
requires the asset and liability approach for financial accounting and reporting
for income taxes. Under this approach, deferred income taxes are provided for
the estimated future tax effects attributable to temporary differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery or
reversal and the effect from a change in tax rates is recognized in the
consolidated statement of operations and comprehensive income in the period
of
enactment. A valuation allowance is provided to reduce the amount of deferred
tax assets if it is considered more likely than not that some portion of, or
all
of the deferred tax assets will not be realized.
The
Company also adopts the provisions of the Financial Accounting Standards
Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes” (“FIN
48”).
FIN 48
prescribes a recognition threshold and measurement process for recording in
the
financial statements uncertain tax positions taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transitions. The adoption of FIN 48 did not have a significant impact on the
Company’s consolidated financial statements.
The
Company conducts major 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 the foreign tax
authority.
RESULTS
OF OPERATIONS
Year
Ended December 31, 2007 compared to Year Ended December 31, 2006
The
following discussion should be read in conjunction with the financial statements
included in this report and is qualified in its entirety by the
foregoing.
REVENUES
Total
revenues were $10,336,449 and $5,269,013 for the years ended December 31,
2007 and 2006, respectively. Total revenues increased $5,067,436, a 96%
increase, for the year ended December 31, 2007 compared to total revenues for
the year ended December 31, 2006.
|
Year
Ended
|
Year
Ended
|
|
|||||||||||||||||
|
Dec.
31 2007
|
Dec.
31 2006
|
Change
|
|||||||||||||||||
|
Amount
|
% of Total
Revenues
|
Amount
|
% of Total
Revenues
|
Amount
|
%
change
|
||||||||||||||
|
REVENUES
|
|||||||||||||||||||
|
Products
|
$
|
6,224,114
|
60.21
|
%
|
$
|
4,787,915
|
90.87
|
%
|
$
|
1,436,199
|
30
|
%
|
|||||||
|
Service
|
2,037,053
|
19.71
|
%
|
481,098
|
9.13
|
%
|
1,555,955
|
323
|
%
|
||||||||||
|
Projects
|
2,075,282
|
20.08
|
%
|
-
|
-
|
2,075,282
|
-
|
||||||||||||
|
Total
Operating Revenues
|
$
|
10,336,449
|
100.00
|
%
|
$
|
5,269,013
|
100.00
|
%
|
$
|
5,067,436
|
96
|
%
|
|||||||
Product
Revenues
Product
revenues are derived principally from the sale of self-manufactured products
and
provision of engineering services. Product revenues were $6,224,114 and
$4,787,915, or 60.21% and 90.87% of total revenues for the years ended
December 31, 2007 and 2006, respectively. Product revenues for the year
ended December 31, 2007 increased $1,436,199,
a 30%
increase, compared to the product revenues for the year ended December 31,
2006.
Service
Revenues
Service
revenues are derived principally from energy-saving technical services that
are
not an element of an arrangement for the sale of products. These services are
generally billed on a time-cost plus basis. Service revenues were $2,037,053
and
$481,098,
or
19.71% and 9.13% of total revenues for the years ended December 31, 2007
and 2006, respectively. Service revenues for the year ended December 31, 2007
increased $1,555,955, a 323% increase, compared to the service revenues for
the
year ended December 31, 2006. This reflects the Company’s efforts in expanding
the energy saving service project businesses.
Project
Revenues
Project
revenues are derived principally from for energy-saving re-engineering projects
that require significant modification or customization or installation subject
to the customers. The Company applies the percentage-of-completion method to
recognize project revenues. This is a newly created business line in 2007.
Project revenues were $2,075,282,
or 20.07% of total revenues for the year ended December 31, 2007. With the
Company’s new emphasis on managing comprehensive energy saving and emission
reduction projects for municipalities and large industrial enterprises, we
expect the project revenues will continue to increase in 2008.
COSTS
AND EXPENSES
Cost
of Revenues
Cost
of
product revenues consists primarily of material costs, direct labor,
depreciation and manufacturing overheads, which are directly attributable to
the
manufacture of products and the rendering of services. Total cost of revenues
was $6,964,240 and $3,827,826, or 67.38% and 72.65% of total revenues for the
years ended December 31, 2007 and 2006, respectively. The total cost of
revenues increased by $3,136,414 (82%) for the year ended December 31, 2007
compared to the total cost of revenues for the year ended December 31, 2006.
The
increase in total cost of revenues was due partly to increased supporting costs
for increasing sales and partly induced by the inflation in PRC.
The
overall gross profit for the Company was $3,372,209 and $1,441,187, or 32.62%
and 27.35% for the years ended December 31, 2007 and 2006 respectively. The
profit margin increased by 5.27% for the year ended December 31, 2007 compared
to the year ended December 31, 2006.
|
Year Ended
|
Year Ended
|
|
|||||||||||||||||
|
Dec. 31 2007
|
Dec. 31 2006
|
Change
|
|||||||||||||||||
|
Amount
|
% of Total Cost
of Revenues
|
Amount
|
% of Total Cost
of Revenues
|
Amount
|
%
change
|
||||||||||||||
|
COST
OF REVENUES
|
|||||||||||||||||||
|
Cost
of Products
|
$
|
4,398,433
|
63.16
|
%
|
$
|
3,597,911
|
93.99
|
%
|
$
|
800,522
|
22
|
%
|
|||||||
|
Cost
of Service
|
1,530,116
|
21.97
|
%
|
229,915
|
6.01
|
%
|
1,300,201
|
566
|
%
|
||||||||||
|
Cost
of Projects
|
1,035,691
|
14.87
|
%
|
-
|
-
|
1,035,691
|
-
|
||||||||||||
|
Total
Cost of Revenues
|
$
|
6,964,240
|
100.00
|
%
|
$
|
3,827,826
|
100.00
|
%
|
$
|
3,136,414
|
82
|
%
|
|||||||
|
Year Ended
|
|||||||||||||||||||||||||
|
December 31, 2007
|
|||||||||||||||||||||||||
|
Products
|
%
|
Service
|
%
|
Projects
|
%
|
Total
|
%
|
||||||||||||||||||
|
Revenues
|
$
|
6,224,114
|
100.00
|
%
|
$
|
2,037,053
|
100.00
|
%
|
$
|
2,075,282
|
100.00
|
%
|
$
|
10,336,449
|
100.00
|
%
|
|||||||||
|
Cost
of Revenues
|
4,398,433
|
70.67
|
%
|
1,530,116
|
75.11
|
%
|
1,035,691
|
49.91
|
%
|
6,964,240
|
67.38
|
%
|
|||||||||||||
|
Gross
Margin
|
$
|
1,825,681
|
29.33
|
%
|
$
|
506,937
|
24.89
|
%
|
$
|
1,039,591
|
50.09
|
%
|
$
|
3,372,209
|
32.62
|
%
|
|||||||||
|
|
Year Ended
|
||||||||||||||||||||||||
|
December 31, 2006
|
|||||||||||||||||||||||||
|
|
|
Products |
%
|
Service |
|
% |
Projects
|
|
%
|
Total |
|
%
|
|||||||||||||
|
Revenues
|
$
|
4,787,915
|
100.00
|
%
|
$
|
481,098
|
100.00
|
%
|
-
|
-
|
$
|
5,269,013
|
100.00
|
%
|
|||||||||||
|
Cost
of Revenues
|
3,597,911
|
75.15
|
%
|
229,915
|
47.79
|
%
|
-
|
-
|
3,827,826
|
72.65
|
%
|
||||||||||||||
|
Gross
Margin
|
$
|
1,190,004
|
24.85
|
%
|
$
|
251,183
|
52.21
|
%
|
-
|
-
|
$
|
1,441,187
|
27.35
|
%
|
|||||||||||
Cost
of Products
Total
cost of product revenues was $4,398,433 and $3,597,911, or 70.67% and 75.15%
of
products revenues, for the years ended December 31, 2007 and 2006,
respectively. The cost of product revenues increased by $800,522 (22%) for
the
year ended December 31, 2007 compared to the cost of revenues for the year
ended
December 31, 2006. The increase in product costs of 22% is less than the
increase in product revenues of 30%. The gross profit for products was
$1,825,681 and $1,190,004, or 29.33% and 24.85% for the years ended
December 31, 2007 and 2006, respectively. The increase in gross profit of
$635,677 and profit margin of 4.48% for products are due to increase in sales
and better control of costs of products revenues.
Cost
of Service
Total
cost of service revenues was $1,530,116 and $229,915, or 75.11% and 47.79%
of
service revenues, for the years ended December 31, 2007 and 2006,
respectively. The cost of service revenues increased by $1,300,201 (566%) for
the year ended December 31, 2007 compared to the cost of revenues for the year
ended December 31, 2006. The increase in product costs of 566% is greater than
the increase in product revenues of 323%. The gross margin for services was
$506,937 and $251,183, or 24.89% and 52.21% for the years ended
December 31, 2007 and 2006, respectively. The decrease in gross margin of
27.32% in service is due to the significant increase in costs to support the
large increase in service revenues and the initial start up costs incurred
to
increase service revenues.
Cost
of Projects
In
2007
the Company began contracting energy-saving re-engineering projects that require
significant modification or customization or installation subject to the
customers. Total cost of projects revenues was $1,035,691, 49.91% of project
revenues, for the year ended December 31, 2007. The gross profit for
projects for the year ended December 31, 2007 was $1,039,591 (50.09%), much
greater than the gross profit for products and service.
Operating
Expenses
The
total
operating expenses were $1,318,739 and $289,261, or 12.76% and 5.49% of total
operating revenues for the year ended on December 31, 2007 and 2006
respectively.
Selling
and marketing expenses
On
September 5, 2007 the Company established a new subsidiary, Liaoning Nengfa
Weiye Tie Fa Sales Co., Ltd. to conduct the sales and marketing of valves
products in the PRC. In 2007 the selling and marketing expenses were $36,092,
.35% of total revenues. In 2006 the
selling and marketing expenses were included in general and administrative
expenses.
Research
and development expenses
The
Company incurred research and development expenses to study the possibility
of
using the Company’s existing manufacturing facilities and valve production
expertise to produce equipment and fittings for wind power plants. The R&D
effort enabled the Company to create a new line of business to tap into a large
demand for the equipment needed for new wind power plants that have been planned
in PRC. The research and development expenses for the year ended December 31,
2007 was $370,633, 3.6% of total revenues.
General
and administrative expenses
General
and administrative expenses increased by $626,343 to $836,421, 8.09% of total
revenues for the year ended December 31, 2007, as compared to $210,078,
3.99% of total revenues for the year ended December 31, 2006. This increase
was primarily due to a stock compensation cost of $510,000 incurred for issuing
1,000,000 shares of restricted common stock for business advisory services
to
Greentree Financial Group, Inc.
Income
from Operations
As
a
result of the foregoing, our income from operations increased by $901,544 to
$2,053,470, 19.87% of total revenues for the year ended December 31, 2007,
as compared to $1,151,926, 21.86% of total revenues for the year ended
December 31, 2006.
