UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
or
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¨
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TRANSITION REPORT PURSUANT TO
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
(Exact
name of registrant as specified in its charter)
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Delaware
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02-0563302
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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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
(Registrant’s
Telephone Number, including area code)
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, $.001 par value per share
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act ¨ Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act ¨ Yes
x
No
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.
x
Yes ¨No
Indicate
by check mark if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K (229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this
Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “small
reporting company’ in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer ¨
Non-accelerated
filer ¨ (Do not check if a small reporting
company)Small reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.):
Yes ¨ No x
The
aggregate market value of the registrant’s common stock held by nonaffiliates of
the registrant was approximately $4,499,608 based on the price of $0.32 per
share which the registrant’s common stock was last sold on June 30,
2008.
As of
March 18, 2009 there were 39,872,704 shares of the registrant’s common stock
outstanding.
2
NF ENERGY
SAVING CORPORATION OF AMERICA
FORM
10-K
TABLE OF
CONTENTS
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3
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
The
discussion contained in this 10-K 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 of Financial Condition and Results of Operations" as well as those
discussed elsewhere in this Form 10-K. 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-K 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.
4
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., and
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 energy saving flow control equipment; 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:
5
Business
Description
Nengfa Energy 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 electric power,
petrochemical, coal, metallurgy, construction, and municipal infrastructure
development industries. We are also engaged in the manufacturing and sales of
the energy-saving flow control equipment. 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 Nengfa Energy 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”. This project
was completed and passed inspection in 2008. In 2008 our Company also
received flow control equipment contracts seven cities in Liaoning Province for
their large water supply system.
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 electric power, water power, petrochemical,
coal, metallurgy, construction, and municipal infrastructure development
industries and the manufacturing and sales of energy-saving flow control
equipment.
6
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.
7
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 flow control equipment
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 flow control
equipment.
The pipeline transport is one of the
five basic modes of transportation together with rail transport, road transport,
air transport and water transport. The water, the gas, the oil, the heat and the
wind highly rely on this transportation, therefore the pipeline or the pipe
network is called the energy highway. The key to the efficiency and energy
conservation in the pipeline transportation process is the valve and the flow
control equipment. Some experts consider the valve to be the blood vessel
monitor of the city and the industry. With unique technology in this field,
Nengfa Energy has already obtained seven patents, especially the bidirectional
seal zero revelation instalment with its special characteristics. This type of
installation will reduce energy consumption by 20% for customers and has
received favourable evaluations all over the world. It is widely used in the
fields of electric power, water power, petroleum, natural gas and etc. This
technology was awarded “Number One Energy Saving Value of China” by
the Chinese Energy Conservation Association. This product is exported to the
United States, Japan, South Korea, Vietnam, India, Iraq, and
Afghanistan.
In 2009 the Company will continue to
develop comprehensive energy conservation and emission reduction services, and
the research and development and manufacturing of wind power
equipment.
8
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. The Chinese government recently issued the Provisional
Measures for Administration of the Financial Reward Capital for the Innovation
of Energy-Saving Technology. The Chinese government will reward enterprises
according to the total savings from their energy-saving technology projects. The
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
businesses.
Nengfa Energy has successful experience
in energy project management in China. In 2009, 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, the
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 should 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 began to emphasize the following three business lines: the
production and sales of energy-saving valves, intelligent valves, and flow
control equipments; 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 electricity generation (large-scale
thermal power generation, hydroelectric power, wind power, and nuclear power),
oil supply (petroleum), gas supply (natural gas), water supply, and heat supply
industries. The revenues from our customers in the electricity generation and
oil, gas, water and heat supplies industries accounted for over 70% of our total
sales revenues. Our major customers are well-established corporations and their
business relates to citizen’s day to day living. These customers form a well
developed market with the potential for very steady growth for
us.
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Marketing
and Sales
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(1)
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Participate
in government organizations’ 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 in order 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
contracts.
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(3)
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Rely
on the marketing and after-sale service system which is formed by over
forty exclusive agents all over the country to obtain
contracts.
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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. We
source our materials locally. Nengfa Energy is located in Liaoning Province
which is China’s largest production base for iron and steel. We have a very
stable long term supply of raw materials. Since we are located close to the
supplies of raw materials, we have the price and transportation advantages. In
addition, through our advanced technology and our management of raw materials,
we are able to reduce the consumption of raw materials in production, thus
creating a larger gross profit.
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.
10
Competition
We have a
leading position in the flow control equipment production and energy saving
industry 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 manufacturing we plan to build our capabilities to meet
the tremendous needs in the wind power equipment and components market in
China.
Research
and Development
In 2007
and 2008, we engaged in research and development activities to study the
feasibility of using our existing facilities and equipment for the production of
wind power equipment. In 2007 and 2008, we also engaged in research and
development activities for the development of new products or processes
including significant improvements and refinements of existing products. The
Company incurred $111,030 and $370,633 of research and development costs for the
years ended December 31, 2008 and 2007, respectively.
Employees
As of December 31, 2008,
there were 210 employees including 26 management personnel
working in our subsidiaries located in China.
Other
Our
internet website address is http://www.nfenergy.com.
Through our website, we make available, free of charge, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and any amendments to those reports, proxy and registration
statements, and all of our insider Section 16 reports, as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission, or SEC. These SEC reports
can be accessed through the “Investors” section of our website.
Investors
should carefully consider the following risk factors, in addition to other
information included in this annual report, in evaluating NF Energy Corporation
of America and our business. If any of the following risks occur, our business,
financial condition and operating results could be materially adversely
affected.
Risk
Related to Our Business
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, especially in light of the current global
economic crises. 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.
11
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,
especially in light of the lack of credit and investment funds in the global
market due to the current global financial crises. 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.
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
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:
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·
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implement
and improve our operational, financial and other systems, procedures and
controls on a timely
basis; and
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·
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expand,
train and manage our workforce, particularly our sales and marketing and
support organizations.
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12
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.
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 50.1% 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 64.7% 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.
13
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
$10.50 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. During 2008, the trading
price of our common stock ranged from a low of $.04 per share to a high of $.55
per share. On March 20, 2009, the closing price of our common stock was $.08 per
share.
14
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 2008, 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.
15
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, 2008, 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.
16
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.
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.
None.
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 third 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.
17
On May
21, 2007, a civil complaint Robert Dawley vs NF Energy Saving
Corp. of America, et al. was filed in the United States District Court,
Middle District of Florida, Orlando, Civil No. 6:07-cv-872-Orl-18DAB. The
complaint accuses the defendants of breaching a contract for payment of money
that was signed by Sam Winer, former Chief Executive Officer, before the
commencement of the Company’s reverse merger with the current subsidiary. After
being initially dismissed by the Court, the action was authorized to proceed on
November 16, 2007. The trial was held in the United States District Court,
Middle District of Florida, Orlando on October 16, 2008. The District Court
issued a judgment on December 11, 2008 awarding the plaintiff the sum of
$400,000.00 against the Company, plus prejudgment interest in the amount of
$132,821.92, with continuing interest of $131.51 per day on the $400,000.00
obligation until it is paid. The Court further adjudged that the plaintiff shall
surrender his stock upon payment of the $400,000.00. In the event the plaintiff
fails to surrender his stock after payment, the Company may cancel the stock.
Any payments or collection under the judgment shall be credited first to
interest.
On
January 6, 2009, the Company filed a notice of appeal 09-10140-B in the United
States of Court of Appeals for the 11th Circuit
from the District Court’s judgment. The Company has engaged an attorney to
prosecute its appeal of the above judgment. The Company has also accrued an
adequate amount for this contingent liability on its balance sheet and has taken
a loss on litigation on the income statement this period. At this point, the
Company does not believe that the judgment would have a material impact on the
company.
None.
Market
information
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, 2008
and 2007 and for the periods indicated. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
|
Common Stock Price
|
||||||||
|
High
|
Low
|
|||||||
|
Fiscal
year ended December 31, 2008
|
||||||||
|
First
quarter
|
$ | 0.60 | $ | 0.11 | ||||
|
Second
quarter
|
$ | 0.35 | $ | 0.19 | ||||
|
Third
quarter
|
$ | 0.35 | $ | 0.27 | ||||
|
Fourth
quarter
|
$ | 0.34 | $ | 0.06 | ||||
|
Fiscal
year ended December 31, 2007
|
||||||||
|
First
quarter
|
$ | 0.51 | $ | 0.51 | ||||
|
Second
quarter
|
$ | 0.75 | $ | 0.51 | ||||
|
Third
quarter
|
$ | 0.51 | $ | 0.20 | ||||
|
Fourth
quarter
|
$ | 0.65 | $ | 0.25 | ||||
18
Holders
As of
March 20, 2009, we had 1,496 common shareholders of record.
