UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM 10-Q







x
            Quarterly
      Report Pursuant to Section 13 Or 15(d) of the Securities Exchange Act of
      1934




for
the Quarterly Period Ended June 30, 2010




o
            Transition
      Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of
      1934




for
the Transition Period from _______ to _______





Commission
File Number: 000-50155




NF Energy Saving
Corporation


(Exact
name of registrant as specified in its charter)







Delaware
            02-0563302(State
      or Other Jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)





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)




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. xYes  o No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


o Yes o No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.




Large
      accelerated filer
            o
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            Smaller
      reporting company
            x





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





As of July 31, 2010, the registrant had 13,315,486
shares of common stock, $0.001 par value, issued and
outstanding.









CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION




The
discussion contained in this 10-Q under the Securities Exchange Act of 1934, as
amended, 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 discussions under "Notes to Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations " as well as those discussed elsewhere in this Form 10-Q. 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-Q 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.









TABLE
OF CONTENTS





PART
      I – FINANCIAL INFORMATIONItem
      1. Financial Statements
            
            
            F-1Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            
            
            23Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            
            
            36Item
      4T. Controls and Procedures
            
            
            36PART
      II – OTHER INFOMRATIONItem
      1. Legal Proceedings
            
            
            37Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            
            
            37Item
      3. Defaults Upon Senior Securities
            
            
            38Item
      4. [Reserved]
            
            
            38Item
      5. Other Information
            
            
            38Item
      6. Exhibits
            
            
            38Signatures
            
            
            39




2




NF
ENERGY SAVING CORPORATION


INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 PageCondensed
      Consolidated Balance Sheets as of June 30, 2010 and December 31,
      2009
                
                
                F-2Condensed
      Consolidated Statements of Operations And Comprehensive Income for the
      Three and Six Months ended June 30, 2010 and 2009
                
                
                F-3Condensed
      Consolidated Statements of Cash Flows for the Six Months ended June 30,
      2010 and 2009
                
                
                F-4Condensed
      Consolidated Statement of Stockholders’ Equity for the Six Months ended
      June 30, 2010
                
                
                F-5Notes
      to Condensed Consolidated Financial Statements
                
                
                F-6
      to F-22
 
 F-1
 
 NF
ENERGY SAVING CORPORATION
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 AS
OF JUNE 30, 2010 AND DECEMBER 31, 2009
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 
 June
      30,2010
              
              
              December
      31,2009(Unaudited)
              
              
              (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              508,959
              
              
              $
              227,329Accounts
      receivable, trade
              
              
              9,392,115
              
              
              
              12,510,875Retention
      receivable
              
              
              406,993
              
              
              
              874,759Inventories
              
              
              1,968,930
              
              
              
              638,775Deferred
      tax assets
              
              
              1,414
              
              
              
              1,408Prepayments
      and other receivables
              
              
              2,062,607
              
              
              
              603,456Total
      current assets
              
              
              14,341,018
              
              
              
              14,856,602Plant
      and equipment, net
              
              
              2,048,661
              
              
              
              2,169,740Construction
      in progress
              
              
              11,853,759
              
              
              
              9,045,332TOTAL
      ASSETS
              
              $
              28,243,438
              
              
              $
              26,071,674LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable, trade
              
              $
              1,882,319
              
              
              $
              2,055,839Customer
      deposits
              
              
              622,915
              
              
              
              152,850Income
      tax payable
              
              
              246,914
              
              
              
              201,480Convertible
      promissory notes, net
              
              
              369,299
              
              
              
              -Note
      payable
              
              
              528,743
              
              
              
              -Current
      portion of obligation under finance lease
              
              
              466,188
              
              
              
              437,917Other
      payables and accrued liabilities
              
              
              565,751
              
              
              
              1,928,494Total
      current liabilities
              
              
              4,682,129
              
              
              
              4,776,580Long-term
      liabilities:Obligation
      under finance lease
              
              
              356,592
              
              
              
              675,809TOTAL
      LIABILITIES
              
              
              5,038,721
              
              
              
              5,452,389Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $0.001 par value; 50,000,000 shares authorized; 13,315,486 and
      13,315,486 shares issued and outstanding as of June 30, 2010 and December
      31, 2009
              
              
              13,315
              
              
              
              13,315Additional
      paid-in capital
              
              
              8,720,917
              
              
              
              7,969,232Statutory
      reserve
              
              
              1,449,345
              
              
              
              1,449,345Accumulated
      other comprehensive income
              
              
              1,444,627
              
              
              
              1,348,382Retained
      earnings
              
              
              11,576,513
              
              
              
              9,839,011Total
      stockholders’ equity
              
              
              23,204,717
              
              
              
              20,619,285TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              28,243,438
              
              
              $
              26,071,674
  See
accompanying notes to condensed consolidated financial statements.
  F-2
  NF
ENERGY SAVING CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF
 OPERATIONS
AND COMPREHENSIVE INCOME
 FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 
 Three
      months endedJune 30,
              
              
              Six
      months endedJune 30,2010
              
              
              2009
              
              
              2010
              
              
              2009REVENUES,
      NETProducts
              
              $
              3,650,612
              
              
              $
              4,627,735
              
              
              $
              6,164,844
              
              
              $
              6,729,561Services
              
              
              3,192,200
              
              
              
              590,969
              
              
              
              3,518,451
              
              
              
              908,975Project
              
              
              375,157
              
              
              
              -
              
              
              
              375,157
              
              
              
              -Total
      revenues, net
              
              
              7,217,969
              
              
              
              5,218,704
              
              
              
              10,058,452
              
              
              
              7,638,536COST
      OF REVENUES:Cost
      of products
              
              
              2,316,196
              
              
              
              3,250,140
              
              
              
              4,264,543
              
              
              
              4,816,014Cost
      of services
              
              
              2,572,151
              
              
              
              443,785
              
              
              
              2,784,836
              
              
              
              618,281Cost
      of project
              
              
              306,378
              
              
              
              -
              
              
              
              306,378
              
              
              
              -Total
      cost of revenues
              
              
              5,194,725
              
              
              
              3,693,925
              
              
              
              7,355,757
              
              
              
              5,434,295GROSS
      PROFIT
              
              
              2,023,244
              
              
              
              1,524,779
              
              
              
              2,702,695
              
              
              
              2,204,241OPERATING
      EXPENSES:Sales
      and marketing
              
              
              14,905
              
              
              
              25,628
              
              
              
              32,652
              
              
              
              74,453General
      and administrative
              
              
              198,770
              
              
              
              194,053
              
              
              
              353,510
              
              
              
              339,246Stock
      based compensation
              
              
              -
              
              
              
              349,000
              
              
              
              -
              
              
              
              349,000Total
      operating expenses
              
              
              213,675
              
              
              
              568,681
              
              
              
              386,162
              
              
              