Interest
income
For
the
year ended December 31, 2007, interest income was $5,127 as compared to
$1,623 for the year ended December 31, 2006. The increase in interest
income was due to the increase of cash deposit at bank.
Income
Tax Expenses
For
the
year ended December 31, 2007, income tax expense was $0, as compared to
$378,069 for the year ended December 31, 2006. The Company is enjoying the
tax holiday in PRC due to NFES's foreign company status. During 2007, the
Tieling city local government tax bureau in the PRC approved Neng Fa as a
foreign investment enterprise. Hence, retroactively effective from January
1,
2007, Neng Fa is entitled to a two-year exemption from corporate income tax
and
a reduced corporate income tax rate of 15% for the following three years.
As
of
December 31, 2007, the operation in the United States of America incurred
$574,989 of net operating losses available for federal tax purposes, which
are
available to offset future taxable income. The net operating loss carry forwards
begin to expire in 2028, if unutilized. The Company has provided for a full
valuation allowance against the deferred tax assets of $217,720 on the expected
future tax benefits from the net operating loss carryforwards as the management
believes it is more likely than not that these assets will not be realized
in
the future.
Net
Income
As
a
result of the foregoing, we had net income of $2,068,706, a 20% profit margin
on
revenues for the year ended December 31, 2007, as compared to net income of
$790,961, a 15% profit margin on revenues for the year ended December 31,
2006. The net income for the year ended December 31, 2007 increased by
$1,277,745 (161.54%)
and the profit margin increased by 5% compared to the net income for
the
year ended December 31, 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Operating
activities
For
the
year ended December 31, 2007, net cash provided by operating activities was
$776,595. This was primarily attributable to our net income of $2,068,706,
adjusted by non-cash items of depreciation and amortization of $270,188, gain
on
disposal of plant and equipment of $7,732, a non-cash expense for shares issued
for service rendered $510,000, and a $2,064,567 decrease in working capital.
Negative cash flows from operations in 2007 were due primarily to the increase
in accounts receivable by $2,483,442, prepayments and other receivables
$278,349, and income tax payable $396,600, partially offset by the decrease
in
inventories by $471,229 and the increase in accounts payable by $518,395 in
this
period.
The
large
increase in accounts receivable of $2,483,442, an increase of 191% over the
accounts receivables balance at December 31, 2006 is mainly due to the sales
growth during the year. The reason for the increase in the prepayments and
other
receivables of $278,349, a 1% increase over the prepayments and other
receivables balance of $276,864 at December 31, 2006 is that the Company expects
the cost of the raw-material will increase in the coming year. In order to
hedge
the increase in raw material costs, we have signed more purchase contracts
in
advance with the suppliers and hence increasing the prepayments. The increase
in
accounts payable of $518,395 correspond to the increase in the cost of sales
during the year. The decrease in income tax payable of $396,900 is the tax
holiday we enjoy in PRC due to our foreign invested company status. The increase
in other payables and accruals are due to the increase in welfare payable,
payables to fixed asset vendors and other accrued expenses.
For
the
year ended December 31, 2006, net cash used in operating activities was
$1,255,750. This was primarily attributable to our net income of $790,961,
adjusted by non-cash items of depreciation and amortization of $188,613, and
a
$2,235,324 decrease in working capital. Negative cash flows from operations
in
2006 were due primarily to the increase in accounts receivable by $1,398,031
and
inventories by $1,812,184, partially offset by the increase in accounts payable
by $676,898 and income tax payable by $378,069 in this period.
Investing
activities
For
the
year ended December 31, 2007, net cash used in investing activities was
$319,296, and was primarily attributable to the purchase of plant and equipment
of $399,757. This amount was partially offset by $80,461 proceeds received
from
disposal of plant and equipment. For the year ended December 31, 2006, net
cash used in investing activities was $16,125 attributable to the purchase
of
plant and equipment.
Financing
activities
For
the
year ended December 31, 2007, net cash provided by financing activities was
$870,000 attributable to proceeds from private placement. For the year ended
December 31, 2006, net cash provided by financing activities was
$1,996,529, and was primarily attributable to $1,872,159 proceeds from and
additions to shareholder loans and capital contribution from stockholders.
During
January 2008, the Company borrowed an aggregate of $2,000,000 on several
dates,
equally from two independent parties (“the lenders”), for working capital
purposes. The loan was made on a demand basis with the term of interest
free. As part of the understanding with respect to the loan, the two lenders
and
the Company agreed to negotiate for the conversion of the principal amount
of
the loan into common stock. The parties are in negotiation for the terms
of the issuance of the stock and conversion of the loan, but have not concluded
their negotiations. Currently the conversion terms contemplate that the
Company will issue an aggregate of 6,645,376 shares of common stock at a
per
share purchase price of $0.30096. The shares will be issued on a
“restricted” basis, without registration rights. As a result of the investment,
each investor will own 8.333% of the issued and outstanding shares of the
Company after the new shares are issued, based on the current number of shares
issued and outstanding. Additionally, each of the investors will have the
right to appoint a director to the board of directors of the Company immediately
upon conversion of the principal of the loan. If the loan is not converted
into common shares, the Company will formalize the terms of the loan or seek
to
repay the principal. The Company and the two lenders expect to complete the
negotiation for the terms of conversion by the end of March,
2008.
We
anticipate we will need additional working capital in 2008 and in the future
to
fund our company’s new business plans and to help establish our company to be a
leader in equipment manufacturing for wind power plants and in comprehensive
energy saving infrastructure projects for municipalities while keeping our
current leading position in valve production. We may decide to pursue additional
investments or debt financing to obtain additional cash resources to fund our
company’s new business and other future developments.
IMPACT
OF RECENTLY ISSUED NEW ACCOUNTING STANDARDS
We
do not
expect adoption of recently issued accounting pronouncements to have a
significant impact on our results of operations, financial position or cash
flow.
EFFECTS
OF INFLATION
We
believe that the relatively moderate rate of inflation over the past few
years
has not had a significant impact on our results of operations.
At
present we are able to increase our prices due to the rising prices of raw
materials.
Our
audited financial statements and footnotes related thereto are included within
Item 13 of this report. The Index to Consolidated Financial Statements appears
on page F-1 of this report. The Report of Independent Registered Public
Accounting Firm, Consolidated Financial Statements, Notes to Consolidated
Financial Statements are listed in the Index to Consolidated Financial
Statements and which appear beginning on page F-2 of this report.
On
January 11, 2007, our Board of Directors approved to dismiss
Rotenberg & Co., LLP as our independent auditor, and dismiss Lake &
Associates, CPA's LLC as our independent auditor in connection with the review
for the interim period from July 1, 2006 to January 11, 2007. Currently, Zhong
Yi (Hong Kong) C.P.A. Company Ltd. ("Zhong Yi") is retained as independent
auditor to audit our financial statements for the fiscal year ended December
31,
2006 and to review our three quarterly reports in 2007, pursuant to the
engagement letters, dated December 21, 2006, which was approved by our Board
of
Directors. On January 2, 2008 our Board of Directors approved the engagement
of
Zhong Yi for the audit of our financial statements for the fiscal year ended
December 31, 2007 pursuant to the engagement letter on January 2, 2008. We
do
not have an audit committee.
Prior
to
making the decision to retain Zhong Yi, we had no prior relationship with Zhong
Yi or any of its members during our two most recent fiscal years ended December
31, 2004 and 2005 and the subsequent interim period through December 21,
2006.
Rotenberg &
Co., LLP's audit reports regarding our financial statements for the fiscal
year
ended December 31, 2005 and 2004, contained no adverse opinion or disclaimer
of
opinion nor were they qualified or modified as to the uncertainty, audit scope
or accounting principles, except
that
their audit reports for the years ended December 31, 2005 and 2004 contained
a
going concern qualification.
In
connection with the prior audits for the fiscal years ended December 31, 2005
and 2004, and the review for the interim periods up to June 30, 2006, there
have
been no disagreements with Rotenberg & Co., LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which if not resolved to the satisfaction of
Rotenberg & Co., LLP would have caused it to make reference to the
subject matter of the disagreement in connection with its report on these
financial statements for those periods. Rotenberg & Co., LLP had no
services in connection with our third quarterly report ended September 30,
2006.
The reason for this is because the third quarter independent review was
conducted by Lake & Associates, CPA's LLC. The reason why we chose to retain
an independent firm for the third quarterly report ended September 30, 2006,
is
because Lake & Associates, CPA's LLC has a comprehensive knowledge of the
Chinese regulatory system and was thus a more appropriate CPA firm. Rotenberg
& Co., LLP had no disagreement with us during the two most recent fiscal
years through the date of January 11, 2007.
Our
Board
of Directors approved to retain Lake & Associates, CPA's LLC on July 1,
2006 in connection with the review for the interim period from July 1, 2006
to January 11, 2007. There have been no disagreements with Lake &
Associates, CPA's LLC on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which if not
resolved to the satisfaction of Lake & Associates, CPA's LLC would have
caused it to make reference to the subject matter of the disagreement in
connection with its report on these financial statements for the interim period
from July 1, 2006, the date of engagement, up to January 11,
2007.
Prior
to
making the decision to retain Lake & Associates, CPA's LLC, we had no prior
relationship with Lake & Associates, CPA's LLC or any of its members during
our two most recent fiscal years ended December 31, 2004 and 2005 and the
subsequent interim period through June 30, 2006.
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in reports filed under the Securities Exchange Act
of
1934 (“Exchange Act”) is recorded, processed, summarized and reported within the
specified time periods. Our Chief Executive Officer and its Chief Financial
Officer (collectively, the “Certifying Officers”) are responsible for
maintaining disclosure controls and procedures for the Company. The controls
and
procedures established by the Company are designed to provide reasonable
assurance that information required to be disclosed by the issuer in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Commission’s
rules and forms.
As
of the
end of the period covered by this report, the Certifying Officers evaluated
the
effectiveness of the Company’s disclosure controls and procedures. Based on the
evaluation, the Certifying Officers concluded that the Company’s disclosure
controls and procedures were effective to provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the applicable rules and forms, and that it is
accumulated and communicated to our management, including the Certifying
Officers, as appropriate to allow timely decisions regarding required
disclosure.
The
Certifying Officers have also concluded, based on their evaluation of the
Company’s controls and procedures that as of December 31, 2007, the Company’s
internal controls over financial reporting are effective and provide a
reasonable assurance of achieving their objective.
The
Certifying Officers have also concluded that there was no change in the
Company’s internal controls over financial reporting identified in connection
with the evaluation that occurred during the Company’s fourth fiscal quarter
that has materially affected, or is reasonably likely to materially affect,
the
Company’s internal control over financial reporting.
None.
Directors
and Executive Officers
Our
directors are elected at the annual meeting of shareholders and hold office
for
one year and until their successors are elected and qualified. Our officers
are
appointed by the Board of Directors and serve at the pleasure of the Board.