Dividends
Since
inception of NFES, 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
Not
Applicable.
Purchases of
Equity Securities by the 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.
Not Applicable.
The following discussion should be read
in conjunction with our consolidated financial statements and the notes thereto
included elsewhere in this Report on Form 10-K. The discussion in this section
of this Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, those
discussed in “Risk Factors” and those discussed elsewhere in this Report on Form
10-K.
19
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
Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. On an on-going
basis, we evaluate our estimates and judgments, including those related to
revenue, receivable, inventory, and accrued expenses. We base our estimates on
historical experience, known trends and events and various other factors that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Changes in estimates
are recorded in the period in which they become known.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue
recognition
In
accordance with the 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.
20
|
(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 at the rate of 17% on the
invoiced value of 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, 2008 and 2007.
|
(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, 2008, 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, 2008 and
2007, 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 reviews historical sales activity
quarterly to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand. The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of December 31, 2008 and 2007, the
Company did not record an allowance for obsolete inventories, nor have there
been any write-offs.
21
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.
Income
taxes
The
Company 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 statement of operations and comprehensive (loss) 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.
Starting
from January 1, 2007, the Company also adopted Financial Accounting Standards
Board Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). FIN 48 prescribes a more likely than not
threshold for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods, and income tax disclosures. The Company did not have any adjustment to
the opening balance of retained earnings as of January 1, 2007 as a result of
the implementation of FIN 48. In accordance with FIN 48, the Company also
adopted the policy of recognizing interest and penalties, if any, related to
unrecognized tax positions as income tax expense. For the years ended December
31, 2008 and 2007, the Company did not have any interest and penalties
associated with tax positions. As of December 31, 2008 and 2007, the Company did
not have any significant unrecognized uncertain tax positions.
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.
22
RESULTS
OF OPERATIONS
Year
Ended December 31, 2008 compared to Year Ended December 31,
2007
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 $15,834,944 and $10,336,449 for the years ended December 31,
2008 and 2007, respectively. Total revenues increased $5,498,495, a 53%
increase, for the year ended December 31, 2008 compared to total revenues for
the year ended December 31, 2007.
In 2008,
the Chinese government announced more flexible monetary policies and financial
policies. The Chinese government will invest close to 4 trillion RMB to
stimulate domestic demand and has announced ten policies to promote growth. The
Chinese government plans to strongly expand policies for domestic projects on
civil engineering, basic infrastructure, constructions for environmental
protection and reconstruction to promote economic stability and growth. The
Chinese government’s policies to stimulate the Chinese economy by its spending
on basic infrastructure and constructions for environmental protection should
greatly benefit Nengfa Energy’s energy saving business which fits government
stimulus policies on building energy saving infrastructure for municipalities
and industrial companies. We expect significant growth for all areas of our
business in 2009 and 2010.
Product
Revenues
Product
revenues are derived principally from the sale of self-manufactured products and
provision of engineering services. Product revenues were $11,632,269 and $6,224,114, or 73.46%
and 60.22% of total revenues for the years ended December 31, 2008 and
2007, respectively. Product revenues for the year ended December 31, 2008
increased $5,408,155 an 87% increase, compared to the product revenues for the
year ended December 31, 2007. The increase in product revenues is due to the
launch of new energy-saving electronic products to the market and increase in
valve and flow control equipment orders that year.
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 $3,330,113 and
$2,037,053 or 21.03% and 19.71% of total revenues for the years ended
December 31, 2008 and 2007, respectively. Service revenues for the year
ended December 31, 2008 increased $1,293,060, a 63% increase, compared to the
service revenues for the year ended December 31, 2007. 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 was a newly created business line in 2007.
Project revenues were $872,562 and $2,075,282 or 5.51% and 20.08% of total
revenues for the years ended December 31, 2008 and 2007, respectively.
Project revenues for the year ended December 31, 2008 decreased $1,202,720, a
58% decrease, compared to the service revenues for the year ended December 31,
2007. There is a lower demand in 2008 for the service of energy saving projects
which has a higher gross profit. Since the Company greatly expanded product
revenues, this has changed the product mix for this fiscal year. Our company is
developing the comprehensive energy saving projects for industrial companies and
municipalities and we believe that the revenues from energy saving projects will
grow in 2009.
23
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 $11,436,787 and
$6,964,240, or 72.22% and 67.38% of total revenues for the years ended
December 31, 2008 and 2007, respectively. The total cost of revenues
increased by $4,472,547 (64%) for the year ended December 31, 2008 compared to
the total cost of revenues for the year ended December 31, 2007. 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 $4,398,157 and $3,372,209 or 27.78% and 32.62% for the years ended
December 31, 2008 and 2007 respectively. The profit margin decreased by 4.84%
for the year ended December 31, 2008 compared to the year ended December 31,
2007.
Cost
of Products
Total
cost of product revenues was $8,383,388 and $4,398,433, or 72.07% and 70.67% of
products revenues, for the years ended December 31, 2008 and 2007,
respectively. The cost of product revenues increased by $3,984,955 (91%) for the year ended
December 31, 2008 compared to the cost of revenues for the year ended December
31, 2007. The increase in product costs of 91% is similar to the increase in
product revenues of 87%, reflecting cost increase due to increased sales. The
gross profit for products was $3,248,881 and $1,825,681, or 27.93%
and 29.33% for the years ended December 31, 2008 and 2007, respectively.
The increase in gross profit of $1,423,200 and a slight decrease in
profit margin of 1.4% for products are due to increase in costs of raw
materials.
Cost
of Service
Total
cost of service revenues was $2,421,109 and $1,530,116, or 72.7% and 75.11% of
service revenues, for the years ended December 31, 2008 and 2007,
respectively. The cost of service revenues increased by $890,993 (58%) for the
year ended December 31, 2008 compared to the cost of revenues for the year ended
December 31, 2007. The increase in cost of service revenues of 58% is less than
the increase in product revenues of 63%. The gross margin for services was
$909,004 and $506,937 or 27.3% and 24.89% for the years ended December 31,
2008 and 2007, respectively. The increase in gross margin of $402,067 (2.41%) 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 $632,290 and $1,035,691, or 72.46% and 49.91%
of project revenues, for the years ended December 31, 2008 and 2007,
respectively. The cost of project revenues decreased by $ 403,401 (39%) for the
year ended December 31, 2008 compared to the cost of projects for the year ended
December 31, 2007. The gross margin for services was $240,272 and $1,039,591 or
27.54% and 50.09% for the years ended December 31, 2008 and 2007,
respectively. The gross margin also decreased by 22.55% compared to
2007.
24
Operating
Expenses
The total operating expenses were
$921,888 and $1,318,739, or 5.82% and 12.76% of total operating revenues, for
the year ended on December 31, 2008 and 2007, respectively. The total operating
expenses decreased by $396,851 (6.94%) for the year ended December 31, 2008
compared to the year ended December 31, 2007.
Sales
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. The total sales and marketing expenses were $169,082 and
$36,092, or 1.07% and 0.35% of total operating revenues, for the year ended on
December 31, 2008 and 2007, respectively. The increase in sales and marketing
expenses of $132,990 is due to higher transportation cost due to the inflation
and also high sales in products.
Research
and development expenses
The
research and development expenses are to develop new product or new production
technology including significant improvements to existing products. The research
and development expenses include the materials and labor costs. Our 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 were $111,030 and
$370,633, or 0.70% and 3.59% of total operating revenues, for the year ended on
December 31, 2008 and 2007, respectively. The research and development expenses
decreased $259,603 in 2008 due to the completion of major research and
development on the manufacturing of wind power equipment in 2007 and the launch
of new energy-saving electronic products that year.
General
and administrative expenses
General and administrative expenses
decreased by $270,238 to $641,776, 4.05% of total revenues, for the year ended
December 31, 2008, as compared to $912,014, 8.82% of total revenues, for
the year ended December 31, 2007. This decrease was primarily due to a one
time 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. in 2007.