              762,699INCOME
      FROM OPERATIONS
              
              
              1,809,569
              
              
              
              956,098
              
              
              
              2,316,533
              
              
              
              1,441,542Other
      (expense) income:Interest
      income
              
              
              351
              
              
              
              1,148
              
              
              
              594
              
              
              
              9,005Other
      income
              
              
              -
              
              
              
              5
              
              
              
              -
              
              
              
              10,164Subsidy
      income
              
              
              -
              
              
              
              33,610
              
              
              
              -
              
              
              
              33,610Interest
      expense
              
              
              (154,136
              )
              
              
              -
              
              
              
              (234,780
              )
              
              
              -Total
      other (expense) income
              
              
              (153,785
              )
              
              
              34,763
              
              
              
              (234,186
              )
              
              
              52,779INCOME
      BEFORE INCOME TAXES
              
              
              1,655,784
              
              
              
              990,861
              
              
              
              2,082,347
              
              
              
              1,494,321Income
      tax expense
              
              
              (285,465
              )
              
              
              (181,912
              )
              
              
              (344,845
              )
              
              
              (243,460
              )NET
      INCOME
              
              $
              1,370,319
              
              
              $
              808,949
              
              
              $
              1,737,502
              
              
              $
              1,250,861Other
      comprehensive income:-
      Foreign currency translation gain
              
              
              95,626
              
              
              
              26,690
              
              
              
              96,245
              
              
              
              40,328COMPREHENSIVE
      INCOME
              
              $
              1,465,945
              
              
              $
              835,639
              
              
              $
              1,833,747
              
              
              $
              1,291,189Net
      income per share:–
      Basic
              
              $
              0.10
              
              
              $
              0.06
              
              
              $
              0.13
              
              
              $
              0.09–
      Diluted
              
              $
              0.10
              
              
              $
              0.06
              
              
              $
              0.13
              
              
              $
              0.09Weighted
      average common stock outstanding:–
      Basic
              
              
              13,315,486
              
              
              
              13,291,387
              
              
              
              13,315,486
              
              
              
              13,291,387–
      Diluted
              
              
              13,373,820
              
              
              
              13,291,387
              
              
              
              13,373,820
              
              
              
              13,291,387
  See
accompanying notes to condensed consolidated financial statements.
  F-3
  NF
ENERGY SAVING CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)
 
 Six
      months endedJune 30,2010
              
              
              2009Cash
      flows from operating activities:Net
      income
              
              $
              1,737,502
              
              
              $
              1,250,861Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
              
              
              145,395
              
              
              
              148,963Stock
      based compensation
              
              
              -
              
              
              
              349,000Gain
      on disposal of plant and equipment
              
              
              (223
              )
              
              
              -Interest
      expenses, non-cash
              
              
              160,984
              
              
              
              -Change
      in operating assets and liabilities:Accounts
      receivable, trade
              
              
              3,159,179
              
              
              
              (540,094
              )Retention
      receivable
              
              
              469,637
              
              
              
              -Inventories
              
              
              (1,322,393
              )
              
              
              681,231Prepayments
      and other receivables
              
              
              (1,389,196
              )
              
              
              7,781Accounts
      payable, trade
              
              
              (181,458
              )
              
              
              658,202Customer
      deposits
              
              
              467,627
              
              
              
              7,295Income
      tax payable
              
              
              44,417
              
              
              
              181,825Other
      payables and accrued liabilities
              
              
              (1,368,916
              )
              
              
              (61,891
              )Net
      cash provided by operating activities
              
              
              1,922,555
              
              
              
              2,683,173Cash
      flows from investing activities:Purchase
      of plant and equipment
              
              
              (16,728
              )
              
              
              (179,070
              )Payments
      to construction in progress
              
              
              (2,759,833
              )
              
              
              (2,595,776
              )Proceeds
      from disposal of plant and equipment
              
              
              1,251
              
              
              
              -Net
      cash used in investing activities
              
              
              (2,775,310
              )
              
              
              (2,774,846
              )Cash
      flows from financing activities:Payments
      on finance lease
              
              
              (294,493
              )
              
              
              (709,373
              )Proceeds
      from note payable
              
              
              526,720
              
              
              
              -Proceeds
      from convertible promissory notes
              
              
              900,000
              
              
              
              -Net
      cash provided by (used in) financing activities
              
              
              1,132,227
              
              
              
              (709,373
              )Effect
      on exchange rate change on cash and cash equivalents
              
              
              2,158
              
              
              
              22,345NET
      CHANGE IN CASH AND CASH EQUIVALENTS
              
              
              281,630
              
              
              
              (778,701
              )BEGINNING
      OF PERIOD
              
              
              227,329
              
              
              
              2,252,771END
      OF PERIOD
              
              $
              508,959
              
              
              $
              1,474,070SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for income taxes
              
              $
              49,871
              
              
              $
              61,561Cash
      paid for interest
              
              $
              261,945
              
              
              $
              -SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Equipment
      purchased under finance leases
              
              $
              -
              
              
              $
              1,381,579
  See
accompanying notes to condensed consolidated financial statements.
  F-4
  NF
ENERGY SAVING CORPORATION
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 
 AccumulatedCommon
      stock
              
              
              Additional
              
              
              
              
              
              other
              
              
              
              
              
              TotalNo.
      of
              
              
              
              
              
              paid-in
              
              
              Statutory
              
              
              comprehensive
              
              
              Retained
              
              
              stockholders’shares
              
              
              Amount
              
              
              capital
              
              
              reserve
              
              
              income
              
              
              earnings
              
              
              equityBalance
      as of January 1, 2010
              
              
              13,315,486
              
              
              $
              13,315
              
              
              $
              7,969,232
              
              
              $
              1,449,345
              
              
              $
              1,348,382
              
              
              $
              9,839,011
              
              
              $
              20,619,285Beneficial
      conversion feature and warrants granted in connection with convertible
      promissory notes
              
              
              -
              
              
              
              -
              
              
              
              751,685
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              751,685Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              96,245
              
              
              
              -
              
              
              
              96,245Net
      income for the period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,737,502
              
              
              
              1,737,502Balance
      as of June 30, 2010
              
              
              13,315,486
              
              
              $
              13,315
              
              
              $
              8,720,917
              
              
              $
              1,449,345
              
              
              $
              1,444,627
              
              
              $
              11,576,513
              
              
              $
              23,204,717
 
 See
accompanying notes to condensed consolidated financial statements.
  F-5
 
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 NOTE1 BASIS
OF PRESENTATION
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared by management in accordance with both accounting principles generally
accepted in the United States (“GAAP”), and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Certain information and note disclosures normally
included in audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information not misleading.
 
 In the
opinion of management, the consolidated balance sheet as of December 31, 2009
which has been derived from audited financial statements and these unaudited
condensed consolidated financial statements reflect all normal and recurring
adjustments considered necessary to state fairly the results for the periods
presented. The results for the period ended June 30, 2010 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2010 or for any future period.
 