We
have not entered into any employment agreements with our executive officers.
|
Name
|
Age
|
Position
|
||
|
|
|
|
||
|
Gang
LI
|
54
|
Chairman,
Chief Executive Officer and President
|
||
|
Li
Hua WANG
|
47
|
Chief
Financial Officer and Director
|
||
|
Hong
LI
|
29
|
Director
|
Gang
LI—
President
and Chief Executive Officer of the Company
Mr.
Gang Li was born in 1953. He graduated from Tianjin University with a bachelor
degree in science and a master degree in law.
Mr. Li
was the director of Technology Innovation Department under the Liaoning Province
Planning and Economy Commission as well as the Director of the Economic
Operation Department under Liaoning Province Economic and Trade Commission.
From
April 1984 to July 1998, he participated in and helped to prepare the Eighth
Five-Year Plan and the Ninth Five-Year Plan regarding the technological
improvement in eight industries including energy, transportation, and other
various metallurgical industries. Mr. Li has also helped to organize and
implement several projects in connection with technological improvements
spanning across over 500 key products, 100 major projects, 100 enterprises
and 8
industries, including the famous “115 engineering”. Thanks to Mr. Li’s
guidance and as a result of the above-mentioned technological improvements,
the
Enterprise Technology Advancement Award was awarded to the Liaoning Provincial
Government by China’s National Technology Improvement Commission.
Mr. Li
is also an accomplished author and with several published papers and books
discussing various industry topics. His book “An Introduction to Technological
Improvement” was published by the prestigious Xinhua Publishing House. In
addition, the Liaoning Provincial Government awarded his paper titled
“Macro-indicator Review Systems in Enterprise Technology Improvement” with the
National Major Outcome prize and a second-place award in the category of
Technological Advancement.
Mr. Li
founded the “Liaoning Nengfa Weiye Group” in 1999 where he currently serves as
the President and Chairman. In addition, Mr. Li serves as the Deputy
Director of the Liaoning Provincial Resource Saving and Comprehensive
Application Association. He also holds the offices of Deputy Director for the
China Energy Conservation Association and Deputy Director for the Energy
Conservation Committee under the China Energy Research Association.
Li
Hua WANG — Chief Financial Officer of the Company
Ms. Lihua
Wang was born in 1960. She graduated with a master degree in accounting from
the
Graduate School of the Ministry of Finance in the Peoples Republic of China.
Since
May
1996, Ms. Wang has been involved in the building of Liaoning EMC, which is
one of three EMCs established by the World Bank. Ms. Wang is the chief
financial officer of Liaoning EMC. In August 2003, the World Bank recommended
her as the premier expert to the Chinese EMC Association. She is also the
general manager of the 100% owned subsidiary Liaoning Nengfa Weiye Energy
Technology Company Ltd. in China.
Hong
LI — Director of the Company
Ms. Hong
Li was born in 1978. She graduated with a bachelor of art degree in Chinese
Law
from Northeastern University in the People’s Republic of China.
Since
September 2001, Ms. Li has been working as in-house counsel within the
legal department of Liaoning Nengfa Weiye Group. She is currently responsible
for regulatory compliance and corporate governance at Nengfa Energy. She has
strong professional experience in the fields of human resources and management.
Family
Relationships
None.
Legal
Proceedings
No
officer, director, or persons nominated for such positions and no promoter
or
significant employee of our Company has been involved in legal proceedings
that
would be material to an evaluation of our management.
Audit
Committee
The
Company does not have a separately designated standing audit committee. Pursuant
to Section 3(a)(58)(B) of the Exchange Act, the entire Board of Directors acts
as an audit committee for the purpose of overseeing the accounting and financial
reporting processes, and audits of the financial statements of the Company.
The
Commission recently adopted new regulations relating to audit committee
composition and functions, including disclosure requirements relating to the
presence of an "audit committee financial expert" serving on its audit
committee. In connection with these new requirements, the Company's Board of
Directors examined the Commission's definition of "audit committee financial
expert" and concluded that the Company does not currently have a person that
qualifies as such an expert. The Company has had minimal operations for the
past
two (2) years. Presently, there are only three (3) directors serving on the
Company's Board, and the Company is not in a position at this time to attract,
retain and compensate additional directors in order to acquire a director who
qualifies as an "audit committee financial expert", but the Company intends
to
retain an additional director who will qualify as such an expert, as soon as
reasonably practicable. While neither of our current directors meets the
qualifications of an "audit committee financial expert", each of the Company's
directors, by virtue of his past employment experience, has considerable
knowledge of financial statements, finance, and accounting, and has significant
employment experience involving financial oversight responsibilities.
Accordingly, the Company believes that its current directors capably fulfill
the
duties and responsibilities of an audit committee in the absence of such an
expert.
Code
of Ethics
The
Company has adopted a code of ethic (the "Code of Ethics") that applies to
the
Company’s principal chief executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. A draft of the Code of Ethics is in Exhibit 14.1 hereto. The Code
of
Ethics is being designed with the intent to deter wrongdoing, and to promote
the
following:
| · |
Honest
and ethical conduct, including the ethical handling of actual or
apparent
conflicts of interest between personal and professional
relationships
|
| · |
Full,
fair, accurate, timely and understandable disclosure in reports
and
documents that a small business issuer files with, or submits to,
the
Commission and in other public communications made by the small
business
issuer
|
| · |
Compliance
with applicable governmental laws, rules and
regulations
|
|
·
|
The
prompt internal reporting of violations of the code to an appropriate
person or persons identified in the
code
|
| · |
Accountability
for adherence to the code
|
Section
16(a) Beneficial Ownership Reporting Compliance
Under
Section 16(a) of the Exchange Act, all executive officers, directors, and each
person who is the beneficial owner of more than 10% of the common stock of
a
company that files reports pursuant to Section 12 of the Exchange Act, are
required to report the ownership of such common stock, options, and stock
appreciation rights (other than certain cash-only rights) and any changes in
that ownership with the Commission. Specific due dates for these reports have
been established, and the Company is required to report, in this Form 10-KSB,
any failure to comply therewith during the fiscal year ended December 2007.
The
Company believes that all of these filing requirements were satisfied by its
executive officers, directors and by the beneficial owners of more than 10%
of
the Company’s common stock. In making this statement, the Company has relied
solely on copies of any reporting forms received by it, and upon any written
representations received from reporting persons that no Form 5 (Annual Statement
of Changes in Beneficial Ownership) was required to be filed under applicable
rules of the Commission.
Compensation
of Directors
We
did
not have any non-employee directors for the years ended December 31, 2007 and
2006. We did not provide any compensation to our directors serving as the
officers or employee of our company.
Compensation
of Executive Officers
We
did
not provide compensation for the executive officers for the years ended December
31, 2007 and 2006. The following table sets forth the cash and non-cash
compensation for each of the last two fiscal years awarded to or earned by
our
Chief Executive Officer and our other most highly compensated executive officers
other than our Chief Executive Officer who were serving as executive officers
at
the end of the fiscal year ended December 31, 2007:
|
SUMMARY
COMPENSATION TABLE
|
||||||||||||||||||||||||||||
|
Name
and
principal position
(a)
|
Year
(b) |
|
Salary
($)
(c) |
|
Bonus
($)
(d)
|
|
Stock
Awards
($)
(e)
|
|
Option
Awards
($)
(f)
|
|
Nonequity
Incentive Plan Compensation
($)
(g)
|
|
Nonqualified
Deferred Compensation Earnings ($)
(h)
|
|
All
Other Compensation
($)
(i)
|
|
Total
($)
(j)
|
|||||||||||
|
Gang,LI
Chief
Executive
|
2007
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||
|
Officer
and President
|
2006
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||
|
Li
Hua, WANG
|
2007
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||
| Chief Financial Officer |
2006
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||
Outstanding
equity awards at fiscal year-end
None.
Employment
and Other Agreement
We
have
not entered into any other employment agreements with our employees, Officers
or
Directors. We have no standard arrangements to compensate our directors for
their services to us.
Stock
Option Plan
We
have
not implemented a stock option plan at this time and since inception, have
issued no stock options, SARs or other compensation. We may decide, at a later
date, and reserve the right to, initiate such a plan as deemed necessary by
the
Board.
Director
Compensation
The
following table provides certain summary information concerning the compensation
paid to our directors during the years ended December 31, 2007 and 2006.
|
DIRECTOR
COMPENSATION
For
the year ended December 31, 2007
|
||||||||||||||||||||||
|
Name
(a)
|
|
Fees earned or
paid in cash
($)
(b)
|
|
Stock
Awards ($)
(c)
|
|
Option
Awards
($)
(d)
|
|
Non-equity
Incentive Plan Compensation ($)
(e)
|
|
Nonqualified
Deferred Compensation Earnings ($)
(f)
|
|
All
Other Compensation ($)
(g)
|
|
Total
($)
(h)
|
|
|||||||
|
Gang
LI
Chairman
|
_
|
_
|
_
|
_
|
_
|
_
|
_
|
|||||||||||||||
|
Li
Hua WANG
Director
|
_
|
_
|
_
|
_
|
_
|
_
|
_
|
|||||||||||||||
|
Hong
Li
Director
|
_
|
_
|
_
|
_
|
_
|
_
|
_
|
|||||||||||||||
The
following table sets forth certain information concerning the ownership of
NF
Energy Saving Corporation of America’s Common Stock as of March 25, 2008, with
respect to: (i) each person known to NF Energy Saving Corporation of America
to
be the beneficial owner of more than five percent of NF Energy Saving
Corporation of America’s Common Stock, (ii) all directors; and (iii) directors
and executive officers of the Company as a group. The notes accompanying the
information in the table below are necessary for a complete understanding of
the
figures provided below. As of March 21, 2008, there were 33,227,328 shares
of
common stock outstanding. As of March 21, 2008, there were no
preferred
shares outstanding.
Security
Ownership of Certain Beneficial Owners (1)
(2)
|
Title
of Class
|
Name
and Address
of
Beneficial Owner(s)
|
Amount and Nature
of Beneficial Ownership
|
Percent of class
|
|||||||
|
|
|
|
|
|||||||
|
Common
Stock
($.001
par value)
|
Pelaria
International Ltd. P.O. Box 957 Offshore Incorporations Centre Road Town, Tortola, British Virgin Islands |
19,991,429
|
60.17
|
%
|
||||||
|
Common
Stock
($.001
par value)
|
Cloverbay
International Ltd. P.O. Box 957 Offshore Incorporations Centre Road Town, Tortola, British Virgin Islands |
5,820,000
|
17.52
|
%
|
||||||
The
following table sets forth the number of shares owned beneficially on March
21,
2008, by each Director and by all Officers and Directors as a group. Information
as to the beneficial ownership is based upon statements furnished to the Company
by such persons.