Income
from Operations
As a
result of the foregoing, our income from operations increased by $1,422,799 to
$3,476,269, 21.95% of total revenues, for the year ended December 31, 2008,
as compared to $2,053,470, 19.87% of total revenues, for the year ended
December 31, 2007.
Other
income
For the
year ended December 31, 2008, interest income was $29,291 as compared to
$5,127 for the year ended December 31, 2007. The increase in interest
income was due to the increase of cash deposit at bank. The other incomes
generated from the sale of scraps were $109,917 and $10,109 for the year ended
December 31, 2008 and 2007, respectively. The company received a subsidy income
of $37,869 in 2008 from government incentive policy on employee
insurance.
25
Income
Tax Expenses
For the
year ended December 31, 2008, the income tax expenses were $536, the income tax
paid by the Sales Company. For the year ended December 31, 2007, income tax
expense was $0. 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 Nengfa energy as a foreign investment enterprise.
Hence, retroactively effective from January 1, 2007, Nengfa Energy 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, 2008, the operation in the United States of America incurred
$342,216 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 2029, if unutilized. The Company has provided for a full
valuation allowance against the deferred tax assets of $324,403 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 $3,652,810, a 23% profit margin on
revenues, for the year ended December 31, 2008, as compared to net income
of $2,068,706, a 20% profit margin on revenues for the year ended
December 31, 2007. The net income for the year ended December 31, 2008
increased by $1,584,104 (76.6%) and the profit margin increased by 3% compared
to the net income for the year ended December 31, 2007.
LIQUIDITY
AND CAPITAL RESOURCES
Operating
activities
For the year ended December 31,
2008, net cash used in operating activities was $12,512. This was primarily
attributable to our net income of $3,652,810, adjusted by non-cash items of
depreciation of $306,994 and a provision for litigation of $200,000, and a
$4,172,316 decrease in working capital. Negative cash flows from operations in
2008 were due primarily to the increase in accounts receivable by $4,759,539,
prepayments and other receivables $119,164, value added tax payable $69,569 and
other payables and accrued liabilities $275,379, partially offset by the
decrease in inventories by $28,348 and the increase in accounts payable by
$689,510, customer deposit $95,093 and income tax payable $56 in this
period.
The large increase in accounts
receivable of $4,759,539, an increase of 117.19% over the accounts receivables
balance at December 31, 2007, is mainly due to the sales growth during the year.
The reason for the increase in the prepayments and other receivables of
$119,164, a 19,66% increase over the prepayments and other receivables balance
of $605,989 at December 31, 2007, 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 $689,510 correspond to the increase in the cost of sales during the year. The
decrease in value added tax payable of $69,569 is due to reduced value added
tax. The decrease in other payables and accruals of $275,379 are due to an
increase in provision for contingent liability, rent payable and other payable
and a decrease in accrued welfare, accrued expenses, and payables to equipment
vendors. The increase in customer deposits is from the deposit received from
sales order of wind energy products.
26
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 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 of $278,349, and
income tax payable of $396,600, partially offset by the decrease in inventories
by $471,229 and the increase in accounts payable by $518,395, customer deposits
of $3,727, value added tax payable of $41,554 and other payables and accrued
liabilities of $59,219 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 accrued welfare, payables to equipment
vendors and accrued expenses.
Investing
activities
For the
year ended December 31, 2008 and 2007, net cash used in investing
activities was 2,144,408 and $319,296, respectively. The $2,144,408 cash used in
2008 is primarily for the addition of land use rights for the development of a
new manufacturing center and the purchase of plant and equipment. The cash used
in 2007 is primarily for 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.
Approved by the Chinese government,
Nengfa Energy has established a manufacturing base for new energy equipment in
Yingzhou District Industrial Park, Tieling City, Liaoning Province. We will
build a new energy equipment base that meets the international and domestic high
standards, high technology base. This manufacturing base will be 33 acres. The
construction will be completed in two phases and the first phase of the
construction project will be completed in 2010. After completion, it will be the
largest manufacturing base for new energy equipment production.
Financing
activities
For the
year ended December 31, 2008, net cash provided by financing activities was
$2,000,000. In January 2008, the Company entered a loan agreement to borrow an
aggregate of $2,000,000 from two independent investors namely, South World Ltd.
and Oriental United Resources Ltd. (the “Investors”), which are established
under the laws of the British Virgin Islands. The loans were unsecured,
non-interest bearing and convertible into common stock in a term of 3 months
from the drawdown date. The Company also had an option to repay the balance with
interest charge at a rate of 36% per annum. The Company received the aggregate
amount of $2,000,000 in January and March 2008.
27
On April
28, 2008, the Company entered into a Securities Purchase Agreement with
the Investors to consummate a private placement of 6,645,376 shares
of restricted common stock for an aggregate purchase price of $2,000,000 at a
50-trading days weighted average market quoted price of $0.30 per share. Each of
the Investors acquired one half of these shares of common stock, or 3,322,688
shares. As a result of this transaction, each of the investors owns 8.33% of the
issued and outstanding common stock of the Company. The proceeds were used to
fund the working capital. The Company also entered into various covenants with
the Investors, including its (i) obtaining a listing on a United States stock
exchange not later than December 31, 2009, (ii) developing a step by step energy
saving and emission reduction business plan as a products and service provider
in consultation with the Investors, (iii) limiting business arrangements with
affiliates, and (iv) establishing good corporate governance and seeking good
financial development.
For the
year ended December 31, 2007, net cash provided by financing activities was
$870,000 attributable to proceeds from the 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.
We anticipate we will need additional
working capital in 2009 and in the future to fund our company’s new business
plans to help the company to establish a manufacturing base for new energy
equipment, to develop comprehensive energy saving infrastructure projects for
municipalities, and to maintain our lead position in flow control equipment
manufacturing. 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.
Inflation
We believe that the relatively moderate
rate of inflation over the past few years has not had a significant impact on
our results of operations.
At present we are able to increase our prices due to the rising prices of raw
materials.
OFF-BALANCE
SHEET ARRANGEMENTS
We do not have any material off-balance
sheet arrangements.
IMPACT
OF RECENTLY ISSUED NEW ACCOUNTING STANDARDS
We do not expect adoption of recently
issued accounting pronouncements to have a significant impact on our results of
operations, financial position or cash flow.
Not applicable.
28
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
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|
30
|
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|
31
|
|||
|
32
|
|||
|
33
|
|||
|
34
|
|||
|
35
– 53
|
29
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,
2008 and 2007, and the related consolidated statements of operations and
comprehensive income, cash flows and stockholders’ equity for the years ended
December 31, 2008 and 2007. 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, 2008 and 2007, and the
results of operations and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
|
/s/ ZYCPA Company Limited
|
ZYCPA
Company Limited
(Formerly
Zhong Yi (Hong Kong) C.P.A. Company Limited)
Certified
Public Accountants
Hong
Kong, China
March 27,
2009
30
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
As of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,252,771 | $ | 2,240,901 | ||||
|
Accounts
receivable, trade
|
8,907,497 | 4,061,352 | ||||||
|
Inventories
|
1,516,777 | 1,448,386 | ||||||
|
Prepayments
and other receivables
|
652,842 | 605,989 | ||||||
|
Total
current assets
|
13,329,887 | 8,356,628 | ||||||
|
Plant
and equipment, net
|
2,393,287 | 2,291,767 | ||||||
|
Construction
in progress
|
2,328,839 | 223,028 | ||||||
|
TOTAL
ASSETS
|
$ | 18,052,013 | $ | 10,871,423 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable, trade
|
$ | 2,043,944 | $ | 1,259,081 | ||||
|
Customer
deposits
|
120,836 | 22,719 | ||||||
|
Value
added tax payable
|
5,886 | 70,604 | ||||||
|
Other
payables and accrued liabilities
|
333,838 | 355,390 | ||||||
|
Total
current liabilities
|
2,504,504 | 1,707,794 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock, $0.001 par value; 50,000,000 shares authorized; issued and
outstanding: 39,872,704 and 33,227,328 shares as of December 31, 2008 and
2007
|
39,872 | 33,227 | ||||||
|
Additional
paid-in capital
|
7,706,587 | 5,713,232 | ||||||
|
Statutory
reserve
|
917,165 | 517,774 | ||||||
|
Accumulated
other comprehensive income
|
1,288,573 | 557,503 | ||||||
|
Retained
earnings
|
5,595,312 | 2,341,893 | ||||||
|
Total
stockholders’ equity
|
15,547,509 | 9,163,629 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 18,052,013 | $ | 10,871,423 | ||||
See
accompanying notes to consolidated financial statements.