 These
unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the Management’s Discussion and the audited
financial statements and notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 2009.
 
 NOTE2 ORGANIZATION
AND BUSINESS BACKGROUND
 
 NF Energy
Saving Corporation (the “Company” or “NFEC”) was incorporated in the State of
Delaware in the name of Galli Process, Inc. on October 31, 2000. On February 7,
2002, the Company changed its name to “Global Broadcast Group, Inc.” On November
12, 2004, the Company changed its name to “Diagnostic Corporation of America.”
On March 15, 2007, the Company changed its name to “NF Energy Saving
Corporation of America.” On August 24, 2009, the Company further changed its
current name to “NF Energy Saving Corporation.”
 
 The
Company, through its subsidiaries, mainly engages in the production of heavy
industrial components and products such as valves and the provision of technical
service and re-engineering projects in the energy saving related industry in the
People’s Republic of China (the “PRC”). All the customers are located in
the PRC.
 
 On May
27, 2010, the Company approved a reverse stock split of its common stock
outstanding at a ratio resulting in a reduction of the aggregate number of
shares of outstanding common stock from anywhere between 10% (i.e. 10:9) to 500%
(i.e. 5:1), as decided by the Board of Directors in its discretion, to take
effect at such time within three months of June 8, 2010 as determined by the
Board of Directors in its discretion. As of the date hereof, the Board has not
yet implemented the reverse stock split.
 
 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
                heldLiaoning
      Nengfa Weiye Energy Technology Co. Ltd (“Nengfa Energy”)
              
              The
      PRC, a limited liability company
              
              Production
      of a variety of industrial valve components which are widely used in
      water supply and sewage system, coal and gas fields, power generation
      stations, petroleum and chemical industries 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 components and products in the PRC
              
              RMB5,000,000
              
              100%
  NFEC and
its subsidiaries are hereinafter referred to as (the
“Company”).
  F-6
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 
 NOTE3 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
 
 The
accompanying condensed consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying condensed consolidated financial statements and
notes.
 
 ·
              Use
      of estimates
 
 In
preparing these condensed 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 periods
reported. Actual results may differ from these estimates.
 
 ·
              Basis
      of consolidation
 
 The
condensed consolidated financial statements include the financial statements of
NFEC and its subsidiaries. All significant inter-company balances and
transactions within the Company have been eliminated upon
consolidation.
 
 ·
              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.
 
 ·
              Accounts
      receivable
 
 Accounts
receivable are recorded at the invoiced amount and do not bear interest, which
are due within contractual payment terms, generally 30 to 90 days from shipment.
Credit is extended based on evaluation of a customer’s financial condition, the
customer’s credit-worthiness and their payment history. Accounts receivable
outstanding longer than the contractual payment terms are considered past due.
Past due balances over 90 days and over a specified amount are reviewed
individually for collectibility. 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 an allowance
for doubtful accounts for any estimated losses resulting from the inability of
its customers to make required payments. For the receivables that are past due
or not being paid according to payment terms, the appropriate actions are taken
to exhaust all means of collection, including seeking legal resolution in a
court of law. Account balances are charged off against the allowance 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.
 
 ·
              Retention
      receivable
 
 Retention
receivable is the amount withheld by a customer based upon 5-10% of the contract
value, until a product warranty is expired.
 
 ·
              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 quarterly reviews historical sales
activity to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand. The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of June 30, 2010, the Company did
not record an allowance for obsolete inventories, nor have there been any
write-offs.
  F-7
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 ·
              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:
 
 Depreciablelife
              
              Residual
      valuePlant
      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.
 
 Depreciation
expense for the three months ended June 30, 2010 and 2009 were $72,721 and
$74,535 respectively.
 
 Depreciation
expense for the six months ended June 30, 2010 and 2009 were $145,395 and
$148,963 respectively.
 
 ·
              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 new manufacturing facility in Yinzhou
District Industrial Park, Tieling City, Liaoning Province, the PRC. Total
estimated construction cost of a new manufacturing facility is approximately $16
million (including land use rights of approximately $3 million). The
construction project is expected to be fully completed in late 2010.
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
 
 ·
              Finance
      leases
 
 Leases
that transfer substantially all the rewards and risks of ownership to the
lessee, other than legal title, are accounted for as finance leases.
Substantially all of the risks or benefits of ownership are deemed to have been
transferred if any one of the four criteria is met: (i) transfer of ownership to
the lessee at the end of the lease term, (ii) the lease containing a
bargain purchase option, (iii) the lease term exceeding 75% of the
estimated economic life of the leased asset, (iv) the present value of the
minimum lease payments exceeding 90% of the fair value. At the inception of a
finance lease, the Company as the lessee records an asset and an obligation at
an amount equal to the present value of the minimum lease payments. The leased
asset is amortized over the shorter of the lease term or its estimated useful
life if title does not transfer to the Company, while the leased asset is
depreciated in accordance with the Company’s normal depreciation policy if the
title is to eventually transfer to the Company. The periodic rent payments made
during the lease term are allocated between a reduction in the obligation and
interest element using the effective interest method in accordance with the
provisions of Accounting Standards Codification (“ASC”) Topic 835-30, “Imputation of Interest”.
 
 ·
              Impairment
      of long-lived assets
 
 In
accordance with the provisions of ASC Topic 360-10-5, “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 June 30, 2010.
  F-8
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 ·
              Revenue
      recognition
 
 The
Company offers a number of products and service to its customers, which
are:
 
 (a)
              Sales
      of energy saving flow control equipment(b)
              Provision
      of energy project management and sub-contracting
service(c)
              Provision
      of energy-saving construction
projects
 
 In
accordance with the ASC Topic 605, “Revenue Recognition”, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling price
is fixed or determinable and collectibility is reasonably assured.
 
 (a)
              Sale
      of products
 
 The
Company derives a majority of revenues from the sale of energy saving flow
control equipment. Generally, these energy saving flow control equipment are
manufactured and configured to customer requirements. The Company typically
produces and builds the energy saving flow control equipment for customers in a
period from 1 to 6 months. When the Company completes the production in
accordance with the customer’s specification, the customer is required to
inspect the finished products for the quality and product conditions with the
full satisfaction at the Company’s plant. Once the product is accepted by the
customer, the Company usually makes delivery to the customer, usually within a
month.
 
 The
Company recognizes revenue from the sale of such finished products upon delivery
to the customers, whereas the title and risk of loss are fully transferred to
the customers. The Company records its revenues, net of 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
experienced no product returns and has recorded no reserve for sales returns for
the six months ended June 30, 2010 and 2009.
 
 (b)
              Service
      revenue
 
 Service
revenue is primarily derived from energy-saving technical services or project
management or sub-contracting 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, for a period of service time from 2 to 3 months. Revenue is
recognized, net of business taxes when service is rendered and accepted by the
customers.
 