Security
Ownership of Officers and Directors
(2)
|
Title
of Class
|
Name
and Address
of
Beneficial Owner(s)
|
Amount and Nature
of
Beneficial
Ownership
|
Percent of class
|
|||||||
|
|
|
|
|
|||||||
|
Common
Stock
($.001
par value)
|
Gang,
Li
21-Jia
Bei Si Dong Road,
Tie
Xi Qu, Shenyang City
Liaoning
Province, P. R. China 110021
|
20,649,143
|
62.15
|
%
|
||||||
|
Common
Stock
($.001
par value)
|
Li
Hua, Wang
21-Jia
Bei Si Dong Road,
Tie
Xi Qu, Shenyang City
Liaoning
Province, P. R. China 110021
|
5,162,286
|
15.54
|
%
|
||||||
|
Common
Stock
($.001
par value)
|
All
officers and directors as a group (three persons)
|
|
25,811,429
|
77.69
|
%
|
|||||
(1)
Pursuant to Rule 13-d-3 under the Securities Exchange Act of 1934, as amended,
beneficial ownership of a security consists of sole or shared voting power
(including the power to vote or direct the voting) and/or sole or shared
investment power (including the power to dispose or direct the disposition)
with
respect to a security whether through a contract, arrangement, understanding,
relationship or otherwise. Unless otherwise indicated, each person indicated
above has sole power to vote, or dispose or direct the disposition of all shares
beneficially owned. We are unaware of any shareholders whose voting rights
would
be affected by community property laws.
(2)
This
table is based upon information obtained from our stock records. Unless
otherwise indicated in the footnotes to the above tables and subject to
community property laws where applicable, we believe that each shareholder
named
in the above table has sole or shared voting and investment power with respect
to the shares indicated as beneficially owned.
Changes
in Control
Pursuant
to and at the closing of the Plan of Exchange, which occurred as of November
30,
2006, the Registrant authorized Guardian Registrar & Transfer, Inc., its
transfer agent, to issue to the shareholders of Neng Fa (the “Neng Fa
Shareholders”), 12,000,000 shares of common stock of the Company pursuant to
Regulation S under the Securities Act of 1933, as amended, in exchange for
a
100% interest in Neng Fa owned by the Neng Fa Shareholders. As a result of
the
transactions consummated at the closing, shares representing 89.4% of the
Company’s post-issuance outstanding shares of common stock were issued to the
Neng Fa shareholders, and all of the registered capital of Neng Fa was acquired
by the Company. Upon completion of the physical exchange of the share
certificates, Neng Fa became a wholly-owned subsidiary of the
Company.
Certain
Relationships and Related Transactions
|
(a)
|
On
February 8, 2006, the three individual owners of Neng Fa completed
an
asset transfer transaction with the Neng Fa whereby they agreed to
transfer $2,237,001 worth of plant and equipment to Neng Fa in exchange
for a shareholders loan. The term of the shareholders loan was interest
free, unsecured and repayable on
demand.
|
|
(b)
|
On
September 15, 2006, we consummated a private sale of 29,100,000
shares of our restricted common stock to Mr. Gang Li, pursuant to
the
terms and conditions of a Subscription and Stock Purchase Agreement,
dated
September 5, 2006. The aggregate purchase price for the Shares was
$560,000 or approximately $.02 per
share.
|
|
(c)
|
On
November 30, 2006, we issued Neng Fa Shareholders 12,000,000 shares
of
common stock of the Company in exchange for all of the shares of
capital
stock of Neng Fa owned by the Neng Fa shareholders, pursuant to Plan
of
Exchange, dated November 15, 2006.
|
|
(d)
|
On
December 27, 2006, we issued 17,100,000 shares of our restricted
common
stock to existing shareholders in exchange for conversion of shareholders
loan in the amount of $4,240,506.
|
|
(e)
|
On
August 8, 2007, pursuant to the terms and conditions of a Subscription
and
Stock Purchase Agreement, dated April 11, 2007, we consummated a
private
sale of 1,700,000 shares of our restricted common stock to Mr. Gang
Li,
our chairman, chief executive officer and president. The aggregate
purchase price for the Shares was $870,000 or approximately $.51
per
share. As a result of this transaction, Mr. Li owns approximately
60.2% of
the issued and outstanding shares of the Registrant’s Common
Stock.
|
|
(f)
|
On
January 10, 2008, Gang Li, NFES Chairman and CEO, and Lihua Wang,
NFES
Director and CFO, transferred an aggregate of 25,811,429 shares in
NFES
(the “Shares”) to Pelaria International Ltd. (“Pelaria”) and Cloverbay
International Limited (“Cloverbay”) for a total sales price of
$1,352,228.58. Pelaria and Cloverbay are wholly owned by Hong Kong
Nengfa
New Energy Development Co., Limited, which is a wholly-owned subsidiary
of
Liaoning Nengfa Weiye New Energy Application Co., Ltd. (“Weiye Energy”).
Weiye Energy is owned by Gang Li and Lihua Wang, each holding 80%
and 20%,
respectively.
|
Cloverbay
and Pelaria’s acquisitions of these shares were effected to restructure the
capital ownership of the Company in response to recently imposed PRC regulations
that restrict ownership of foreign equity by PRC citizens. Mr. Li and Ms. Wang
are both citizens of the PRC. The consummation of these transactions resulted
in
Mr. Li’s 60.2% and Ms. Wang’s 17.5% ownership in the Company being transferred
to non-PRC entities, Cloverbay and Pelaria, respectively. Through Weiye Energy’s
indirect ownership of the Shares owned by Cloverbay and Pelaria, Mr. Li will
continue to indirectly beneficially own 20,649,143 shares or 62.15% of the
Company’s common stock (representing 80% of his ownership interest in Weiye
Energy), and Ms. Wang will continue to indirectly beneficially own 5,162,286
shares or 15.54% of the Company’s common stock (representing her 20% interest in
Weiye Energy).
Director
Independence
As
of the
date of this report, Gang Li, our President and CEO, Lihua Wang, our Chief
Financial Officer, and Hong Li, our officer, all three members of our Board
of
Directors would not qualify as “independent.” In making that determination, we
used the definitions of independence of NASDAQ, even though such definitions
do
not currently apply to us because we are not listed on NASDAQ. We do not have
a
separately designated compensation, nominating or audit committee.
|
Exhibit
Number
|
Description
|
Incorporated
by
Reference
to
|
||
|
2
|
Agreement
and Plan of Merger of City View, Inc., a Florida corporation and
Global
Broadcast Group, Inc., formerly known as Galli Process, Inc., a Delaware
corporation
|
Exhibits
with the corresponding numbers filed with our registration statement
on
Form 10-SB filed January 17, 2003.
(File
No. 000-50155).
|
||
|
3.1
|
Certificate
of Incorporation
|
Exhibits
with the corresponding numbers filed with our registration statement
on
Form 10-SB filed January 17, 2003.
(File
No. 000-50155).
|
||
|
3.2
|
Certificate
of Amendment
|
Exhibits
submitted with our registration statement on Form 10-SB filed January
17,
2003.
(File
No. 000-50155)
|
||
|
3.3
|
Authorization
to Transact Business in Florida
|
Exhibits
submitted with our registration statement on Form 10-SB filed January
17,
2003. (File No. 000-50155)
|
||
|
3.4
|
Bylaws
|
Exhibits
submitted with our registration statement on Form 10-SB filed January
17,
2003. (File No. 000-50155)
|
||
|
5
|
Opinion
and Consent of Adorno & Yoss, P.A
|
Exhibit
submitted with our Form SB-2, filed April 29, 2004.
(File
No. 333-114985)
|
||
|
23.1
|
Consent
of Rotenberg & Co. LLP
|
Exhibit
submitted with our Form SB-2, filed April 29, 2004.
(File
No. 333-114985)
|
||
|
23.2
|
Consent
of Adorno & Yoss
|
Exhibit
5 submitted with our registration statement on Form SB-2 filed on
May 11,
2004
(File
No. 222-50155)
|
||
| 32.2* | Section 1350 Certifications of Chief Financial Officer | |||
| * Filed herewith |
Fees
Billed For Audit and Non-Audit Services
The
following table represents the aggregate fees billed for professional audit
services rendered to the independent auditor, Zhong Yi (Hong Kong) C.P.A.
Company Ltd. (“Zhong Yi”) for our audit of the annual financial statements for
the years ended December 31, 2007 and December 31, 2006. Audit fees and other
fees of auditors are listed as follows:
|
Year
Ended December 31
|
2007
|
2006
|
|||||
|
Zhong
Yi
|
Zhong
Yi
|
||||||
|
Audit
Fees (1)
|
$
|
45,000
|
(3)
|
$
|
46,000
|
(2)
|
|
|
Audit-Related
Fees (4)
|
—
|
—
|
|||||
|
Tax
Fees (5)
|
—
|
||||||
|
All
Other Fees (6)
|
—
|
—
|
|||||
|
Total
Accounting Fees and Services
|
$
|
45,000
|
$
|
46,000
|
|||
| (1) |
Audit
Fees.
These are fees for professional services for the audit of the Company's
annual financial statements, and for the review of the financial
statements included in the Company's filings on Form 10-QSB, and
for
services that are normally provided in connection with statutory
and
regulatory filings or engagements.
|
|
(2)
|
The
amounts $46,000 shown for Zhong Yi in 2006 relate to (i) the audit
of the
Company's annual financial statements for the fiscal year ended December
31, 2006, and (ii) the review of the financial statements included
in the
Company's filings on Form 10-QSB for the first, second and third
quarters
of 2007.
|
| (3) |
The
amounts $45,000 shown for Zhong Yi in 2007 relate to the audit of
the
Company's annual financial statements for the fiscal year ended December
31, 2007.
|
| (4) |
Audit-Related
Fees.
These are fees for the assurance and related services reasonably
related
to the performance of the audit or the review of the Company's financial
statements.
|
| (5) |
Tax
Fees.
These are fees for professional services with respect to tax compliance,
tax advice, and tax planning.
|
| (6) |
All
Other Fees.
These are fees for permissible work that does not fall within any
of the
other fee categories, i.e., Audit Fees, Audit-Related Fees, or Tax
Fees.
|
Pre-Approval
Policy For Audit and Non-Audit Services
The
Company does not have a standing audit committee, and the full Board performs
all functions of an audit committee, including the pre-approval of all audit
and
non-audit services before the Company engages an accountant. All of the services
rendered to the Company by Zhong Yi (Hong Kong) C.P.A. Company Ltd. were
pre-approved by the Board of Directors of the Company.