31
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
Years ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
OPERATING
REVENUE, NET:
|
||||||||
|
Products
|
$ | 11,632,269 | $ | 6,224,114 | ||||
|
Service
|
3,330,113 | 2,037,053 | ||||||
|
Projects
|
872,562 | 2,075,282 | ||||||
|
Total
operating revenues
|
15,834,944 | 10,336,449 | ||||||
|
COST
OF REVENUES:
|
||||||||
|
Cost
of products
|
8,383,388 | 4,398,433 | ||||||
|
Cost
of service
|
2,421,109 | 1,530,116 | ||||||
|
Cost
of projects
|
632,290 | 1,035,691 | ||||||
|
Total
cost of revenues
|
11,436,787 | 6,964,240 | ||||||
|
GROSS
PROFIT
|
4,398,157 | 3,372,209 | ||||||
|
OPERATING
EXPENSES:
|
||||||||
|
Sales
and marketing
|
169,082 | 36,092 | ||||||
|
Research
and development
|
111,030 | 370,633 | ||||||
|
General
and administrative
|
641,776 | 912,014 | ||||||
|
Total
operating expenses
|
921,888 | 1,318,739 | ||||||
|
INCOME
FROM OPERATIONS
|
3,476,269 | 2,053,470 | ||||||
|
OTHER
INCOME:
|
||||||||
|
Interest
income
|
29,291 | 5,127 | ||||||
|
Other
income
|
109,917 | 10,109 | ||||||
|
Subsidy
income
|
37,869 | - | ||||||
|
INCOME
BEFORE INCOME TAXES
|
3,653,346 | 2,068,706 | ||||||
|
Income
tax expenses
|
(536 | ) | - | |||||
|
NET
INCOME
|
$ | 3,652,810 | $ | 2,068,706 | ||||
|
Other
comprehensive income:
|
||||||||
|
-
Foreign currency translation gain
|
731,070 | 487,143 | ||||||
|
COMPREHENSIVE
INCOME
|
$ | 4,383,880 | $ | 2,555,849 | ||||
|
Net
income per share – Basic and diluted
|
$ | 0.10 | $ | 0.06 | ||||
|
Weighted
average number of shares outstanding during the year – Basic and
diluted
|
37,269,173 | 32,081,217 | ||||||
See
accompanying notes to consolidated financial statements.
32
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”))
|
Years ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income
|
$ | 3,652,810 | $ | 2,068,706 | ||||
|
Adjustments
to reconcile net income to net cash used in operating
activities
|
||||||||
|
Depreciation
|
306,994 | 270,188 | ||||||
|
Provision
for contingent liability
|
200,000 | - | ||||||
|
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
|
(4,759,539 | ) | (2,483,442 | ) | ||||
|
Inventories
|
28,348 | 471,229 | ||||||
|
Prepayments
and other receivables
|
119,164 | (278,349 | ) | |||||
|
Accounts
payable
|
689,510 | 518,395 | ||||||
|
Customer
deposits
|
95,093 | 3,727 | ||||||
|
Income
tax payable
|
56 | (396,900 | ) | |||||
|
Value
added tax payable
|
(69,569 | ) | 41,554 | |||||
|
Other
payables and accrued liabilities
|
(275,379 | ) | 59,219 | |||||
|
Net
cash (used in) provided by operating activities
|
(12,512 | ) | 776,595 | |||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of plant and equipment
|
(119,965 | ) | (399,757 | ) | ||||
|
Cash
paid to construction in progress
|
(2,024,443 | ) | - | |||||
|
Proceeds
from disposal of plant and equipment
|
- | 80,461 | ||||||
|
Net
cash used in investing activities
|
(2,144,408 | ) | (319,296 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from private placement
|
2,000,000 | 870,000 | ||||||
|
Net
cash provided by financing activities
|
2,000,000 | 870,000 | ||||||
|
Effect
on exchange rate change on cash and cash equivalents
|
168,790 | 116,658 | ||||||
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
11,870 | 1,443,957 | ||||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
2,240,901 | 796,944 | ||||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$ | 2,252,771 | $ | 2,240,901 | ||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid for income taxes
|
$ | 488 | $ | 396,900 | ||||
|
Cash
paid for interest expenses
|
$ | - | $ | - | ||||
|
SUPPLEMENTAL
DISLCOSURE OF NON-CASH INVESTING TRANSACTIONS
|
||||||||
|
Settlement
of accounts receivable in exchange for partial prepayment to an equipment
vendor
|
$ | 260,942 | $ | - | ||||
See
accompanying notes to consolidated financial statements.
33
STATEMENTS
OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
Common stock
|
Accumulated
other
|
Total
|
||||||||||||||||||||||||||
|
No. of shares
|
Amount
|
Additional
paid-in capital
|
comprehensive
income
|
Statutory
reserve
|
Retained
earnings
|
stockholders’
equity
|
||||||||||||||||||||||
|
Balance
as of January 1, 2007
|
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 | |||||||||||||||||||||
|
Appropriation
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 | |||||||||||||||
|
Common
stock issued for private placement
|
6,645,376 | 6,645 | 1,993,355 | - | - | - | 2,000,000 | |||||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | 731,070 | - | - | 731,070 | |||||||||||||||||||||
|
Net
income for the year
|
- | - | - | - | - | 3,652,810 | 3,652,810 | |||||||||||||||||||||
|
Appropriation
to statutory reserve
|
- | - | - | - | 399,391 | (399,391 | ) | - | ||||||||||||||||||||
|
Balance
as of December 31, 2008
|
39,872,704 | $ | 39,872 | $ | 7,706,587 | $ | 1,288,573 | $ | 917,165 | $ | 5,595,312 | $ | 15,547,509 | |||||||||||||||
See
accompanying notes to consolidated financial statements.
34
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
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 January 30, 2002, the Company
changed its name to “Global Broadcast Group, Inc.” On November 3, 2004, the
Company changed its name to “Diagnostic Corporation of America.” On March 15,
2007, the Company further changed its current name to “NF Energy Saving
Corporation of America.”
The
Company, through its subsidiaries, mainly engages in the production of
industrial valve components and energy-saving flow control device, which are
widely used in power stations, urban water supply and drainage infrastructure
and petrochemical enterprises. The Company also provides energy saving
technology and consulting services on energy optimization design, re-engineering
of energy saving pipeline systems and energy management services for the
varieties of industries in electric power, petrochemical, coal, metallurgy,
construction and municipal infrastructure development in the PRC.
Recapitalization and
reorganization
On
November 30, 2006, NFES completed a stock exchange transaction with the equity
owners of Liaoning Nengfa Weiye Energy Technology Co., Ltd (formerly Liaoning
Neng Fa Weiye Pipe Network Construction and Operation Co. Ltd.) (“Nengfa
Energy”), whereby 12,000,000 shares of the Company’s common stock were issued to
the equity owners of Nengfa Energy in exchange for 100% of the equity ownership
in Nengfa Energy. As a result of the stock exchange, Nengfa Energy became a
wholly-owned subsidiary of the Company. The stock exchange transaction has been
accounted for as a reverse acquisition and recapitalization of the Company
whereby Nengfa Energy is deemed to be the accounting acquirer (legal acquiree)
and the Company to be the accounting acquiree (legal acquirer). The Company is
deemed to be a continuation of the business of Neng Fa.
The stock
exchange transaction has been accounted for as a reverse acquisition and
recapitalization of the Company whereby Nengfa Energy 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 Nengfa Energy, 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 Nengfa Energy.
Description of
subsidiaries
|
Name
|
Place
of incorporation
and
kind of
legal
entity
|
Principal
activities
and
place of
operation |
Particulars
of
issued/
registered
share
capital
|
Effective
interest
held
|
||||||||
|
Liaoning
Nengfa Weiye Energy Technology Co. Ltd (“Nengfa Energy”)
|
The
PRC, a limited liability company
|
Manufacture
and provision of energy-saving components and service in the
PRC
|
US$ | 2,770,895 | 100 | % | ||||||
|
Liaoning
Nengfa Weiye Tei Fa Sales Co., Ltd. (“Sales Company”)
|
The
PRC, a limited liability company
|
Sales
and marketing of valves products in the PRC
|
RMB | 5,000,000 | 99 | % | ||||||
NFES and
its subsidiaries are hereinafter referred to as (the
“Company”).
