| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
● Basis of presentation and consolidation These accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America (“U.S. GAAP”) and reflected the activities of NFEC and its subsidiaries. All significant inter-company
balances and transactions within the Company have been eliminated upon consolidation. The unaudited interim condensed consolidated
financial information as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 have been prepared, pursuant
to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote
disclosures, which are normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP, have
been omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial information should
be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K/A
for the fiscal year ended December 31, 2018 previously filed with the SEC on September 6, 2019. In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited condensed consolidated
financial position as of March 31, 2019 and its unaudited condensed consolidated results of operations for the three months ended
March 31, 2019 and 2018, and its unaudited condensed consolidated cash flows for the three months ended March, 2019 and 2018, as
applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the fiscal
year or any future periods.
● 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.
● Reclassification Certain prior period amounts have been
reclassified to conform to the current period presentation.
● Cash and cash equivalents Cash and cash equivalents consist primarily
of cash in readily available checking and saving accounts. Cash equivalents consist of highly liquid investments that are readily
convertible to cash and that mature within three months or less from the date of purchase. The carrying amounts approximate fair
value due to the short maturities of these instruments.
● Restricted cash Cash and cash equivalents that are restricted
as to withdrawal or use under the terms of certain contractual agreements are recorded in restricted cash account on the Company’s
unaudited interim condensed consolidated balance sheet. The Company’s restricted cash balance is related to a contract performance
guarantee bond. The balance of restricted cash was $183,444 and $179,496 as of March 31, 2019 and December 2018, respectively.
● Accounts receivable and allowance for
doubtful accounts Accounts receivable are recorded at
the invoiced amount, do not bear interest and are due within contractual payment terms, generally 30 to 90 days from
shipment. Credit is granted based on evaluation of a customer's financial condition, the customer credit-worthiness and their
payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due
balances over 90 days are reviewed individually for collectability. At the end of each period, the Company specifically
evaluates individual customer’s financial condition, credit history, and the current economic conditions to monitor the
progress of the collection of accounts receivables. The Company will consider the allowance for doubtful accounts for any
estimated losses resulting from the inability of its customers to make required payments. For those receivables that are past
due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection,
including seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means
of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any
off-balance-sheet credit exposure related to its customers. As of March 31, 2019 and December 31, 2018, the allowance for
doubtful accounts was $11,579,977 and $11,327,271, respectively.
● Retention receivable and allowance for
doubtful accounts Retention receivable is the amount withheld
by a customer based upon 5-10% of the contract value, until a product warranty expires. The warranty period is usually 12 months.
As of March 31, 2019 and December 31, 2018, the allowance for doubtful accounts was $962,381 and $942,376, respectively.
● Inventories Inventories are stated at the lower of
cost or market value (net realizable value), cost being determined on a weighted average method. Costs include material, labor
and manufacturing overhead costs. The Company reviews historical sales activity quarterly to determine excess, slow moving items
and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides
inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of March 31, 2019 and
December 31, 2018, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.
● Property, plant and equipment Property, plant and equipment are stated
at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line
basis over the following expected useful lives from the date on which they become fully operational and after taking into account
their estimated residual values:
Expected useful lives Residual value
Building 10 – 30 years 5%
Plant and machinery 5 – 14 years 4 ~ 5%
Furniture, fixture and equipment 5 years 4 ~ 13% Expenditures for repairs and maintenance
are expensed as incurred. When assets have been retired or sold, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is recognized in the results of operations.
● Land use right All lands in the PRC are owned by the PRC
government. Under applicable law, the PRC government, may sell the right to use the land for a specified period of time. Thus,
the Company’s land purchases in the PRC are considered to be leaseholds and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreement on a straight-line
basis, which is 50 years and will expire in 2059.
● Construction in progress Construction in progress is stated at cost,
which includes acquisition of land use rights, cost of construction, purchases of plant and equipment and other direct costs attributable
to the construction of a manufacturing facility in Yinzhou District Industrial Park, Tieling City, Liaoning Province, PRC. Construction
in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest
is incurred during the period of construction.
● Impairment of long-lived assets In accordance with the provisions of ASC
Topic 360, “ Impairment or Disposal of Long-Lived Assets
● Revenue recognition On January 1, 2018, the Company adopted
ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not
completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while
prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting
under ASC 605, Revenue Recognition. The adoption had no material impact on the Company’s consolidated financial statements
and there was no adjustment to the beginning retained earnings on January 1, 2018. Under ASC 606, revenue is recognized when
control of the promised goods and services is transferred to the Company’s customers, in an amount that reflects the consideration
that the Company expects to be entitled to in exchange for those goods and services, net of value-added tax. The Company determines
revenue recognition through the following steps:
ü Identify the contract with a customer;
ü Identify the performance obligations in the contract;
ü Determine the transaction price;
ü Allocate the transaction price to the performance
obligations in the contract; and
ü Recognize revenue when (or as) the entity satisfies
a performance obligation.