 (c)
              Project
      revenue
 
 In
February 2010, NFEC, through its subsidiary Nengfa Energy, entered into a
cooperative arrangement with one of the biomass energy technology companies in
Fuxin (“Fuxin”) for the development of energy-related systems and facilities and
the provision of an economic energy saving solutions to the farmers in Laoning
Province, the PRC for a term of 1 year. Under this project arrangement, Nengfa
Energy agreed to design, build and provide the energy-related equipments and
components, as well as provide training to Fuxin to operate these energy-related
facilities. Fuxin agreed to operate the administration of this arrangement and
provide on-site training to the farmers to operate these facilities. In
consideration for this cooperative arrangement, both parties agreed to equally
share in the sales of energy-related systems during the term of the project, in
accordance with the agreed energy-saving milestone requirement. At the end of
the project term, Nengfa agreed to transfer its ownership and proprietary right
to the energy-related system and facility to Fuxin.
 
 Under
this cooperative arrangement, Nengfa Energy is entitled to total project income
of $750,314 from the joint energy-saving project with total project cost of
approximately $618,000 over the term of the project. For the six months ended
June 30, 2010, Nengfa Energy recognized the project revenue of $375,157 in the
statement of operations under the installment method.
  F-9
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 (d)
              Interest
      income
 
 Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.
 
 ·
              Comprehensive
      income
 
 ASC Topic
220,“Comprehensive
Income”, establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during a period from non-owner sources.
Accumulated other comprehensive income, as presented in the accompanying
condensed consolidated statement of stockholders’ equity, consists of changes in
unrealized gains and losses on foreign currency translation. This comprehensive
income is not included in the computation of income tax expense or
benefit.
 
 ·
              Income
      taxes
 
 The
provision for income taxes is determined in accordance with the provisions of
ASC Topic 740, “Income Taxes“ (“ASC 740”). Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted income tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
Any effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
 
 ASC 740
prescribes a comprehensive model for how companies should recognize, measure,
present and disclose in their financial statements uncertain tax positions taken
or expected to be taken on a tax return. Under ASC 740, tax positions must
initially be recognized in the financial statements when it is more likely than
not the position will be sustained upon examination by the tax authorities. Such
tax positions must initially and subsequently be measured as the largest amount
of tax benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement with the tax authority assuming full knowledge of the
position and relevant facts.
 
 For the
three and six months ended June 30, 2010 and 2009, the Company did not have any
interest and penalties associated with tax positions. As of June 30, 2010, the
Company did not have any significant unrecognized uncertain tax
positions.
 
 The
Company conducts 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 the foreign tax authority. For the
six months ended June 30, 2010, the Company filed and cleared 2009 PRC tax
return by its tax authority.
 
 ·
              Product
      warranty
 
 Under the
terms of the contracts, the Company offers the customers a free 12-months’
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 a customer for 12 months, until the product warranty is expired. 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 result of operations for the three and six
months ended June 30, 2010.
 
 ·
              Stock
      based compensation
 
 The
Company adopts ASC Topic 718, “Stock Compensation”, (“ASC 718”) using the fair
value method. Under ASC 718, stock-based compensation is measured using the
Black-Scholes Option-Pricing model on the date of grant.
 
 For
non-employee stock based compensation, the Company adopts ASC Topic
505-50, “Equity-Based Payments to
Non-Employees”,
stock based compensation related to non-employees is accounted for based on
the fair value of the related stock or options or the fair value of the services
on the grant date, whichever is more readily determinable in accordance with ASC
718.
  F-10
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 ·
              Net
      income per share
 
 The
Company calculates net income per share in accordance with ASC Topic 260,“Earnings per Share.” Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.
 
 ·
              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, Nengfa Energy and Sales Company maintain
their books and records in their local currency, the Renminbi Yuan (“RMB”),
which is the functional currency as being the primary currency of the economic
environment in which these entities operate.
 
 In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with ASC Topic 830-30 “Translation of Financial
Statement”,using the exchange rate on
the balance sheet date. Revenues and expenses are translated at average rates
prevailing during the period. The gains and losses resulting from translation of
financial statements of foreign subsidiaries are recorded as a separate
component of accumulated other comprehensive income within the statement of
stockholders’ equity.
 
 Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective period:
 
 June
      30,2010
              
              
              June
      30, 2009Period-end
      RMB:US$1 exchange rate
              
              
              6.8086
              
              
              
              6.8432Period
      average RMB:US$1 exchange rate
              
              
              6.8348
              
              
              
              6.8448
 
 ·
              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” establishes standards for reporting information about
operating segments on a basis consistent with the Company’s internal
organization structure as well as information about geographical areas, business
segments and major customers in financial statements. The Company operates in
two reportable operating segments in the PRC.
  F-11
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 ·
              Fair
      value measurement
 
 ASC Topic
820 “Fair Value Measurements
and Disclosures” (“ASC 820”), establishes a new framework for measuring
fair value and expands related disclosures. Broadly, ASC 820 framework requires
fair value to be determined based on the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants. ASC 820 establishes a three-level valuation
hierarchy based upon observable and non-observable inputs. These tiers
include: Level 1, defined as observable inputs such as quoted prices in active
markets; Level 2, defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
 
 For
financial assets and liabilities, fair value is the price the Company would
receive to sell an asset or pay to transfer a liability in an orderly
transaction with a market participant at the measurement date. In the absence of
active markets for the identical assets or liabilities, such measurements
involve developing assumptions based on market observable data and, in the
absence of such data, internal information that is consistent with what market
participants would use in a hypothetical transaction that occurs at the
measurement date.
 
 ·
              Financial
      instruments
 
 Cash and
cash equivalents, accounts and retention receivable, prepayments and other
receivable, accounts payable, customer deposits, income tax payable, other
payable and accrued liabilities are carried at cost which approximates fair
value. The estimated fair value of convertible promissory note, note payable and
obligation under finance lease was approximately $2.3 million as of June 30,
2010, based on current market prices or interest rates. Any changes in fair
value of assets or liabilities carried at fair value are recognized in other
comprehensive income for each period.
 
 ·
              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, as follows:
 
 In September 2009, the Financial Accounting Standard Board
(“FASB”) issued certain amendments as codified in ASC Topic 605-25, “Revenue Recognition;
Multiple-Element Arrangements.”  These amendments provide
clarification on whether multiple deliverables exist, how the arrangement should
be separated, and the consideration allocated. An entity is required to allocate
revenue in an arrangement using estimated selling prices of deliverables in the
absence of vendor-specific objective evidence or third-party evidence of selling
price. These amendments also eliminate the use of the residual method and
require an entity to allocate revenue using the relative selling price method.
The amendments significantly expand the disclosure requirements for
multiple-deliverable revenue arrangements. These provisions are to be applied on
a prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with earlier application
permitted. The Company will adopt the provisions of these amendments in its
fiscal year 2011 and is currently evaluating the impact of these amendments to
its consolidated financial statements.
 