35
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
l
|
Basis
of presentation
|
These
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.
|
l
|
Use
of estimates
|
In
preparing these consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheet and revenues and expenses during the years reported. Actual
results may differ from these estimates.
|
l
|
Basis
of consolidation
|
The
consolidated financial statements include the financial statements of NFES and
its subsidiaries.
All
significant inter-company balances and transactions within the Company have been
eliminated upon consolidation.
|
l
|
Cash
and cash equivalents
|
Cash and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
|
l
|
Accounts
receivable
|
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customer’s current
credit worthiness and the economic environment. As of December 31, 2008 and
2007, the Company has determined that no allowance for doubtful accounts is
necessary.
36
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
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 reviews historical sales activity
quarterly to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand. The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of December 31, 2008 and 2007, the
Company did not record an allowance for obsolete inventories, nor have there
been any write-offs.
|
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 and construction in progress 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, 2008
and 2007.
37
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
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.
|
(e)
|
Sale
of products
|
The
Company derives revenues from the sale of self-manufactured products and
provision of engineering services. The Company recognizes records 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 at the rate of
17% on the invoiced value of 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, 2008 and 2007.
|
(f)
|
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, net of taxes
when service is rendered and accepted by the customers.
|
(g)
|
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, 2008, all projects were
completed and their project revenues were fully recognized.
|
(h)
|
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. Shipping and handling costs, associated
with the distribution of finished products to customers, are borne by the
customers.
38
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
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, 2008 and 2007.
|
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 $111,030 and $370,633 of such costs for the years ended
December 31, 2008 and 2007, respectively.
|
l
|
Government
subsidy income
|
Subsidy
income is received at a discretionary amount as determined by the local PRC
government. Subsidy income is recognized at their fair value where there is a
reasonable assurance that the subsidy will be received and the Company will
comply with applicable conditions. Subsidy income is recognized in the
accompanying consolidated statements of operations at the period when it was
received from the local PRC government.
|
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), stock-based
compensation cost is measured at the grant date based on the fair value of the
award or using the Black-Scholes pricing model and is recognized as expense over
the appropriate 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 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 statement of operations and comprehensive (loss) 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.
39
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
The
Company also adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), on January 1, 2007. FIN 48 prescribes a more
likely than not threshold for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods, and income tax disclosures. The Company did
not have any adjustment to the opening balance of retained earnings as of
January 1, 2007 as a result of the implementation of FIN 48. In accordance with
FIN 48, the Company also adopted the policy of recognizing interest and
penalties, if any, related to unrecognized tax positions as income tax expense.
For the years ended December 31, 2008 and 2007, the Company did not have any
interest and penalties associated with tax positions. As of December 31, 2008
and 2007, the Company did not have any significant unrecognized uncertain tax
positions.
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 income per share in accordance with SFAS No. 128, “Earnings per Share.” Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.
|
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 12 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, 2008 and 2007.
40
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
l
|
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statement of
operations.
The
reporting currency of the Company is the United States dollars ("US$"). The
Company's subsidiaries in the PRC maintain their books and records in its local
currency, Renminbi Yuan ("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$ are translated into US$, in accordance
with SFAS No. 52, “Foreign
Currency Translation”, using the exchange rate on the balance sheet date.
Revenues and expenses are translated at average rates prevailing during the
period. The gains and losses resulting from translation of financial statements
of foreign subsidiaries are recorded as a separate component of accumulated
other comprehensive income within the statement of stockholders’
equity.
Translation
of amounts from RMB into US$ has been made at the following exchange rates for
the respective year:
|
2008
|
2007
|
|||||||
|
Year-end
RMB:US$ exchange rate
|
6.8542 | 7.3141 | ||||||
|
Yearly
average RMB:US$ exchange rate
|
6.9623 | 7.5633 | ||||||
|
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. The Company currently operates in two reportable business segments:
Valves manufacturing business and Energy-saving related business.
|
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.
41
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
The
Company’s financial instruments primarily include cash and cash equivalents,
accounts receivable, prepayments and other receivables, accounts payable,
customer deposits, value added tax payable, 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
|
Recent
accounting pronouncements
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and does 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 financial position or
results of operations.
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 No. 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"
("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.
42
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets” (FSP No.142-3) that amends the factors considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142. FSP No. 142-3 requires a
consistent approach between the useful life of a recognized intangible asset
under SFAS No. 142 and the period of expected cash flows used to measure the
fair value of an asset under SFAS No. 141(R). FSP No. 142-3 also requires
enhanced disclosures when an intangible asset’s expected future cash flows are
affected by an entity’s intent and/or ability to renew or extend the
arrangement. FSP No. 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008 and is applied prospectively. The
Company does not expect the adoption of FSP No.142-3 to have a material impact
on its consolidated results of operations or financial condition.
In May
2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60" ("SFAS
No. 163"). SFAS No. 163 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. SFAS No. 163 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years. As such, the Company is
required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of SFAS No.
163 on its financial statements but does not expect it to have an effect on the
Company's financial position, results of operations or cash flows.
In June
2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF
07-5"). EITF 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
application is not permitted. The Company is assessing the potential impact of
this EITF 07-5 on the financial condition and results of
operations.
In
September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about Credit Derivatives
and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement
No. 161” (“FSP FAS 133-1” and “FIN 45-4”). FSP FAS 133-1 and FIN 45-4
amends disclosure requirements for sellers of credit derivatives and financial
guarantees. It also clarifies the disclosure requirements of SFAS No. 161 and is
effective for quarterly periods beginning after November 15, 2008, and fiscal
years that include those periods. The adoption of FSP FAS 133-1 and FIN 45-4 did
not have a material impact on the Company’s current financial position, results
of operation or cash flows.
In
October 2008, the FASB issued Staff Position (“FSP”) No. 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active” (“FSP FAS
157-3.”) FSP FAS 157-3 clarifies the application of SFAS No. 157 in an inactive
market. It illustrated how the fair value of a financial asset is determined
when the market for that financial asset is inactive. FSP FAS 157-3 was
effective upon issuance, including prior periods for which financial statements
had not been issued. The adoption of FSP FAS 157-3 did not have a material
impact on the Company’s current financial position, results of operations or
cash flows.
43
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
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,
2008 and 2007.
For the
year ended December 31, 2008, $260,942 of accounts receivable were settled in
exchange for partial prepayment to an equipment vendor.
|
4.
|
INVENTORIES
|
Inventories
consisted of the following:
|
As of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Raw
materials
|
$ | 720,460 | $ | 310,040 | ||||
|
Work-in-process
|
569,450 | 734,711 | ||||||
|
Finished
goods
|
226,867 | 403,635 | ||||||
| $ | 1,516,777 | $ | 1,448,386 | |||||
For the
years ended December 31, 2008 and 2007, no allowance for obsolete inventories
was recorded by the Company.
|
5.
|
PREPAYMENTS
AND OTHER RECEIVABLES
|
Prepayments
and other receivables consisted of the following:
|
As of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Prepayment
to vendors for raw materials
|
$ | 473,064 | $ | 558,047 | ||||
|
Prepayment
to equipment vendors
|
126,930 | - | ||||||
|
Prepaid
operating expenses
|
26,354 | 25,874 | ||||||
|
Value
added tax receivable
|
- | 12,537 | ||||||
|
Other
receivables
|
26,494 | 9,531 | ||||||
| $ | 652,842 | $ | 605,989 | |||||
44
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
6.
|
PLANT
AND EQUIPMENT, NET
|
Plant and
equipment, net, consisted of the following:
|
As of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Plant
and machinery
|
$ | 2,967,425 | $ | 2,566,042 | ||||
|
Furniture,
fixture and equipment
|
58,170 | 33,968 | ||||||
|
Foreign
translation difference
|
181,814 | 162,461 | ||||||
| 3,207,409 | 2,762,471 | |||||||
|
Less:
accumulated depreciation
|
(778,988 | ) | (448,981 | ) | ||||
|
Less:
foreign translation difference
|
(35,134 | ) | (21,723 | ) | ||||
|
Plant
and equipment, net
|
$ | 2,393,287 | $ | 2,291,767 | ||||
Depreciation
expense for the years ended December 31, 2008 and 2007 were $306,994 and
$270,188, respectively, of which $270,539 and $213,577 were included
in cost of revenue.
|
7.
|
CONSTRUCTION
IN PROGRESS
|
During
2008, the Company was approved by the local government to construct a new
manufacturing facility for energy-saving products and equipments in Yingzhou
District Industrial Park, Tieling City, Liaoning Province, the PRC. The
construction project consists of two phases, whereas the first phase is related
to the development of new manufacturing facilities on the production of valves
components and energy-saving equipments and it is expected to be fully completed
till 2010. Total estimated construction cost of the first phase is approximately
$5 million.