The
Company is presently working with its legal counsel to establish formal
pre-approval policies and procedures for future engagements of the Company's
accountants. The new policies and procedures will be detailed as to the
particular service, will require that the Board or an audit committee thereof
be
informed of each service, and will prohibit the delegation of pre-approval
responsibilities to management. It is currently anticipated that the Company's
new policy will provide (i) for an annual pre-approval, by the Board or audit
committee, of all audit, audit-related and non-audit services proposed to be
rendered by the independent auditor for the fiscal year, as specifically
described in the auditor's engagement letter, and (ii) that additional
engagements of the auditor, which were not approved in the annual pre-approval
process, and engagements that are anticipated to exceed previously approved
thresholds, will be presented on a case-by-case basis, by the President or
Controller, for pre-approval by the Board or audit committee, before management
engages the auditors for any such purposes. The new policy and procedures may
authorize the Board or audit committee to delegate, to one or more of its
members, the authority to pre-approve certain permitted services, provided
that
the
estimated fee for any such service does not exceed a specified dollar amount
(to
be determined). All pre-approvals shall be contingent on a finding, by the
Board, audit committee, or delegate, as the case may be, that the provision
of
the proposed services is compatible with the maintenance of the auditor's
independence in the conduct of its auditing functions. In no event shall any
non-audit related service be approved that would result in the independent
auditor no longer being considered independent under the applicable rules and
regulations of the Securities and Exchange Commission.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned majority of the Board of Directors, thereunto duly authorized.
|
|
NF
ENERGY SAVING CORPORATION OF AMERICA
|
|
|
Date:
March 28, 2008
|
|
/s/
Gang Li
|
|
|
Gang
Li
|
|
|
|
Chairman,
Chief Executive Officer and President
|
|
|
Date:
March 28, 2008
|
|
/s/
Li Hua Wang
|
|
|
Li
Hua Wang
|
|
|
|
Chief
Financial Officer and Director
|
|
|
Date:
March 28, 2008
|
|
/s/
Hong Li
|
|
|
Hong
Li
|
|
|
|
Director
|
|
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7 –
F- 23
|
The
Board of Directors and Stockholders
NF
Energy Saving Corporation of America
We
have
audited the accompanying consolidated balance sheets of NF Energy Saving
Corporation of America and its subsidiaries (“the Company”) as of December 31,
2007 and 2006, and the related consolidated statements of operations and
comprehensive income, cash flows and stockholders’ equity for the years ended
December 31, 2007 and 2006. These financial statements are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NF Energy Saving Corporation
of America and its subsidiaries as of December 31, 2007 and 2006, and the
results of operations and cash flows for the years ended December 31, 2007
and
2006, in conformity with accounting principles generally accepted in the United
States of America.
|
Zhong
Yi (Hong Kong) C.P.A. Company Limited
|
Hong
Kong, China
March
28,
2008
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
AS
OF DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
2007
|
2006
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,240,901
|
$
|
796,944
|
|||
|
Accounts
receivable, trade
|
4,061,352
|
1,398,031
|
|||||
|
Inventories
|
1,448,386
|
1,812,184
|
|||||
|
Prepayments
and other receivables
|
605,989
|
276,864
|
|||||
|
Total
current assets
|
8,356,628
|
4,284,023
|
|||||
|
Plant
and equipment, net
|
2,514,795
|
2,195,512
|
|||||
|
TOTAL
ASSETS
|
$
|
10,871,423
|
$
|
6,479,535
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable, trade
|
$
|
1,259,081
|
$
|
676,898
|
|||
|
Customer
deposits
|
22,719
|
17,661
|
|||||
|
Income
tax payable
|
-
|
378,069
|
|||||
|
Value
added tax payable
|
70,604
|
25,871
|
|||||
|
Other
payables and accrued liabilities
|
355,390
|
153,256
|
|||||
|
Total
current liabilities
|
1,707,794
|
1,251,755
|
|||||
|
Stockholders’
equity:
|
|||||||
|
Common
stock, $0.001 par value; 50,000,000 shares authorized; issued
and
outstanding: 33,227,328 and 30,527,328 shares as of December
31, 2007 and
2006
|
33,227
|
30,527
|
|||||
|
Additional
paid-in capital
|
5,713,232
|
4,335,932
|
|||||
|
Statutory
reserve
|
517,774
|
115,139
|
|||||
|
Accumulated
other comprehensive income
|
557,503
|
70,360
|
|||||
|
Retained
earnings
|
2,341,893
|
675,822
|
|||||
|
Total
stockholders’ equity
|
9,163,629
|
5,227,780
|
|||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
10,871,423
|
$
|
6,479,535
|
|||
See
accompanying notes to consolidated financial statements.
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
Years
ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
OPERATING
REVENUE:
|
|||||||
|
Products
|
$
|
6,224,114
|
$
|
4,787,915
|
|||
|
Service
|
2,037,053
|
481,098
|
|||||
|
Projects
|
2,075,282
|
-
|
|||||
|
Total
operating revenues
|
10,336,449
|
5,269,013
|
|||||
|
COST
OF REVENUES:
|
|||||||
|
Cost
of products
|
4,398,433
|
3,597,911
|
|||||
|
Cost
of service
|
1,530,116
|
229,915
|
|||||
|
Cost
of projects
|
1,035,691
|
-
|
|||||
|
Total
cost of revenues
|
6,964,240
|
3,827,826
|
|||||
|
GROSS
PROFIT
|
3,372,209
|
1,441,187
|
|||||
|
OPERATING
EXPENSES:
|
|||||||
|
Consulting
and professional fee
|
75,593
|
79,183
|
|||||
|
Sales
and marketing
|
36,092
|
-
|
|||||
|
Research
and development
|
370,633
|
-
|
|||||
|
General
and administrative
|
836,421
|
210,078
|
|||||
|
Total
operating expenses
|
1,318,739
|
289,261
|
|||||
|
INCOME
FROM OPERATIONS
|
2,053,470
|
1,151,926
|
|||||
|
OTHER
INCOME:
|
|||||||
|
Interest
income
|
5,127
|
1,623
|
|||||
|
Other
income
|
10,109
|
15,481
|
|||||
|
Total
other income
|
15,236
|
17,104
|
|||||
|
INCOME
BEFORE INCOME TAXES
|
2,068,706
|
1,169,030
|
|||||
|
Income
tax expenses
|
-
|
(378,069
|
)
|
||||
|
NET
INCOME
|
$
|
2,068,706
|
$
|
790,961
|
|||
|
Other
comprehensive income:
|
|||||||
|
-
Foreign currency translation gain
|
487,143
|
70,360
|
|||||
|
COMPREHENSIVE
INCOME
|
$
|
2,555,849
|
$
|
861,321
|
|||
|
Net
income per share – Basic and diluted
|
$
|
0.06
|
$
|
0.20
|
|||
|
Weighted
average number of shares outstanding during the year – Basic and
diluted
|
32,081,217
|
3,877,328
|
|||||
See
accompanying notes to consolidated financial statements.
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
Years
ended December 31,
|
|
||||||
|
|
|
2007
|
|
2006
|
|||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
2,068,706
|
$
|
790,961
|
|||
|
Adjustments
to reconcile net income to net cash used in operating
activities
|
|||||||
|
Depreciation
|
270,188
|
188,613
|
|||||
|
Gain
on disposal of plant and equipment
|
(7,732
|
)
|
-
|
||||
|
Shares
issued for service rendered, non-cash
|
510,000
|
-
|
|||||
|
Change
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(2,483,442
|
)
|
(1,398,031
|
)
|
|||
|
Inventories
|
471,229
|
(1,812,184
|
)
|
||||
|
Prepayments
and other receivables
|
(278,349
|
)
|
(276,864
|
)
|
|||
|
Accounts
payable
|
518,395
|
676,898
|
|||||
|
Customer
deposits
|
3,727
|
17,661
|
|||||
|
Income
tax payable
|
(396,900
|
)
|
378,069
|
||||
|
Value
added tax payable
|
41,554
|
25,871
|
|||||
|
Other
payables and accrued liabilities
|
59,219
|
153,256
|
|||||
|
Net
cash provided by (used in) operating activities
|
776,595
|
(1,255,750
|
)
|
||||
|
Cash
flows from investing activities:
|
|||||||
|
Purchase
of plant and equipment
|
(399,757
|
)
|
(16,125
|
)
|
|||
|
Proceeds
from disposal of plant and equipment
|
80,461
|
-
|
|||||
|
Net
cash used in investing activities
|
(319,296
|
)
|
(16,125
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from private placement
|
870,000
|
-
|
|||||
|
Proceeds
from and additions to shareholder loans
|
-
|
1,872,159
|
|||||
|
Capital
contribution from stockholders
|
-
|
124,370
|
|||||
|
Net
cash provided by financing activities
|
870,000
|
1,996,529
|
|||||
|
Foreign
currency translation adjustment
|
116,658
|
70,360
|
|||||
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
1,443,957
|
795,014
|
|||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
796,944
|
1,930
|
|||||
|
|
|||||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$
|
2,240,901
|
$
|
796,944
|
|||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|||||||
|
Cash
paid for income taxes
|
$
|
396,900
|
$
|
-
|
|||
|
Cash
paid for interest expenses
|
$
|
-
|
$
|
-
|
|||
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH TRANSACTIONS:
|
|||||||
|
Plant
and equipment in exchange for loan due to owners
|
$
|
-
|
$
|
2,237,001
|
|||
|
Conversion
of debt-to-equity
|
$
|
-
|
$
|
4,240,506
|
|||
See
accompanying notes to consolidated financial statements.
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
Common stock
|
|
|||||||||||||||||||||
|
No. of shares
|
Amount
|
Additional
paid-in capital
|
|
Accumulated
other
comprehensive
income
|
|
Statutory
reserve
|
|
Retained
earnings
|
|
Total
stockholders’ equity |
||||||||||||
|
Balance
as of January 1, 2006
|
1,427,328
|
$
|
1,427
|
$
|
2,040,885
|
$
|
-
|
$
|
-
|
$
|
(2,040,729
|
)
|
$
|
1,583
|
||||||||
|
Issuance
of new shares in reverse acquisition
|
12,000,000
|
12,000
|
112,370
|
-
|
-
|
-
|
124,370
|
|||||||||||||||
|
Recapitalization
|
-
|
-
|
(2,040,729
|
)
|
-
|
-
|
2,040,729
|
-
|
||||||||||||||
|
Conversion
of debt-to-equity
|
17,100,000
|
17,100
|
4,223,406
|
-
|
-
|
-
|
4,240,506
|
|||||||||||||||
|
Foreign
currency transactions adjustment
|
-
|
-
|
-
|
70,360
|
-
|
-
|
70,360
|
|||||||||||||||
|
Net
income for the year
|
-
|
-
|
-
|
-
|
-
|
790,961
|
790,961
|
|||||||||||||||
|
Transfer
of retained earnings to statutory reserve
|
-
|
-
|
-
|
-
|
115,139
|
(115,139
|
)
|
-
|
||||||||||||||
|
Balance
as of December 31, 2006
|
30,527,328
|
$
|
30,527
|
$
|
4,335,932
|
$
|
70,360
|
$
|
115,139
|
$
|
675,822
|
$
|
5,227,780
|
|||||||||
|
Shares
issued for service rendered
|
1,000,000
|
1,000
|
509,000
|
-
|
-
|
-
|
510,000
|
|||||||||||||||
|
Shares
issued for private placement
|
1,700,000
|
1,700
|
868,300
|
-
|
-
|
-
|
870,000
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
487,143
|
-
|
-
|
487,143
|
|||||||||||||||
|
Net
income for the year
|
-
|
-
|
-
|
-
|
-
|
2,068,706
|
2,068,706
|
|||||||||||||||
|
Transfer
of retained earnings to statutory reserve
|
-
|
-
|
-
|
-
|
402,635
|
(402,635
|
)
|
-
|
||||||||||||||
|
|
||||||||||||||||||||||
|
Balance
as of December 31, 2007
|
33,227,328
|
$
|
33,227
|
$
|
5,713,232
|
$
|
557,503
|
$
|
517,774
|
$
|
2,341,893
|
$
|
9,163,629
|
|||||||||
See
accompanying notes to consolidated financial statements.