 In March
2010, the FASB issued Accounting Standards Update (“ASU”) 2010-11, “Derivatives and Hedging (Topic 815)
— Scope Exception Related to Embedded Credit Derivatives.” ASU 2010-11
clarifies that the only form of an embedded credit derivative that is exempt
from embedded derivative bifurcation requirements are those that relate to the
subordination of one financial instrument to another. As a result, entities that
have contracts containing an embedded credit derivative feature in a form other
than such subordination may need to separately account for the embedded credit
derivative feature. The provisions of ASU 2010-11 will be effective on July 1,
2010 and are not expected to have a significant impact on the Company’s
consolidated financial statements.
 
 In April
2010, the FASB issued ASU 2010-13, Compensation–Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of a Share-Based Payment
Award in the Currency of the Market in Which the Underlying Equity Security
Trades. ASU 2010-13 provides guidance on the classification of a
share-based payment award as either equity or a liability. A share-based payment
that contains a condition that is not a market, performance, or service
condition is required to be classified as a liability. ASU 2010-13 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010 and is not expected to have a significant impact on
the Company’s financial statements.
  F-12
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 In May
2010, the FASB issued ASU 2010-19, ForeignCurrency (Topic830): Foreign Currency Issues:
Multiple Foreign Currency Exchange Rates. The amendments in ASU
2010-19 are effective as of the announcement date of March 18, 2010. The
Company does not expect the provisions of ASU 2010-19 to have a material
effect on the financial position, results of operations or cash flows of
the Company.
 
 In July
2010, the FASB issued new accounting guidance that will require additional
disclosures about the credit quality of loans, lease receivables and other
long-term receivables and the related allowance for credit losses. Certain
additional disclosures in this new accounting guidance will be effective for the
Company on December 31, 2010 with certain other additional disclosures that will
be effective on March 31, 2011. The Company does not expect the adoption of this
new accounting guidance to have a material impact on its consolidated financial
statements.
 
 NOTE4 INVENTORIES
 
 Inventories
consisted of the following:
 
 June
      30,2010
              
              
              December
      31,2009(Unaudited)
              
              
              (Audited)Raw
      materials
              
              $
              1,675,473
              
              
              $
              512,903Work-in-process
              
              
              221,139
              
              
              
              122,123Finished
      goods
              
              
              72,318
              
              
              
              3,749$
              1,968,930
              
              
              $
              638,775
 
 For the
three and six months ended June 30, 2010 and 2009, no allowance for obsolete
inventories was recorded by the Company.
 
 NOTE5 PREPAYMENTS
AND OTHER RECEIVABLES
 
 Prepayments
and other receivables consisted of the following:
 
 June
      30,2010
              
              
              December
      31,2009(Unaudited)
              
              
              (Audited)Prepayment
      to vendors for raw materials
              
              $
              1,959,785
              
              
              $
              545,102Prepayment
      to equipment vendors
              
              
              6,609
              
              
              
              7,115Prepaid
      operating expenses
              
              
              69,288
              
              
              
              34,801Other
      receivables
              
              
              26,925
              
              
              
              16,438$
              2,062,607
              
              
              $
              603,456
 
 The
Company generally makes prepayments to vendors for raw materials in the normal
course of business. Prepayments to vendors are recorded when payment is made by
the Company and relieved against inventory when goods are received, which
include provisions that set the purchase price and delivery date of raw
materials.
 
 NOTE6 CONSTRUCTION
IN PROGRESS
 
 In 2008,
the Company was approved by the local government to construct a new
manufacturing facility for energy-saving products and equipment in Yingzhou
District Industrial Park, Tieling City, Liaoning Province, the PRC. Total
estimated construction cost of a new manufacturing facility is approximately $16
million (including land use rights of approximately $3 million). The
construction project is expected to be fully completed in late 2010. As of June
30, 2010, the Company incurred and capitalized $11,853,759 as construction in
progress.
  F-13
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 
 NOTE7 OTHER
PAYABLES AND ACCRUED LIABILITIES
 
 Other
payables and accrued liabilities consisted of the following:
 
 June
      30,2010
              
              
              December
      31,2009(Unaudited)
              
              
              (Audited)Rent
      payable
              
              $
              18,359
              
              
              $
              40,221Payable
      to the PRC government for land use rights
              
              
              -
              
              
              
              1,018,682Value
      added tax payable
              
              
              83,860
              
              
              
              263,834Provision
      for contingent liability
              
              
              200,000
              
              
              
              200,000Accrued
      operating expenses
              
              
              253,900
              
              
              
              372,324Other
      payable
              
              
              9,632
              
              
              
              33,433$
              565,751
              
              
              $
              1,928,494
  NOTE8 NOTE
PAYABLE
 
 On June
20, 2010, the Company received an unsecured note payable (the “Note”) of
$562,720 (equivalent to RMB3,600,000) from Liaoning Dongda Nengfa Weiye Energy
Saving Technology Engineering Design & Research Institute. The Company
intends to use the fund for capital expenditure purpose. The Note becomes
repayable in full on June 19, 2011 and carries interest at 16.5% per annum
payable at its due date
 
 NOTE9 CONVERTIBLE
PROMISSORY NOTES
 
 On
February 24, 2010 and March 4, 2010, the Company sold, through a private
placement to two accredited investors, ARC China Investment Funds and ARC Semper
China Investment Funds, convertible promissory notes (the “Notes”) in the
aggregate principal amount of $960,000 and warrants (the “Warrants”) to purchase
160,000 shares of its common stock, par value $0.001 per share (“Common Stock”).
The Company intends to use the net proceeds of approximately $900,000 from the
private placement for working capital and general corporate
purposes.
 
 The Notes
bear an effective interest at the rate of 6% per annum, absent an “event of
default,” are payable in shares of the Company’s Common Stock. Provided an
“event of default” has not occurred and is not then continuing, the Notes will
convert upon the earlier to occur of (i) the commencement of trading of the
Company’s Common Stock on a major US stock exchange, or (ii) one year after
issuance. Upon conversion, the holders of the Notes shall receive such number of
shares of Common Stock equal to the quotient obtained by dividing (a) the
then-outstanding principal amount and accrued but unpaid interest on the Notes
by (b) the then-current conversion price, which initially shall be $3.00 per
share. The conversion price is subject to adjustment for stock dividends,
splits, combinations and similar events. The Notes are secured by a security
interest in and lien upon all of the Company’s assets.
 