As of
December 31, 2008, the Company incurred and capitalized $2,328,839 as
construction in progress.
|
8.
|
OTHER
PAYABLES AND ACCRUED LIABILITIES
|
Other
payables and accrued liabilities consisted of following:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Rent
payable
|
$ | 40,121 | $ | 37,599 | ||||
|
Provision
for contingent liability
|
200,000 | - | ||||||
|
Accrued
welfare
|
- | 108,125 | ||||||
|
Accrued
expenses
|
42,719 | 74,576 | ||||||
|
Payable
to equipment vendors
|
38,196 | 135,090 | ||||||
|
Other
payable
|
12,802 | - | ||||||
| $ | 333,838 | $ | 355,390 | |||||
45
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
9.
|
INCOME
TAXES
|
For the
years ended December 31, 2008 and 2007, the local (“United States of America”)
and foreign components of income (loss) before income taxes were comprised of
the following:
|
Years ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Tax
jurisdiction from:
|
||||||||
|
-
Local
|
$ | (342,216 | ) | $ | (574,989 | ) | ||
|
-
Foreign
|
3,995,562 | 2,643,695 | ||||||
|
Income
before income taxes
|
$ | 3,653,346 | $ | 2,068,706 | ||||
|
Years ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Current:
|
||||||||
|
-
Local
|
$ | - | $ | - | ||||
|
-
Foreign
|
536 | - | ||||||
|
Deferred:
|
||||||||
|
-
Local
|
- | - | ||||||
|
-
Foreign
|
- | - | ||||||
|
Income
tax expense
|
$ | 536 | $ | - | ||||
The
effective tax rate in the years presented is the result of the mix of income
earned in various tax jurisdictions that apply a broad range of income tax rate.
The Company operates in various countries: United States of America and the PRC
that are subject to tax in the jurisdictions in which they operate, as
follows:
United
States of America
NFES is
incorporated in the State of Delaware and is subject to the tax laws of United
States of America.
As of
December 31, 2008, the operation in the United States of America incurred
$342,216 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 2029, if unutilized. The Company has provided for a full
valuation allowance against the deferred tax assets of $324,403 on the expected
future tax benefits from the net operating loss carryforwards as the management
believes it is more likely than not that these assets will not be realized in
the future.
46
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
The
PRC
The
Company generated all of its net income from subsidiaries operating in the PRC
for the years ended December 31, 2008 and 2007. These subsidiaries 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.
One of
the PRC subsidiaries, Nengfa Energy is approved as a foreign investment
enterprise and entitled to, starting from the first profit-making year, 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, 2008, Nengfa
Energy continues to enjoy the tax holiday through fiscal year 2011.
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. Hence, Nengfa
Energy will continue to enjoy to the unexpired tax holiday of 50%-reduction on
the unified income tax through 2011, subject to a transitional policy under the
Corporate Income Tax Law. Sales Company is subject to the unified income rate of
25% on the taxable income.
The
reconciliation of income tax rate to the effective income tax rate for the years
ended December 31, 2008 and 2007 is as follows:
|
Years ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Income
before income taxes from PRC operation
|
$ | 3,995,562 | $ | 2,643,695 | ||||
|
Statutory
income tax rate
|
25 | % | 33 | % | ||||
|
Income
tax expense at statutory rate
|
998,890 | 872,419 | ||||||
|
Effect
from tax holiday
|
(998,354 | ) | (859,327 | ) | ||||
|
Non-deductible
items
|
- | (13,092 | ) | |||||
|
Income
tax expense
|
$ | 536 | $ | - | ||||
The
following table sets forth the significant components of the aggregate deferred
tax assets of the Company as of December 31, 2008 and 2007:
|
As of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
-
Net operating loss carryforwards
|
$ | 324,403 | $ | 204,628 | ||||
|
-
Accrued liabilities
|
- | 13,092 | ||||||
|
Total
deferred tax assets
|
324,403 | 217,720 | ||||||
|
Less:
valuation allowance
|
(324,403 | ) | (217,720 | ) | ||||
|
Deferred
tax assets
|
$ | - | $ | - | ||||
47
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
Management
believes that it is more likely than not that the deferred tax assets will not
be fully realizable in the future. Accordingly, the Company provided for a full
valuation allowance against its deferred tax assets of $324,403 and $217,720 as
of December 31, 2008 and 2007, respectively. During 2008, the valuation
allowance increased by $106,683, primarily relating to net operating loss
carryforwards from the local tax regime.
|
10.
|
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. The following table sets forth the
computation of basic and diluted net income per share for the years ended
December 31, 2008 and 2007:
|
Years ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Basis
and diluted net income per share calculation
|
||||||||
|
Numerator:
|
||||||||
|
-
Net income in computing basic and diluted net income per
share
|
$ | 3,652,810 | $ | 2,068,706 | ||||
|
Denominator:
|
||||||||
|
-
Weighted average ordinary shares outstanding
|
33,227,328 | 29,381,217 | ||||||
|
-
Stock issued for private placement
|
4,041,845 | 1,700,000 | ||||||
|
-
Stock issued for service rendered
|
- | 1,000,000 | ||||||
|
Shares
used in computing basic and diluted net income per share
|
37,269,173 | 32,081,217 | ||||||
|
Basic
and diluted net income per share
|
$ | 0.10 | $ | 0.06 | ||||
|
11.
|
COMMON
STOCK SUBSCRIPTIONS
|
In
January 2008, the Company entered a loan agreement to borrow an aggregate of
$2,000,000 from two independent investors namely, South World Ltd. and Oriental
United Resources Ltd. (the “Investors”), which are established under the laws of
the British Virgin Islands. The loans were unsecured, non-interest bearing and
convertible into common stock in a term of 3 months from the drawdown date. The
Company also had an option to repay the balance with interest charge at a rate
of 36% per annum. The Company received the aggregate amount of $2,000,000 in
January and March 2008.
48
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
On April
28, 2008, the Company entered into a Securities Purchase Agreement with the
Investors to consummate a private placement of 6,645,376 shares of
restricted common stock for an aggregate purchase price of $2,000,000 at a
50-trading days’ weighted average market quoted price of $0.30 per share. Each
of the Investors acquired one half of these shares of common stock, or 3,322,688
shares. As a result of this transaction, each of the investors owns 8.33% of the
issued and outstanding common stock of the Company. The proceeds were used to
fund the working capital. The Company also entered into various covenants with
the Investors, including its (i) obtaining a listing on a United States stock
exchange not later than December 31, 2009, (ii) developing a step by step energy
saving and emission reduction business plan as a products and service provider
in consultation with the Investors, (iii) limiting business arrangements with
affiliates, and (iv) establishing good corporate governance and seeking good
financial development.
As of
December 31, 2008 and 2007, the number of issued and outstanding shares of the
Company’s common stock was 39,872,704 and 33,227,328, respectively.
|
12.
|
CHINA
CONTRIBUTION PLAN
|
Under the
PRC Law, full-time employees of the Company’s subsidiaries in the PRC, Nengfa
Energy 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.
Nengfa Energy 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 $176,121 and $129,923 for the years ended
December 31, 2008 and 2007, respectively.
|
13.
|
STATUTORY
RESERVES
|
Under the
PRC Law the Company’s subsidiaries, Nengfa Energy 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.