● Cost of revenue Cost of revenue consists primarily of material
costs, direct labor, depreciation, and manufacturing overhead, which are directly attributable to the manufacture of products and
the rendering of services or projects. Shipping and handling costs, associated with the distribution of finished products to customers,
are borne by the customers.
● Comprehensive income ASC Topic 220, “Comprehensive
Income”,
● Income taxes Income taxes are determined in accordance
with the provisions of ASC Topic 740, “ Income Taxes ASC 740 prescribes a comprehensive model
for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken
or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements
when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must
initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. For the three months ended March 31, 2019
and 2018, the Company did not have any interest and penalties associated with tax positions. As of March 31, 2019, the Company
did not have any significant unrecognized uncertain tax positions. The Company conducts the majority of its
businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by a foreign tax authority.
● Product warranty Under the terms of the contracts, the Company
offers its customers with a free product warranty on a case-by-case basis, depending upon the type of customers, nature and size
of the infrastructure projects. Under such arrangements, a portion of the project contract balance (usually 5-10% of contract value)
is withheld by customers from 12 to 24 months, until the product warranty has expired. The Company has not experienced any material
returns or claims where it was under obligation to honor this standard warranty provision. As of March 31, 2019 and December 31,
2018, the Company reported a net reserve of $31,297 and $65,529 as retention receivable for the receivables withheld by its customers
for product warranty, respectively.
● Net loss per share The Company calculates net loss per share
in accordance with ASC Topic 260, “Earnings per Share.”
● Foreign currencies translation Transactions denominated in currencies
other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of
the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into
the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are
recorded in the statement of operations. The reporting currency of the Company is
the United States Dollar ("US$"). The Company's subsidiaries in the PRC maintain their books and records in their local
currency, the Renminbi Yuan ("RMB"), which is the functional currency as being the primary currency of the economic environment
in which these entities operate. In general, for consolidation purposes,
assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with
ASC Topic 830-30, “ Translation of Financial Statement”, Translation of amounts from RMB into US$
has been made at the following exchange rates for the respective period:
March 31, March 31,
Period-end RMB:US$1 exchange rate 6.7335 6,2802
Three month end average RMB:US$1 exchange rate 6.7468 6.3566
● Retirement plan costs Contributions to retirement plans (which
are defined contribution plans) are charged to general and administrative expenses in the accompanying consolidated statements
of operation as the related employee service is provided.
● 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 operational decisions. Companies are also considered
to be related if they are subject to common control or common significant influence.
● Segment reporting ASC Topic 280, “ Segment Reporting
● Fair value of financial instruments The carrying value of the Company’s
financial instruments (excluding short-term bank borrowing and convertible promissory notes): cash and cash equivalents, accounts
and retention receivable, prepayments and other receivables, accounts payable, income tax payable, amount due to a related party,
other payables and accrued liabilities approximate at their fair values because of the short-term nature of these financial instruments. Management believes, based on the current
market prices or interest rates for similar debt instruments, the fair value of its obligation under finance lease and short-term
bank borrowing approximate the carrying amount. The Company also follows the guidance of
the ASC Topic 820-10, “ Fair Value Measurements and Disclosures
Level 1
Level 2:
Level 3: Fair value estimates are made at a specific
point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
● Recent accounting pronouncements In January 2017, the Financial Accounting
Standard Board (“FASB”) issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting
for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires
a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard, which will be effective for the Company
beginning in the first quarter of fiscal year 2020, is required to be applied prospectively. Early adoption is permitted for interim
or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact
this standard will have on its consolidated financial statements. In June 2018, the FASB issued ASU 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which supersedes ASC 505-50 and expands
the scope of ASC 718 to include all share-based payments arrangements related to the acquisition of goods and services from both
employees and nonemployees. For public companies, the amendments are effective for annual reporting periods beginning after December
15, 2018, including interim periods within those annual periods. Early adoption is permitted, but no earlier than a company's adoption
date of ASC 606. The Company does not believe that the adoption of ASU 2018-07 will have a material impact on the Company’s
consolidated financial statements. In August 2018, the FASB issued Accounting
Standard Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosure requirements
on fair value measurements in Topic 820, Fair Value Measurement, including, among other changes, the consideration of costs and
benefits when evaluating disclosure requirements. For public companies, the amendments are effective for annual reporting periods
beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. The Company
is currently assessing the impact that adopting this new accounting guidance will have on the Company’s financial statements
and footnote disclosures. Other accounting standards that have been
issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected
to have a material impact on the Company’s consolidated financial statements upon adoption. |