 The
Warrants, which are exercisable for shares of Common Stock at an initial
exercise price of $4.00 per share, are not exercisable until six months after
issuance and will terminate five years thereafter. The exercise price is subject
to adjustment for stock dividends, splits, combinations and similar events. The
Company has agreed to provide the investors with “piggy-back” registration
rights with respect to the shares of Common Stock issuable upon conversion of
the Notes and exercise of the Warrants.
  F-14
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 The
Company has engaged an independent valuer to perform the valuation of the Notes
and the Company has determined that the Notes are recorded in accordance with
ASC Topic 470-20, “Debt with
conversion and other options”, the warrants and related convertible notes
should be accounted for as two separate instruments (equity and debt
instruments). The accounting for these instruments reflects the notion that the
consideration received upon issuance must be allocated between equity and debt
components. Proceeds from the sale of a debt instrument with stock purchase
warrants are allocated to the two elements, based on the relative fair values of
the debt instrument without the warrants and of the warrants themselves at time
of issuance. The portion of the proceeds allocated to the warrants is accounted
for as paid-in capital. The remainder of the proceeds is allocated to the debt
instrument portion of the transaction as debt discount.
 
 June
      30,2010Notional
      amount of the convertible promissory notes payable, net of
      expenses
              
              
              960,000Less
      : warrant portion
              
              
              (285,342
              )Less:
      debt discount, unamortized
              
              
              (305,359
              )$
              369,299
 
 The Notes
are discounted for the fair value of warrants on the grant date using
Black-Scholes Option Pricing Model under ASC Topic 718, with the following
assumptions. The discount is being amortized over the life of the debentures
using the effective interest method. For the six months ended June 30, 2010, the
Company recognized $160,984 as amortization of debt discount and recorded as
interest expense in the statement of operations.
 
 Expected
      life (in years)
              
              
              5Volatility
              
              
              63.38%-65.46
              %Risk
      free interest rate
              
              
              0.32
              %Dividend
      yield
              
              
              0
              %Weighted
      average fair value
              
              
              1.76-1.89
  NOTE10 OBLIGATION
UNDER FINANCE LEASE
 
 The
Company purchased certain equipment under finance lease agreements with an
effective interest rate of 8.6% per annum, due through May 25, 2012, with
principal and interest payable monthly.
 
 The
obligation under the finance lease is as follows:
 
 June
      30,2010Finance
      lease
              
              $
              822,780Less:
      current portion
              
              
              (466,188
              )Non-current
      portion
              
              $
              356,592
 
 The
maturities of the finance lease obligation for the next two years are as
follows:
 
 Year
      ending June 30:2011
              
              $
              526,5652012
              
              
              369,305Total
      finance leases obligation
              
              
              895,870Less:
      interest
              
              
              (73,090
              )Present
      value of minimum obligation
              
              $
              822,780
  F-15
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
  The
obligation under finance leases were guaranteed by two of the Company’s
executive officers and directors, Mr. Gang Li and Ms. Li Hua Wang. Certain plant
and machinery amounting to $2,073,250 held under finance leases are capitalized
as construction in progress.
 
 NOTE11 INCOME
TAXES
 
 NFEC is
registered in the State of Delaware and is subject to the tax laws of United
States of America.
 
 As of
June 30, 2010, the operation in the United States of America incurred $1,603,931
of cumulative net operating losses which can be carried forward to offset future
taxable income. The net operating loss carryforwards begin to expire in 2030, if
unutilized. The Company has provided for a full valuation allowance against the
deferred tax assets of $545,336 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.
 
 Effective
from January 1, 2008, the Corporate Income Tax Law of the People’s Republic of
China (the “New CIT Law”) is imposed. Under the New CIT Law, Nengfa Energy, as a
foreign investment enterprise continues to enjoy the unexpired tax holiday of
50%-reduction on the unified income tax through 2011, subject to a transitional
policy. Sales Company is a domestic company which is entitled to the unified
statutory income tax rate of 25%.
 
 The
reconciliation of income tax rate to the effective income tax rate for the six
months ended June 30, 2010 and 2009 is as follows:
 
 Six
      months endedJune 30,2010
              
              
              2009Income
      before income taxes from PRC operation
              
              $
              2,383,855
              
              
              $
              1,943,684Statutory
      income tax rate
              
              
              25
              %
              
              
              25
              %Income
      tax expense at statutory rate
              
              
              595,963
              
              
              
              485,921Tax
      effect of non-deductible item
              
              
              53,417
              
              
              
              -Tax
      effect from tax holiday
              
              
              (304,535
              )
              
              
              (242,461
              )Income
      tax expense
              
              $
              344,845
              
              
              $
              243,460
 
 The 2009
tax return was filed and finalized by the PRC tax authority with an additional
tax payment of $39,145 in May 2010.
 
 NOTE12 WARRANTS
 
 As of
June 30, 2010, the Company has 58,334 shares of outstanding warrants at the
weighted average exercise price of $1.8. There was no movement during the period
ended June 30, 2010. The Company adopted ASC 718 using the Black-Scholes
Option Pricing Model to measure the fair value of warrants on the grant date,
with the following assumptions:
 
 Expected
      life (in years)
              
              
              5Volatility
              
              
              340.61%-
      456.53
              %Risk
      free interest rate
              
              
              2.28%
      - 2.89
              %Dividend
      yield
              
              
              0
              %
 
 F-16
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 NOTE13 SEGMENT
INFORMATION
 
 The
Company’s business units have been aggregated into two reportable segments, as
defined by ASC Topic 280:
 
 ·
              Heavy
      manufacturing business – production of valves components and the provision
      of valve improvement and engineering
services;
 
 ·
              Energy-saving
      related business – production of wind-energy equipment, provision of
      energy-saving related re-engineering and technical services and long-term
      construction project.
 
 The
Company operates these business segments in the PRC and all of the identifiable
assets of the Company are located in the PRC during the periods
presented.
 
 The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 3). The Company had no
inter-segment sales for the three and six months ended June 30, 2010 and 2009.
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 three and six months ended June 30, 2010 and
2009:
 
 Three
      months endedJune 30, 2010Valves
                manufacturingbusiness
              
              
              Energy-savingrelatedbusiness
              
              
              TotalOperating
      revenues, net:-
      Products
              
              $
              3,650,567
              
              
              $
              45
              
              
              $
              3,650,612-
      Services
              
              
              3,192,200
              
              
              
              -
              
              
              
              3,192,200-
      Project
              
              
              -
              
              
              
              375,157
              
              
              
              375,157Total
      operating revenues
              
              
              6,842,767
              
              
              
              375,202
              
              
              
              7,217,969Cost
      of revenues
              
              
              (4,888,304
              )
              
              
              (306,421
              )
              
              
              (5,194,725
              )Gross
      profit
              
              
              1,954,463
              
              
              
              68,781
              
              
              
              2,023,244Depreciation
              
              
              71,206
              
              
              
              1,515
              
              
              
              72,721Total
      assets
              
              
              26,378,711
              
              
              
              1,864,727
              
              
              