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
| NOTE - 1 |
ORGANIZATION
AND BUSINESS BACKGROUND
|
NF
Energy
Saving Corporation of America (formerly Diagnostic Corporation of
America)
(the
“Company” or “NFES”) 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 further changed its name to “NF Energy Saving Corporation of
America.”
The
Company, through its subsidiaries, mainly engages in the production of
industrial valve components and products in the PRC. During 2007, the Company
commenced a new business segment in the provision of technical service and
re-engineering projects in the energy saving related industry in the
PRC.
On
November 30, 2006, NFES completed a stock exchange transaction with the equity
owners of Liaoning Neng Fa Weiye Pipe Network Construction and Operation
Co.
Ltd. (“Neng Fa”), whereby 12,000,000 shares of the Company’s common stock were
issued to the equity owners of Neng Fa in exchange for 100% of the equity
ownership in Neng Fa. Neng Fa was organized and existing under the laws of
the
Peoples’ Republic of China (the “PRC”) on February 8, 2006 and Mr. Li owns 60%
of Neng Fa. As a result of the stock exchange, the former
owners of Neng Fa own 89.4% of the issued and outstanding
shares of the Company.
The
stock
exchange transaction has been accounted for as a reverse acquisition and
recapitalization of the Company whereby Neng Fa is deemed to be the accounting
acquirer (legal acquiree) and the Company to be the accounting acquiree (legal
acquirer). The accompanying consolidated financial statements are in substance
those of Neng Fa, with the assets and liabilities, and revenues and expenses,
of
the Company being included effective from the date of stock exchange
transaction. The Company is deemed to be a continuation of the business of
Neng
Fa.
Neng
Fa
is a valves manufacturer and involves in the production of a variety of
industrial valve components, which are widely used in water supply and sewage
system, coal and gas fields, power generation stations, petroleum and chemistry
industries. All the customers are located in the PRC.
On
September 5, 2007, the Company, through Neng Fa has established a new
subsidiary, Liaoning Nengfa Weiye Tie Fa Sales Co., Ltd. (“Sales Company”) in
the PRC with a registered capital of $683,620 (equivalent to RMB 5,000,000).
Sales Company was incorporated as a limited liability company under the laws
of
the PRC and mainly conducts the sales and marketing of valves products in
the
PRC.
NFES,
Neng Fa and Sales Company are hereinafter referred to as (the
“Company”).
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
| NOTE - 2 |
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
| l |
Basis
of presentation
|
These
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.
| l |
Use
of estimates
|
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 period reported. Actual
results may differ from these estimates.
| l |
Basis
of consolidation
|
The
consolidated financial statements include the financial statements of NFES
and
its subsidiaries, Neng Fa and Sales Company.
All
significant inter-company balances and transactions within the Company have
been
eliminated upon consolidation.
| l |
Cash
and cash equivalents
|
Cash
and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
| l |
Accounts
receivable
|
Accounts
receivable are recorded at the invoiced amount and do not bear interest.
The
Company extends unsecured credit to its customers in the ordinary course
of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customer’s current
credit worthiness and the economic environment. As of December 31, 2007 and
2006, the Company has determined that no allowance for doubtful accounts
is
necessary.
| l |
Inventories
|
Inventories
are stated at the lower of cost or market (net realizable value), cost being
determined on a weighted average method. Costs include material, labor and
manufacturing overhead costs. The Company quarterly reviews historical sales
activity to determine excess, slow moving items and potentially obsolete
items
and also evaluates the impact of any anticipated changes in future demand.
The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of December 31, 2007 and 2006,
the
Company did not record an allowance for obsolete inventories, nor have there
been any write-offs.
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
| l |
Plant
and equipment, net
|
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:
|
Depreciable life
|
Residual value
|
||||||
|
Plant
and machinery
|
3
– 20 years
|
5%
|
|
||||
|
Furniture,
fixture and equipment
|
5
– 8 years
|
5%
|
|
||||
Expenditure
for repairs and maintenance is expensed as incurred. When assets have 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.
| l |
Construction
in progress
|
Construction
in progress includes design and construction costs of melting facilities.
Interest incurred during the period of construction has not been capitalized
as
such amounts are considered to be immaterial at this time. Construction in
progress is not depreciated until such time as the assets are completed and
put
into operational use.
| l |
Impairment
of long-lived assets
|
In
accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets”,
all
long-lived assets such as 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 assets to estimated discounted net cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the impairment
to
be recognized is measured by the amount by which the carrying amounts of
the
assets exceed the fair value of the assets. There has been no impairment
as of
December 31, 2007 or 2006.
| l |
Revenue
recognition
|
In
accordance with the SEC’s Staff Accounting Bulletin No. 104, “Revenue
Recognition”,
the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling
price
is fixed or determinable and collectibility is reasonably assured.
| (a) |
Sale
of products
|
The
Company derives revenues from the sale of self-manufactured products and
provision of engineering services. The Company recognizes its revenues net
of
related business taxes and value added taxes (“VAT”). The Company is subject to
VAT which is levied on the majority of the products of Neng Fa at the rate
of
17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition
to the invoiced value of purchases to the extent not refunded for export
sales.
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
The
Company recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced
no
product returns and has recorded no reserve for sales returns for the years
ended December 31, 2007 and 2006.
| (b) |
Service
revenue
|
Service
revenue is primarily derived from energy-saving technical services that are
not
an element of an arrangement for the sale of products. These services are
generally billed on a time-cost plus basis. Revenue is recognized when service
is rendered and accepted by the customers.
| (c) |
Project
revenue
|
The
Company applies the percentage-of-completion method under SOP 81-1 “Accounting
for Performance of Construction-Type and Production-Type
Contracts”,
to
recognize revenues for energy-saving re-engineering projects that require
significant modification or customization or installation subject to the
customers. The Company records a provision in those instances in which the
Company believes a contract will probably generate a net loss and the Company
can reasonably estimate this loss. If the Company cannot reasonably estimate
the
loss, the Company limits the amount of revenue that the Company recognizes
to
the costs the Company has incurred, until the Company can estimate the total
loss. Advance payments from customers and amounts billed to clients in excess
of
revenue recognized are recorded as receipt in advance. As of December 31,
2007,
all projects were completed and their project revenues were fully
recognized.
| (d) |
Interest
income
|
Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.
| l |
Cost
of revenues
|
Cost
of
revenues consists primarily of material costs, direct labor, depreciation
and
manufacturing overheads, which are directly attributable to the manufacture
of
products and the rendering of services.
| l |
Advertising
costs
|
The
Company expenses advertising costs as incurred in accordance with SOP 93-7
“Reporting
for Advertising Costs”.
No
advertising expense was incurred for the years ended December 31, 2007 and
2006.
| l |
Research
and development
|
Research
and development costs are expensed when incurred in the development of new
products or processes including significant improvements and refinements
of
existing products. Such costs mainly relate to labor and material cost. The
Company incurred $370,633 and $0 of such costs for the years ended December
31,
2007 and 2006.
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
| l |
Stock-based
compensation
|
The
Company adopts SFAS No. 123 (revised 2004), "Share-Based
Payment"
("SFAS
No. 123R") using the fair value method. Under
SFAS No. 123(R), the stock-based compensation is measured using the
Black-Scholes Option-Pricing model on the date of grant. The fair value of
stock-based compensation that are expected to vest are recognized using the
straight-line method over the requisite service period.
| l |
Retirement
plan costs
|
Contributions
to retirement schemes (which are defined contribution plans) are charged
to
general and administrative expenses in the consolidated statements of operations
and comprehensive income as and when the related employee service is
provided.
| l |
Income
taxes
|
The
Company also accounts for income tax using SFAS No. 109 “Accounting
for Income Taxes”,
which
requires the asset and liability approach for financial accounting and reporting
for income taxes. Under this approach, deferred income taxes are provided
for
the estimated future tax effects attributable to temporary differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery or
reversal and the effect from a change in tax rates is recognized in the
consolidated statement of operations and comprehensive income in the period
of
enactment. A valuation allowance is provided to reduce the amount of deferred
tax assets if it is considered more likely than not that some portion of,
or all
of the deferred tax assets will not be realized.
The
Company also adopts the provisions of the Financial Accounting Standards
Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes” (“FIN
48”).
FIN 48
prescribes a recognition threshold and measurement process for recording
in the
financial statements uncertain tax positions taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transitions. The adoption of FIN 48 did not have a significant impact on
the
Company’s consolidated financial statements.
The
Company conducts major 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 the foreign tax
authority.
| l |
Net
income per share
|
The
Company calculates net (loss) income per share in accordance with SFAS No.
128,“Earnings
per Share.”
Basic
(loss) income per share is computed by dividing the net (loss) income by
the
weighted-average number of common shares outstanding during the period. Diluted
(loss) income per share is computed similar to basic (loss) income per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common stock
equivalents had been issued and if the additional common shares were
dilutive.
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
| l |
Comprehensive
income
|
SFAS
No.
130, “Reporting
Comprehensive Income”,
establishes standards for reporting and display of comprehensive income,
its
components and accumulated balances. Comprehensive income as defined includes
all changes in equity during a period from non-owner sources. Accumulated
comprehensive income consists of changes in unrealized gains and losses on
foreign currency translation. This comprehensive income is not included in
the
computation of income tax expense or benefit.
| l |
Product
warranty
|
Under
the
terms of the contracts, the Company will provide a product warranty to its
customers for a period of twelve months, free of charge and then at the
discretion of the customers, enter into maintenance contracts. The Company
has
not experienced any material returns where it was under obligation to honor
this
standard warranty provision. As such, no reserve for product warranty has
been
provided in the consolidated statement of operations for the years ended
December 31, 2007 and 2006.
| l |
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated
into
the functional currency at the exchange rates prevailing at the dates of
the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency
using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statement of
operations.
The
reporting currency of the Company is the United States dollars ("US$"). The
Company's subsidiaries in the PRC, Neng Fa and Sales Company maintain their
books and records in its local currency, the Renminbi (“RMB”), which is
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 dollars are translated
into
US dollars, in accordance with SFAS No. 52, “Foreign
Currency Translation”,
using
the exchange rate on the balance sheet date. Revenues and expenses are
translated at average rates prevailing during the period. The gains and losses
resulting from translation of financial statements of foreign subsidiaries
are
recorded as a separate component of accumulated other comprehensive income
within the statement of stockholders’ equity.