For the
years ended December 31, 2008 and 2007, the Company’s subsidiaries contributed
$399,391 and $402,635 to statutory reserve, respectively.
|
14.
|
SEGMENT
INFORMATION
|
The
Company’s business units have been aggregated into two reportable segments:
Valves manufacturing business and Energy-saving related business. Valves
manufacturing business included the production of valves components and
provision of valve improvement and engineering services. Energy-saving related
business included the provision of energy-saving related re-engineering and
technical services and long-term construction project. The Company operates
these segments in the PRC and all of the identifiable assets of the Company are
located in the PRC during the years presented.
49
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
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, 2008 and 2007. 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, 2008:
|
Valves
manufacturing
business
|
Energy-saving
related
business
|
Total
|
||||||||||
|
Operating
revenues
|
||||||||||||
|
-
Products
|
$ | 11,013,921 | $ | 618,348 | $ | 11,632,269 | ||||||
|
-
Services
|
3,330,113 | - | 3,330,113 | |||||||||
|
-
Projects
|
- | 872,562 | 872,562 | |||||||||
|
Total
operating revenues
|
14,344,034 | 1,490,910 | 15,834,944 | |||||||||
|
Cost
of revenues
|
(10,204,540 | ) | (1,232,247 | ) | (11,436,787 | ) | ||||||
|
Gross
profit
|
$ | 4,139,494 | $ | 258,663 | $ | 4,398,157 | ||||||
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 | ||||||
For the
years ended December 31, 2008 and 2007, 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.
|
15.
|
CONCENTRATIONS
OF RISK
|
The
Company is exposed to the following concentrations of risk:
(a) Major
customers and vendors
50
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
For the
year ended December 31, 2008, 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
|
$
|
8,717,096
|
55
|
% |
$
|
6,438,107
|
||||||
|
Customer
C
|
2,345,891
|
15
|
% |
181,456
|
||||||||
|
Total:
|
$
|
11,062,987
|
70
|
% |
Total:
|
$
|
6,619,563
|
|||||
For the
year ended December 31, 2008, only one vendor represented more than 10% of total
purchases and accounts payable, respectively. This vendor accounts for 10% of
total purchases amounting to $3,152,828 for the year ended and $310,310 of
accounts receivable as of, December 31, 2008.
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
|
|||||
For the
year ended December 31, 2007, only one vendor represented more than 10% of total
purchases and accounts payable, respectively. This vendor accounts for 10% of
total purchases amounting to $2,258,473 for the year ended and $45,542 of
accounts receivable as of, December 31, 2007.
(b) Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of trade accounts receivable. The Company
performs ongoing credit evaluations of its customers' financial condition, but
does not require collateral to support such receivables.
(c) Exchange
rate risk
The
reporting currency of the Company is the US$, 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.
51
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
(d) Economic
and political risks
The
Company's operations are conducted in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.
The
Company's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation.
|
16.
|
LEGAL
PROCEEDINGS
|
On May
21, 2007, a civil complaint Robert Dawley vs NF Energy Saving Corp. of America,
et al. was filed in the United States District Court, Middle District of
Florida, Orlando, Civil No. 6:07-cv-872-Orl-18DAB. The complaint accuses the
defendants of breaching a contract for payment of money that was signed by Sam
Winer, former Chief Executive Officer, before the commencement of the Company’s
reverse merger with the current subsidiary. After being initially dismissed by
the Court, the action was authorized to proceed on November 16, 2007. The trial
was held in the United States District Court, Middle District of Florida,
Orlando on October 16, 2008. The District Court issued a judgment on December
11, 2008 awarding the plaintiff the sum of $400,000.00 against the Company, plus
prejudgment interest in the amount of $132,821.92, with continuing interest of
$131.51 per day on the $400,000 obligation until it is paid. The Court further
adjudged that the plaintiff shall surrender his stock upon payment of the
$400,000.00. In the event the plaintiff fails to surrender his stock after
payment, the company may cancel the stock. Any payments or collection under the
judgment shall be credited first to interest.
On
January 6, 2009, the Company filed a notice of appeal 09-10140-B in the United
States of Court of Appeals for the 11th Circuit
from the District Court’s judgment. The Company has engaged an attorney to
prosecute its appeal of the above judgment. The Company has also accrued
$200,000 for this contingent liability to the statement of operation for the
year ended December 31, 2008. At this point, the Company does not believe that
the judgment would have a material impact on the Company.
|
17.
|
COMMITMENTS
AND CONTINGENCIES
|
|
(a)
|
Operating
lease commitment
|
The
Company was committed under various non-cancelable operating leases with fixed
monthly rentals, due through October 2009. Total rent expenses for the years
ended December 31, 2008 and 2007 was $50,271 and $39,665,
respectively.
52
NF
ENERGY SAVING CORPORATION OF AMERICA
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
Future
minimum rental payments due under these non-cancelable operating leases are
$9,118 in the next 12 months.
|
(b)
|
Capital
commitment
|
During
2008, the local government has approved the Company to establish a new
manufacturing facility for energy-saving products and equipments in Yingzhou
District Industrial Park, Tieling City, Liaoning Province, the PRC. The
construction consists of two phases, whereas the first phase is related to the
development of new manufacturing facilities on the production of valves
components and energy-saving equipments and it is expected to be fully completed
till 2010. Total estimated construction cost of the first phase is approximately
$5 million.
As of
December 31, 2008, the Company incurred approximately $2.3 million and recorded
as construction in progress. Hence the aggregate contingent payments related to
the third party contractors and the addition of new plant and equipment are
approximately $2.7 million.
|
18.
|
COMPARATIVE
FIGURES
|
Certain
amounts presented in the prior period have been reclassified to conform to the
current period financial statement presentation.
53
None.
(a) Evaluation of
Disclosure Controls and Procedures. Our chief executive
officer and chief financial officer evaluated the effectiveness of our
disclosure controls and procedures as of December 31, 2008. The term
“disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of December 31, 2008, our chief executive
officer and chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective.
(b) Management’s
Report on Internal Control Over Financial Reporting.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the
Exchange Act as a process designed by, or under the supervision of, the
company’s principal executive officer and principal financial officer and
effected by the Company’s Board of Directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
|
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with management authorization,
and
|
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
54
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, the company’s
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.
Based on
this assessment, our management concluded that, as of December 31, 2008,
our internal control over financial reporting is effective.
This
annual report does not include an attestation report of our Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit us to provide
only management’s report in this annual report.
c)
Changes in Internal Controls
No change
in our internal control over financial reporting occurred during the fiscal year
ending December 31, 2008 that has materially affected, or is reasonably
likely to materially affect, our 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
|
Term
|
|||
|
Gang
Li
|
56
|
Chairman
and Chief Executive Officer and President
|
2009
|
|||
|
Li
Hua Wang
|
49
|
Director
and Chief Financial Officer
|
2009
|
|||
|
Hong
Li
|
31
|
Director
|
2009
|
Gang Li — President and Chief Executive
Officer
Mr. Gang
Li became the Chairman and Chief Executive Officer and President of the Company
on November 15, 2006. Mr. Li was born in 1953. He graduated
from Tianjin University with a bachelor degree in science and a master degree in
law.
55
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 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 project”. Due to Mr. Li’s leadership on the
“115 engineering project” and as a result of the above-mentioned technological
improvements, he was awarded the Enterprise Technology Advancement Award 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
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. Ms. Wang became the Director and Chief
Financial Officer of the Company on November 15, 2006.
Hong
Li — Director
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.
Ms. Li become the Director of the Company on November 15, 2006.
Family
Relationships
None.
56
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
SEC 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 SEC'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 or her
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 the Company files with, or submits to, the SEC and in other
public communications made by the
Company;
|
|
|
Compliance
with applicable governmental laws, rules and
regulations;
|
|
|
The
prompt internal reporting of violations of the code to an appropriate
person or persons identified in the code;
and
|
|
|
Accountability
for adherence to the
code.
|
Section
16(a) Beneficial Ownership Reporting Compliance
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 SEC. Specific due dates for these reports have been
established, and the Company is required to report, in this Form 10-K, any
failure to comply therewith during the fiscal year ended December 31, 2008. 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 SEC.
57
Compensation of
Directors
We did not have any non-employee
directors for the years ended December 31, 2008 and 2007. 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 any compensation to our executive officers for the years ended
December 31, 2008 and 2007.
Outstanding
equity awards at fiscal year-end
We have
not implemented a stock option plan at this time and since inception, have
issued no stock options, SARs or other equity awards. We may decide, at a later
date, and reserve the right to, initiate such a plan as deemed necessary by the
Board.