              28,243,438Expenditure
      for long-lived assets
              
              $
              541,814
              
              
              
              -
              
              
              
              541,814
 
 Six
      months endedJune 30, 2010Valves
                manufacturingbusiness
              
              
              Energy-savingrelatedbusiness
              
              
              TotalOperating
      revenues, net:-
      Products
              
              $
              5,925,091
              
              
              $
              239,753
              
              
              $
              6,164,844-
      Services
              
              
              3,518,451
              
              
              
              -
              
              
              
              3,518,451-
      Project
              
              
              -
              
              
              
              375,157
              
              
              
              375,157Total
      operating revenues
              
              
              9,443,542
              
              
              
              614,910
              
              
              
              10,058,452Cost
      of revenues
              
              
              (6,818,377
              )
              
              
              (537,380
              )
              
              
              (7,355,757
              )Gross
      profit
              
              
              2,625,165
              
              
              
              77,530
              
              
              
              2,702,695Depreciation
              
              
              135,732
              
              
              
              9,663
              
              
              
              145,395Total
      assets
              
              
              26,378,711
              
              
              
              1,864,727
              
              
              
              28,243,438Expenditure
      for long-lived assets
              
              $
              2,776,561
              
              
              
              -
              
              
              
              2,776,561
  F-17
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 Three
      months endedJune 30, 2009Valves
                manufacturingbusiness
              
              
              Energy-savingrelatedbusiness
              
              
              TotalOperating
      revenues, net:-
      Products
              
              $
              4,627,683
              
              
              $
              52
              
              
              $
              4,627,735-
      Services
              
              
              590,969
              
              
              
              -
              
              
              
              590,969Total
      operating revenues
              
              
              5,218,652
              
              
              
              52
              
              
              
              5,218,704Cost
      of revenues
              
              
              (3,693,886
              )
              
              
              (39
              )
              
              
              (3,693,925
              )Gross
      profit
              
              
              1,524,766
              
              
              $
              13
              
              
              $
              1,524,779Depreciation
              
              
              74,746
              
              
              
              211
              
              
              
              74,957Total
      assets
              
              
              21,338,299
              
              
              
              84,526
              
              
              
              21,422,825Expenditure
      for long-lived assets
              
              $
              3,699,058
              
              
              
              -
              
              
              
              3,699,058
 
 Six
      months endedJune 30, 2009Valves
                manufacturingbusiness
              
              
              Energy-savingrelatedbusiness
              
              
              TotalOperating
      revenues, net:-
      Products
              
              $
              6,625,976
              
              
              $
              103,585
              
              
              $
              6,729,561-
      Services
              
              
              908,975
              
              
              
              -
              
              
              
              908,975Total
      operating revenues
              
              
              7,534,951
              
              
              
              103,585
              
              
              
              7,638,536Cost
      of revenues
              
              
              (5,355,523
              )
              
              
              (78,772
              )
              
              
              (5,434,295
              )Gross
      profit
              
              
              2,179,428
              
              
              
              24,813
              
              
              
              2,204,241Depreciation
              
              
              148,359
              
              
              
              604
              
              
              
              148,963Total
      assets
              
              
              21,338,299
              
              
              
              84,526
              
              
              
              21,422,825Expenditure
      for long-lived assets
              
              $
              4,155,773
              
              
              
              -
              
              
              
              4,155,773
  NOTE14 CONCENTRATIONS
OF RISK
 
 The
Company is exposed to the following concentrations of risk:
  (a)         Major
customers
 
 For the
three and six months ended June 30, 2010 and 2009, the customer who accounts for
10% or more of the Company’s revenues and its outstanding balance as at
period-end dates, are presented as follows:
 
 Three
      months endedJune 30, 2010
              
              
              June
      30, 2010Customer
              
              
              Revenues
              
              Percentage
                of
      revenues
              
              
              Accounts
                ReceivableCustomer
      A
              
              
              $
              1,551,538
              
              22%
              
              
              $
              4,177,157Customer
      C
              
              
              
              2,452,946
              
              34%
              
              
              
              384,127Customer
      D
              
              
              
              1,673,949
              
              23%
              
              
              
              203,566Total:
              
              $
              5,678,433
              
              79%
              
              Total:
              $
              4,764,850
 
 Six
      months endedJune 30, 2010
              
              
              June
      30,2010Customer
              
              
              Revenues
              
              Percentage
                of
      revenues
              
              
              Accounts
                ReceivableCustomer
      A
              
              
              $
              1,599,444
              
              16%
              
              
              $
              4,177,157Customer
      C
              
              
              
              2,452,946
              
              24%
              
              
              
              384,127Customer
      D
              
              
              
              1,673,949
              
              17%
              
              
              
              203,566Total:
              
              $
              5,726,339
              
              57%
              
              Total:
              $
              4,764,850
  F-18
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 Three
      months endedJune 30, 2009
              
              
              June
      30,2009Customer
              
              
              Revenues
              
              Percentage
                of
      revenues
              
              
              Accounts
                ReceivableCustomer
      A
              
              
              $
              3,403,588
              
              65%
              
              
              $
              7,219,505Customer
      B
              
              
              
              549,735
              
              11%
              
              
              
              257,349Total:
              
              $
              3,953,323
              
              76%
              
              Total:
              $
              7,476,854
  Six
      months endedJune 30, 2009
              
              
              June
      30,2009Customer
              
              Revenues
              
              
              Percentageof
      revenues
              
              
              AccountsReceivableCustomer
      A
              
              $
              5,158,710
              
              
              
              68
              %
              
              $
              7,219,505
 
 (b)         Major
vendors
 
 For the
three and six months ended June 30, 2010 and 2009, the vendor who accounts for
10% or more of the Company’s purchases and its outstanding balance as at
period-end dates, are presented as follows:
 
 Three
      months endedJune 30, 2010
              
              
              June
      30,2010Vendor
              
              
              Purchases
              
              Percentage
                of
      purchases
              
              
              Accounts
                PayableVendors
      A
              
              
              $
              2,455,453
              
              39%
              
              
              $
              -Vendors
      B
              
              
              
              713,395
              
              11%
              
              
              
              -Total:
              
              $
              3,168,848
              
              50%
              
              Total:
              $
              -
 
 Six
      months endedJune 30, 2010
              
              
              June
      30,2010Vendor
              
              
              Purchases
              
              Percentage
                of
      purchases
              
              
              Accounts
                PayableVendors
      A
              
              
              $
              3,435,468
              
              40%
              
              
              $
              -Total:
              
              $
              3,435,468
              
              40%
              
              Total:
              $
              -
 
 Three
      months endedJune 30, 2009
              
              
              June
      30,2009Vendor
              
              
              Purchases
              
              Percentage
                of
      purchases
              
              
              Accounts
                payableVendors
      A
              
              
              $
              426,964
              
              17%
              
              
              $
              348,160Vendors
      C
              
              
              