Translation
of amounts from RMB into US$ has been made at the following exchange rates
for
the respective year:
|
2007
|
2006
|
||||||
|
Months
end RMB:US$ exchange rate
|
7.3141
|
7.9051
|
|||||
|
Average
monthly RMB:US$ exchange rate
|
7.5633
|
7.9913
|
|||||
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
| l |
Related
parties
|
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
operating decisions. Companies are also considered to be related if they
are
subject to common control or common significant influence.
| l |
Segment
reporting
|
SFAS
No.
131 “Disclosures
about Segments of an Enterprise and Related Information”
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
the financial statements. Neng Fa currently operates in two reportable business
segments in Tieling City, Liaoning Province, the PRC:
Valves
manufacturing business and Energy-saving related business (See Note
14).
| l |
Fair
value of financial instruments
|
The
Company values its financial instruments as required by SFAS No. 107,
“Disclosures
about Fair Value of Financial Instruments”.
The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. The
estimates presented herein are not necessarily indicative of amounts that
the
Company could realize in a current market exchange.
The
Company’s financial instruments primarily include cash and cash equivalents,
accounts receivable, inventories, prepayments and other receivables, accounts
payable, customer deposits, income tax payables, value added tax payables,
other
payables and accrued liabilities.
As
of the
balance sheet date, the estimated fair values of financial instruments were
not
materially different from their carrying values as presented due to short
maturities of these instruments.
| l |
Recently
issued accounting
pronouncements
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or
the
results of its operations.
In
September 2006, the FASB issued SFAS No. 157, "Fair
Value Measurements" ("SFAS
No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles ("GAAP"),
and
expands disclosures about fair value measurements. This statement applies
under
other accounting pronouncements that require or permit fair value measurement
where the FASB has previously determined that under those pronouncements
fair
value is the appropriate measurement. This statement does not require any
new
fair value measurements but may require companies to change current practice.
This statement is effective for those fiscal years beginning after November
15,
2007 and to the interim periods within those fiscal years. The Company believes
that SFAS No. 157 should not have a material impact on the consolidated
financial position or results of operations
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
In
September 2006, the FASB issued SFAS No. 158, ‘‘Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132(R )’’
(‘‘SFAS No. 158’’). This statement improves financial reporting by requiring an
employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multi-employer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income
of a
business entity or changes in unrestricted net assets for a not-for-profit
organization. This statement also improves financial reporting by requiring
an
employer to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. The Company does
not
believe that this new pronouncement will have a material impact on its
consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, "The
Fair Value Option for Financial Assets and Financial Liabilities"
("SFAS
No. 159"). SFAS No. 159 permits entities to choose to measure, on an
item-by-item basis, specified financial instruments
and certain other items at fair value. Unrealized gains and losses on items
for
which the fair value option has been elected are required to be reported
in
earnings at each reporting date. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007, the provisions of which are required to
be
applied prospectively. The Company believes that SFAS 159 should not have
a
material impact on the consolidated financial position or results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations", or
SFAS
No. 141R. SFAS No. 141R will change the accounting for business combinations.
Under SFAS No. 141R, an acquiring entity will be required to recognize all
the
assets acquired and liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS No. 141R will change the accounting
treatment and disclosure for certain specific items in a business combination.
SFAS No. 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Accordingly, any business
combinations the Company engages in will be recorded and disclosed following
existing GAAP until January 1, 2009. The Company expects SFAS No. 141R will
have
an impact on accounting for business combinations once adopted but the effect
is
dependent upon acquisitions at that time. The Company is still assessing
the
impact of this pronouncement.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements--An Amendment of ARB No. 51,
or
SFAS No. 160".
SFAS
No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. The Company believes that SFAS 160 should not have a material
impact on the consolidated financial position or results of
operations.
| NOTE - 3 |
ACCOUNTS
RECEIVABLE, TRADE
|
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, management has determined
that
no allowance for doubtful accounts is required for the years ended December
31,
2007 and 2006.
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
| NOTE - 4 |
INVENTORIES
|
Inventories
consisted of the following:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Raw
materials
|
$
|
310,040
|
$
|
269,759
|
|||
|
Work-in-process
|
734,711
|
701,206
|
|||||
|
Finished
goods
|
403,635
|
841,219
|
|||||
|
$
|
1,448,386
|
$
|
1,812,184
|
||||
For
the
years ended December 31, 2007 and 2006, no allowance for obsolete inventories
was recorded by the Company.
| NOTE - 5 |
PREPAYMENTS
AND OTHER RECEIVABLES
|
Prepayments
and other receivables consisted of the following:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Prepayment
to vendors for raw materials
|
$
|
558,047
|
$
|
-
|
|||
|
Prepayment
to equipment vendors
|
-
|
266,183
|
|||||
|
Prepaid
expenses
|
25,874
|
-
|
|||||
|
Value
added tax receivable
|
12,537
|
-
|
|||||
|
Advances
to staff
|
9,531
|
10,681
|
|||||
|
$
|
605,989
|
$
|
276,864
|
||||
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
| NOTE - 6 |
PLANT
AND EQUIPMENT, NET
|
Plant
and
equipment, net, consisted of the following:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Plant
and machinery
|
$
|
2,566,042
|
$
|
2,351,240
|
|||
|
Furniture,
fixture and equipment
|
33,968
|
32,885
|
|||||
|
Construction
in progress
|
223,029
|
-
|
|||||
|
Foreign
translation difference
|
162,460
|
-
|
|||||
|
2,985,499
|
2,384,125
|
||||||
|
Less:
accumulated depreciation
|
(448,981
|
)
|
(188,613
|
)
|
|||
|
Less:
foreign translation difference
|
(21,723
|
)
|
-
|
||||
|
Plant
and equipment, net
|
$
|
2,514,795
|
$
|
2,195,512
|
|||
Depreciation
expense for the years ended December 31, 2007 and 2006 were $270,188 and
$188,613, respectively.
| NOTE - 7 |
OTHER
PAYABLES AND ACCRUED
LIABILITIES
|
Other
payables and accrued liabilities consisted of following:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Rent
payable
|
$
|
37,599
|
$
|
35,200
|
|||
|
Government
levies payable
|
-
|
7,295
|
|||||
|
Welfare
payable
|
108,125
|
59,495
|
|||||
|
Accrued
expenses
|
74,576
|
51,266
|
|||||
|
Payable
to equipment vendors
|
135,090
|
-
|
|||||
|
$
|
355,390
|
$
|
153,256
|
||||
| NOTE - 8 |
INCOME
TAXES
|
The
Company is registered in the United States of America and has operations
in two
tax jurisdictions: the United States of America and the PRC. The operation
in
the United States of America has incurred net operating losses for income
tax
purposes. The Company generated substantially its net income from the operation
of its subsidiaries in the PRC and is subject to the PRC tax
jurisdiction.
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
The
components of income before income taxes separating U.S. and PRC tax
jurisdictions are as follows:
|
Years
ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Tax
jurisdictions:
|
|||||||
|
Loss
subject to U.S. operation
|
$
|
(574,989
|
)
|
$
|
(9,662
|
)
|
|
|
Income
subject to the PRC operation
|
2,643,695
|
1,178,692
|
|||||
|
Income
before income taxes
|
$
|
2,068,706
|
$
|
1,169,030
|
|||
United
States of America
NFES
is
registered in the State of Delaware
and is
subject to the tax laws of United States of America.
As
of
December 31, 2007, the operation in the United States of America incurred
$574,989 of net operating losses available for federal tax purposes, which
are
available to offset future taxable income. The net operating loss carry forwards
begin to expire in 2028, if unutilized. The Company has provided for a full
valuation allowance against the deferred tax assets of $217,720 on the expected
future tax benefits from the net operating loss carryforwards as the management
believes it is more likely than not that these assets will not be realized
in
the future.
The
PRC
The
Company's subsidiaries operating in the PRC, Neng Fa and Sales Company are
subject
to the Corporate Income Tax governed by the Income Tax Law of the People’s
Republic of China, at a statutory rate of 33%, which is comprised of a 30%
national income tax and 3% local income tax.
During
2007, the Tieling city local government tax bureau in the PRC approved Neng
Fa
as a foreign investment enterprise. Hence, retroactively effective from January
1, 2007, Neng Fa is entitled to a two-year exemption from corporate income
tax
and a reduced corporate income tax rate of 15% for the following three years.
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT
Law,
among
other things, imposes a unified income tax rate of 25% for both domestic
and
foreign invested enterprises with
effect from January 1,
2008.
Sales Company will be entitled to the tax rate reduction from 33% to 25%
that
may impact the carrying value of deferred tax assets as a result of new tax
rate. However, Neng Fa is considered a foreign invested enterprise and its
ultimate applicable effective tax rate in 2008 and beyond will depend on
many
factors, including but not limited to whether certain of its legal entity
will
be subject to a transitional policy under the Corporate Income Tax Law, whether
Neng Fa can continue to enjoy the unexpired tax holidays.
The
reconciliation of income tax rate to the effective income tax rate for the
years
ended December 31, 2007 and 2006 is as follows:
|
Years
ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Income
before income taxes from PRC operation
|
$
|
2,643,695
|
$
|
1,178,692
|
|||
|
Statutory
income tax rate
|
33
|
%
|
33
|
%
|
|||
|
872,419
|
388,968
|
||||||
|
Effect
from tax holiday
|
(859,327
|
)
|
-
|
||||
|
Tax
effect of expenses not deductible for tax purposes:
|
|||||||
|
-
Provisions
|
(13,092
|
)
|
(10,899
|
)
|
|||
|
Income
tax expense
|
$
|
-
|
$
|
378,069
|
|||
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
For
the
PRC operation, its effective income tax rate for the years ended December
31,
2007 and 2006 was 0% and 32%, respectively.
The
following table sets forth the significant components of the aggregate deferred
tax assets of the Company as of December 31, 2007 and 2006:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Deferred
tax assets:
|
|||||||
|
-
Net operating loss carried forward
|
$
|
204,628
|
$
|
3,382
|
|||
|
-
Accrued liabilities
|
13,092
|
10,899
|
|||||
|
|
|
217,720
|
14,281
|
||||
|
Less:
valuation allowance
|
(217,720
|
)
|
(14,281
|
)
|
|||
|
Deferred
tax assets
|
$
|
-
|
$
|
-
|
|||
| NOTE - 9 |
NET
INCOME PER SHARE
|
Basic
net
income per share is computed using the weighted average number of the ordinary
shares outstanding during the year. Diluted net income per share is computed
using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year. Pursuant to stock exchange transaction
on November 30, 2006, the weighted average number of common shares issued and
outstanding was adjusted to account for the effects of the stock exchange
transaction as a reverse acquisition.