Option
exercises and stock vested
None.
Pension
benefits
We have not entered into any pension
benefit agreements with our executive officers or directors.
Nonqualified
defined contribution and other nonqualified deferred compensation
plans
None.
Potential
payments upon termination or change-in-control
None.
The following table sets forth certain
information concerning the ownership of NF Energy Saving Corporation of
America’s Common Stock as of March 20, 2009, 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) each director and executive officer; and (iii) all 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 20, 2009, there were 39,872,704 shares of
common stock outstanding. As of March 20, 2009, there were no preferred shares
outstanding.
58
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
|
Pelaria
International Ltd.
|
19,991,429 |
(3)
|
50.14 | % | |||||
|
($.001
par value)
|
P.O.
Box 957
|
|||||||||
|
Offshore
Incorporations Centre
|
||||||||||
|
Road
Town, Tortola, British
|
||||||||||
|
Virgin
Islands
|
||||||||||
|
Common
Stock
|
Cloverbay
International Ltd.
|
5,820,000 |
(3)
|
14.60 | % | |||||
|
($.001
par value)
|
P.O.
Box 957
|
|||||||||
|
Offshore
Incorporations Centre
|
||||||||||
|
Road
Town, Tortola, British
|
||||||||||
|
Virgin
Islands
|
||||||||||
|
Common
Stock
|
South
World Ltd.
|
3,322,688 | 8.33 | % | ||||||
|
($.001
par value)
|
903
Unicorn Trade Centre
|
|||||||||
|
127-131
Des Voeux Road
|
||||||||||
|
Central
Hong Kong
|
||||||||||
|
PR
China
|
||||||||||
|
Common
Stock
|
Oriental
United Resources Ltd
|
3,322,688 | 8.33 | % | ||||||
|
($.001
par value)
|
903
Unicorn Trade Centre
|
|||||||||
|
127-131
Des Voeux Road
|
||||||||||
|
Central
Hong Kong
|
||||||||||
|
PR
China
|
||||||||||
The
following table sets forth the number of shares owned beneficially on March 20,
2009, by each Director and by all Officers and Directors as a group. Information
as to the beneficial ownership is based upon statements furnished to the Company
by such persons.
Security
Ownership of Officers and Directors
(2)
|
Title of Class
|
Name and Address
of Beneficial Owner(s)
|
Amount and Nature
of Beneficial
Ownership
|
Percent of class
|
|||||||
|
Common
Stock
|
Gang,
Li
|
20,649,143 |
(4)
|
51.79 | % | |||||
|
($.001
par value)
|
21-Jia
Bei Si Dong Road,
|
|||||||||
|
Tie
Xi Qu, Shenyang City
|
||||||||||
|
Liaoning
Province, P. R. China
|
||||||||||
|
110021
|
||||||||||
|
Common
Stock
|
Li
Hua, Wang
|
5,162,286 |
(5)
|
12.95 | % | |||||
|
($.001
par value)
|
21-Jia
Bei Si Dong Road,
|
|||||||||
|
Tie
Xi Qu, Shenyang City
|
||||||||||
|
Liaoning
Province, P. R. China
|
||||||||||
|
110021
|
||||||||||
59
|
Common
Stock
|
Hong
Li
|
0 | 0 | % | ||||||
|
($.001
par value)
|
21-Jia
Bei Si Dong Road,
|
|||||||||
|
Tie
Xi Qu, Shenyang City
|
||||||||||
|
Liaoning
Province, P. R. China 110021
|
||||||||||
|
Common
Stock
|
All
officers and directors as a group (three persons)
|
25,811,429 | 64.74 | % | ||||||
|
($.001
par value)
|
(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.
(3) Pelaria
International Ltd. (“Pelaria”) and Cloverbay International Ltd. (“Cloverbay”)
are the record owners of the stated number of shares. Pelaria and Cloverbay are
wholly-owned subsidiaries of Liaoning Nengfa Weiye New Energy Application Co.,
Ltd. (“Weiye Energy”). Weiye Energy is 80% owned by Gang Li and 20% owned by Li
Hua Wang. Mr. Li and Ms. Wang are two of the three directors of Weiye Energy,
and therefore, effectively share the voting and dispositive authority over the
shares.
(4) Represents
the 80% beneficial ownership of the shares of Weiye Energy, described in
footnote 3 above.
(5) Represents
the 20% beneficial ownership of the shares of Weiye Energy, described in
footnote 3 above.
Transactions
with related persons, promoters and certain control persons
|
(a)
|
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.
|
60
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 51.79% 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 12.95% of the Company’s common
stock (representing her 20% interest in Weiye Energy).
Director
Independence
The Company does not have any
independent directors.
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, ZYCPA Company Limited (formerly Zhong Yi (Hong Kong) C.P.A.
Company Ltd.) (“ZYCPA”) for our audit of the annual financial statements for the
years ended December 31, 2008 and 2007. Audit fees and other fees of auditors
are listed as follows:
|
Year
Ended December 31
|
2008
|
2007
|
||||||
|
ZYCPA
|
ZYCPA
|
|||||||
|
Audit Fees (1)
|
$
|
67,752
|
(2)
|
$
|
66,000
|
(3)
|
||
|
Audit-Related Fees
(4)
|
—
|
—
|
||||||
|
Tax Fees (5)
|
—
|
|||||||
|
All Other Fees (6)
|
—
|
—
|
||||||
|
Total
Accounting Fees and Services
|
$
|
67,752
|
$
|
66,000
|
||||
|
(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-Q, and for services that are
normally provided in connection with statutory and regulatory filings or
engagements.
|
|
(2)
|
The
amounts $67,752 shown for ZYCPA in 2008 relate to (i) the audit of the
Company's annual financial statements for the fiscal year ended December
31, 2008, and (ii) the review of the financial statements included in the
Company's filings on Form 10-Q for the first, second and third quarters of
2008.
|
61
|
(3)
|
The
amounts $66,000 shown for ZYCPA in 2007 relate to (i) the audit of the
Company's annual financial statements for the fiscal year ended December
31, 2007, and (ii) the review of the financial statements included in the
Company's filings on Form 10-Q for the first, second and third quarters of
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 and Procedures 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 ZYCPA 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.
(a)(1) Financial
Statements.
For a
list of the financial information included herein, see “Index to Financial
Statements” on page 29.
(a)(2) Financial
Statement Schedules.
All schedules are omitted because they
are not applicable or the required information is shown in the financial
Statements or Notes thereto.
(a)
(3) Exhibits. The list of Exhibits filed as a part
of this Form 10-K are set forth on the Exhibit Index immediately
preceding such Exhibits and is incorporated herein by this
reference.
62
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned.
|
NF ENERGY SAVING CORPORATION OF
AMERICA
(Registrant)
|
||
|
Date:
March 27, 2009
|
By:
|
/s/
GANG LI
|
|
Gang
Li
President
and Chief Executive Officer
|
||
Pursuant
to the requirements of the Securities Act of 1934, this report has been signed
by the following persons in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
GANG LI
|
President,
Chief Executive Officer and Chairman
|
March 27,
|
||
|
2009
|
||||
|
Gang
Li
|
||||
|
/s/
LI HUA WANG
|
Chief
Financial Officer and Director
|
March 27,
|
||
|
2009
|
||||
|
Li
Hua Wang
|
||||
|
/s/
HONG LI
|
Director
|
March 27,
|
||
|
2009
|
||||
|
Hong
Li
|
63
INDEX
TO EXHIBITS
|
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)
|
||
|
10.1
|
Form
of Securities Purchase Agreement among NF Energy Saving Corporation of
America, South World Ltd. (investor), Oriental United Resources Ltd.
(investor), Mr. Gang Li (guarantor), Ms. Lihua Wang (guarantor), Pelaria
International Ltd. (guarantor), and Cloverbay International Ltd.
(guarantor)
|
Exhibits
submitted with our Current Report on Form 8-K/A filed April 30, 2008.
(File No. 000-50155)
|
||
|
14.1
|
Code
of ethics of NF Energy Saving Corporation of America
|
|||
|
21.1
|
Subsidiaries
of Registrant
|
|||
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14
of the
Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|||
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
|
32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
|
|||
|
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
|
64