The
following table sets forth the computation of basic and diluted net income
per
share for the years ended December 31, 2007 and 2006:
|
Years
ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Basis
and diluted net income per share calculation
|
|||||||
|
Numerator:
|
|||||||
|
-
Net income in computing basic and diluted net income per
share
|
$
|
2,068,706
|
$
|
790,961
|
|||
|
Denominator:
|
|||||||
|
-
Weighted average ordinary shares outstanding
|
29,381,217
|
2,181,365
|
|||||
|
-
Stock issued for debt-to-equity conversion
|
-
|
1,695,963
|
|||||
|
-
Stock issued for private placement
|
1,700,000
|
-
|
|||||
|
-
Stock issued for service rendered
|
1,000,000
|
-
|
|||||
|
Shares
used in computing basic and diluted net income per share
|
32,081,217
|
3,877,328
|
|||||
|
Basic
and diluted net income per share
|
$
|
0.06
|
$
|
0.20
|
|||
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
| NOTE - 10 |
STOCK-BASED
COMPENSATION
|
On
January 26, 2007, the Company issued 1,000,000 restricted shares of common
stock
for business advisory services to Greentree Financial Group, Inc. The fair
value
of this restricted stock issuance was determined using the fair value of the
Company’s common stock on the grant date, at
a
quoted stock price of $0.51 per share. The
Company recognized a stock-based compensation cost of $510,000 at its fair
value
for the year ended December 31, 2007.
| NOTE - 11 |
CAPITAL
TRANSACTION
|
On
April
11, 2007, the Company entered into a Subscription and Stock Purchase Agreement
with Mr Li Gang ("Mr. Li"), a citizen of the PRC, to consummate a private sale
of 1,700,000 shares of its common stock (“the Shares”) for an aggregate purchase
price of $870,000 at a price of $0.51 per share. The proceeds of this private
placement were used to fund the business expansion. These shares were fully
issued on August 17, 2007.
As
a
result of this transaction, Mr. Li owns approximately 60.2% of the issued and
outstanding shares of the Company’s common stock.
| NOTE - 12 |
CHINA
CONTRIBUTION PLAN
|
Under
the
PRC Law, full-time employees of its subsidiaries in the PRC, Neng Fa and Sales
Company are entitled to staff welfare benefits including medical care, welfare
subsidies, unemployment insurance and pension benefits through a China
government-mandated multi-employer defined contribution plan. Neng Fa and Sales
Company are required to accrue for these benefits based on certain percentages
of the employees’ salaries. The total contributions made for such employee
benefits were $129,923 and $85,288 for the years ended December 31, 2007 and
2006, respectively.
| NOTE - 13 |
STATUTORY
RESERVES
|
Under
the
PRC Law the Company’s subsidiaries, Neng Fa and Sales Company are required to
make appropriations to the statutory reserve based on after-tax net earnings
and
determined in accordance with generally accepted accounting principles of the
People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory
reserve should be at least 10% of the after-tax net income until the reserve
is
equal to 50% of the registered capital. The statutory reserve is established
for
the purpose of providing employee facilities and other collective benefits
to
the employees and is non-distributable other than in liquidation.
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
For
the
years ended December 31, 2007 and 2006, the Company’s subsidiaries contributed
$402,635 and $115,139 to statutory reserve, respectively.
| NOTE - 14 |
SEGMENT
INFORMATION
|
The
Company’s business units have been aggregated into two reportable segments:
Valves manufacturing business and Energy-saving related business. Valves
manufacturing business included the production
of valves components and provision of valve improvement and engineering
services.
Energy-saving related business included the provision of energy-saving related
re-engineering and technical services and long-term construction project. The
Company operates these segments in the PRC and all of the identifiable assets
of
the Company are located in the PRC during the periods presented.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 2). The Company had no
inter-segment sales for the years ended December 31, 2007 and 2006. The
Company’s reportable segments are strategic business units that offer different
products and services. They are managed separately because each business
requires different technology and marketing strategies.
Summarized
financial information concerning the Company’s reportable segments is shown in
the following table for the year ended December 31, 2007:
|
Valves
manufacturing business
|
Energy-saving
related business
|
Total
|
||||||||
|
Operating
revenues
|
||||||||||
|
-
Products
|
$
|
6,224,114
|
$
|
-
|
$
|
6,224,114
|
||||
|
-
Services
|
-
|
2,037,053
|
2,037,053
|
|||||||
|
-
Projects
|
-
|
2,075,282
|
2,075,282
|
|||||||
|
Total
operating revenues
|
6,224,114
|
4,112,335
|
10,336,449
|
|||||||
|
Cost
of revenues
|
(4,398,433
|
)
|
(2,565,807
|
)
|
(6,964,240
|
)
|
||||
|
Gross
profit
|
1,825,681
|
1,546,528
|
3,372,209
|
|||||||
|
Depreciation
|
170,644
|
99,544
|
270,188
|
|||||||
|
Net
income
|
893,318
|
1,175,388
|
2,068,706
|
|||||||
|
Long-lived
assets
|
1,588,279
|
926,516
|
2,514,795
|
|||||||
|
Capital
expenditure
|
$
|
252,476
|
$
|
147,281
|
$
|
399,757
|
||||
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
Summarized financial information concerning the Company’s reportable segments is shown in the following table for the year ended December 31, 2006:
|
Valves
manufacturing business
|
Energy-saving
related business
|
Total
|
||||||||
|
Operating
revenues
|
||||||||||
|
-
Products
|
$
|
4,787,915
|
$
|
-
|
$
|
4,787,915
|
||||
|
-
Services
|
-
|
481,098
|
481,098
|
|||||||
|
Total
operating revenues
|
4,787,915
|
481,098
|
5,269,013
|
|||||||
|
Cost
of revenues
|
(3,597,911
|
)
|
(229,915
|
)
|
(3,827,826
|
)
|
||||
|
Gross
profit
|
1,190,004
|
251,183
|
1,441,187
|
|||||||
|
Depreciation
|
177,296
|
11,317
|
188,613
|
|||||||
|
Net
income
|
703,955
|
87,006
|
790,961
|
|||||||
|
Long-lived
assets
|
2,063,641
|
131,871
|
2,195,512
|
|||||||
|
Capital
expenditure
|
$
|
15,158
|
$
|
967
|
$
|
16,125
|
||||
For
the
year ended December 31, 2006, no operation in energy-saving related business
was
commenced.
| NOTE - 15 |
CONCENTRATION
AND RISK
|
| (a) |
Major
customers and vendors
|
For
the
years ended December 31, 2007 and 2006, 100% of the Company’s assets were
located in the PRC and 100% of the Company’s revenues and purchases were derived
from customers and vendors located in the PRC.
For
the
year ended December 31, 2007, customers and vendors who account for 10% or
more
of revenues and purchases are presented as follows:
|
Customers
|
Revenues
|
Percentage
of revenues
|
Accounts
receivable, trade
|
|||||||||
|
Customer
A
|
$
|
4,536,777
|
43
|
% |
$
|
1,351,567
|
||||||
|
Customer
B
|
1,113,225
|
11
|
% |
619,673
|
||||||||
|
Total:
|
$
|
5,650,002
|
54
|
% |
Total:
|
$
|
1,971,240
|
|||||
|
Vendors
|
Purchases
|
Percentage
of
purchases
|
Accounts
payable
|
|||||||||
|
Vendor
A
|
$
|
2,258,473
|
32
|
% |
$
|
45,542
|
||||||
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
For
the
year ended December 31, 2006, customers and vendors who account for 10% or
more
of revenues and purchases are presented as follows:
|
Customers
|
Revenues
|
Percentage
of revenues
|
Accounts
receivable, trade
|
|||||||||
|
Customer
A
|
$
|
2,971,183
|
56
|
% |
$
|
192,775
|
||||||
|
Customer
C
|
617,823
|
12
|
% |
141,992
|
||||||||
|
Customer
D
|
1,298,102
|
25
|
% |
958,721
|
||||||||
|
Total:
|
$
|
4,887,108
|
93
|
% |
Total:
|
$
|
1,293,488
|
|||||
|
Vendors
|
Purchases
|
Percentage
of purchases
|
Accounts
payable
|
|||||||||
|
|
||||||||||||
|
Vendor
A
|
$
|
2,277,489
|
59
|
% |
$
|
135,347
|
||||||
| (b) |
Credit
risk
|
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of trade accounts receivable. The Company
performs ongoing credit evaluations of its customers' financial condition,
but
does not require collateral to support such receivables.
| (c) |
Exchange
rate risk
|
The
reporting currency of the Company is the 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
the RMB
depreciates against the US$, the value of the RMB revenues and assets as
expressed in US$ financial statements will decline. The Company does not
hold
any derivative or other financial instruments that expose to substantial
market
risk.
| NOTE - 16 |
COMMITMENT
AND CONTINGENCIES
|
|
(a)
|
Operating
lease commitment
|
The
Company leased an office premise under a non-cancelable operating lease
agreement for a renewal period of one year, due February 9, 2009. The annual
lease payment is $39,665 (RMB 300,000).
NF
ENERGY SAVING CORPORATION OF AMERICA
(FORMERLY
DIAGNOSTIC CORPORATION OF AMERICA)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars
(“US$”))
|
(b)
|
Capital
commitment
|
As
of
December 31, 2007, the Company has contracted for purchase of equipment
amounting to $218,756 (RMB 1,600,000), of which $152,828 (RMB 1,117,800) was
paid to suppliers.
|
(c)
|
Litigation
|
On
May
21, 2007, a civil complaint Robert
Dawley vs NF Energy Saving Corp. of America, etal.
was
filed in the United States District Court, Middle District of Florida, Orlando,
Civil No. 6:07-cv-872-Orl-18DAB. The complaint faults the defendants in breach
of contract, which was signed by Sam Winer, former Chief Executive Officer,
before the commencement of reverse merger with the current subsidiary. The
case
was dismissed on August 13, 2007 without justice. On October 5, 2007 the
plaintiff filed addendum to complaint Case No. 6:07-cv-872-Orl-19DAB and the
case was authorized by court on November 16, 2007. The plaintiff charged the
Company with breach of contract since March 8, 2006 and sought a relief of
11,900,000 shares of common stock plus $60,000-$120,000 annual “consultant
income”.
On
March
5, 2008 the Company has filed a counterclaim against Dawley and Winer for
$2,000,000. It included charges of security fraud and breach of warranty by
Winer. The trial was scheduled for October, 2008. Counsel advised that the
October 2008 trial would probably be postponed because of the new issues raised
in the counterclaim.
The
Company plans to fight against the lawsuit aggressively. At this point, the
Company does not believe that the lawsuit would have a material impact on the
company.
| NOTE - 17 |
SUBSEQUENT
EVENTS
|
In
January 2008, the Company borrowed an aggregate of $2,000,000 on several dates,
equally from two independent parties (“the lenders”), for working capital
purposes. The loan was made on a demand basis with the term of interest free.
As
part of the understanding with respect to the loan, the two lenders and the
Company agreed to negotiate for the conversion of the principal amount of the
loan into common stock. Currently the negotiations contemplate conversion of
the
loan principal into an aggregate of 6,645,376 shares of common stock at a price
of $0.30096 per share. If the loan is not converted into common shares, the
Company will formalize the terms of the loan or repay it.
F-23