              543,491
              
              22%
              
              
              
              250,555Total:
              
              $
              970,455
              
              39%
              
              Total:
              $
              598,715
 
 Six
      months endedJune 30, 2009
              
              
              June
      30,2009Vendor
              
              
              Purchases
              
              Percentage
                of
      purchases
              
              
              Accounts
                payableVendors
      A
              
              
              $
              968,013
              
              23%
              
              
              $
              348,160Vendors
      B
              
              
              
              530,264
              
              13%
              
              
              
              121,292Vendors
      C
              
              
              
              543,491
              
              13%
              
              
              
              250,555Total:
              
              $
              2,041,768
              
              49%
              
              Total:
              $
              720,007
  F-19
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 (c)         Credit
risk
 
 Financial
instruments that are potentially subject to credit risk consist principally of
trade receivables. The Company believes the concentration of credit risk in its
trade receivables is substantially mitigated by its ongoing credit evaluation
process and relatively short collection terms. The Company does not generally
require collateral from customers. The Company evaluates the need for an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.
 
 (d) Interest
rate risk
 
 As the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
 
 The
Company’s interest-rate risk arises from note payable, borrowings under
promissory notes and finance lease. The Company manages interest rate risk by
varying the issuance and maturity dates variable rate debt, limiting the amount
of variable rate debt, and continually monitoring the effects of market changes
in interest rates. As of June 30, 2010, note payable, borrowings under
promissory notes and finance lease was at fixed rates.
 
 (e)         Exchange
rate risk
 
 The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets and
liabilities are denominated in RMB. As a result, the Company is exposed to
foreign exchange risk as its revenues and results of operations may be affected
by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates
against US$, the value of RMB revenues and assets as expressed in US$ financial
statements will decline. The Company does not hold any derivative or other
financial instruments that expose to substantial market risk.
 
 (f)         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.
 
 NOTE15 COMMITMENTS
AND CONTINGENCIES
 
 (a) Operating
lease commitments
 
 The
Company is committed under a non-cancelable operating lease with fixed monthly
rentals, due through February 9, 2011.Costs incurred under the operating lease,
which are considered equivalent to the market rate, are recorded as rental
expense and totaled approximately $23,776 and $25,573 for the six months ended
June 30, 2010 and 2009, respectively.
 
 As of
June 30, 2010, the future minimum rental payments due under this non-cancelable
operating lease in the next twelve months is $26,621.
  F-20
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 (b) Capital
commitments
 
 In 2008,
the Company was approved by the local government to construct a new
manufacturing facility for energy-saving products and equipment in Yingzhou
District Industrial Park, Tieling City, Liaoning Province, the PRC. Total
estimated construction cost of a new manufacturing facility is approximately $16
million (including land use rights of approximately $3 million). The
construction project is expected to be fully completed in late
2010.
 
 As of
June 30, 2010, the Company is committed to the future contingent payments of
approximately $0.85 million on the purchase of new plant and equipment and third
party contractors in the next twelve months.
 
 (c) Litigation
 
 On May
21, 2007, a civil complaint Robert Dawley vs NF Energy Saving Corp., 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
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 against the Company, plus prejudgment interest in the amount of
$132,822, with continuing interest of $132 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. 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 in fiscal year 2008. The parties have
completed briefing the appeal and are waiting for the court’s decision on the
appeal. In addition, two of the Company’s executive officers and directors, Mr.
Gang Li and Ms. Li Hua Wang have personally agreed to guarantee and bear all
contingent liabilities and costs to be incurred from this litigation
claim.
 
 On April
1, 2010, the Eleventh Circuit issued a unanimous opinion reversing the District
Court’s Judgment on the grounds that Dawley was not entitled to the relief that
he sought and that the law did not support the District Court’s Judgment against
NF Energy.  The Eleventh Circuit, to the contrary, entered Judgment in NF
Energy’s favor. Subsequently, the United States District Court for the Middle
District of Florida, acting upon instructions from the Court of Appeal, entered
a Bill of Costs against Robert Dawley on June 24, 2010, totaling
$2,088.
 
 Mr.
Dawley has orally advised the Company that he has filed a Petition for Writ of
Certiorari of the Eleventh Circuit’s Opinion and Judgment with the Supreme Court
of the United States.  However, to date, the Company has received no
indication that the Supreme Court has accepted any filings by Mr. Dawley or has
scheduled any response to his Petition.  The Company therefore has not
taken any action with respect to any such Petition.
 
 On or
about July 1, 2010, Mr. Dawley apparently commenced a second action before the
United States District Court for the Middle District of Florida, entitled Robert
Dawley v. NF Energy Corp. of America, et al.  In addition to the Company,
Mr. Dawley has named as defendants Mr. Gang Li and the Company’s litigation
counsel.  Mr. Dawley asserts, among other things, that Defendants committed
fraud with respect to the same agreements as were the subject of the prior
action.  He also complains that he is entitled to have a restrictive legend
removed from certain stock certificates that the predecessor company had issued
to him in exchange for an additional capital contribution.  Though he has
served copies of the Complaint, he has yet to serve a Summons requiring the
Defendants to respond to the Complaint.
 
 The
Company believes that the second action by Mr. Dawley has no merit, is barred by
the Judgment entered by the Court of Appeals in the prior action and, in any
event, fails to state fraud claims with the specificity required by law. 
Mr. Dawley has refused to withdraw the complaint, and so it is the Company’s
intention to ask the Court to strike the complaint and issue monetary sanctions
against Mr. Dawley equivalent to the amount of the Company’s attorneys’ fees and
costs incurred as a result of the second action.
  F-21
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 Though
the Company believes that its contemplated motion has merit, the Company cannot
predict with certainty that the Court will agree.  Accordingly, the Company
does not express any opinion as to the likelihood of its motion’s success. 
In the event that the Court does deny the motion, it is the Company’s intent to
continue its efforts to prevail against Mr. Dawley on behalf of all the named
Defendants to the second action.
 
 NOTE16 SUBSEQUENT
EVENTS
 
 On July
27, 2010, the Company announced that it has signed a two year unsecured credit
facility with a domestic Chinese bank to borrow up to RMB 40 million
(approximately $5.88 million based on current exchange rates).
 
 Under the
terms of the agreement, the Company will be able to draw up to a maximum of RMB
40 million over a 24 month period ending June 28, 2012. Outstanding balances
under the facility will accrue interest at a rate of 1.3 times the Bank of China
benchmark lending rate. Any amounts of principal repaid may be redrawn during
the 24 month period. Drawings under the facility will be used to complete the
Company’s new manufacturing plant and for general corporate
purposes.
  F-22


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





GENERAL
DESCRIPTION OF BUSINESS





As used
herein the terms “we”, “us”, “our,” the “Registrant,” “NFEC” and the “Company”
means, NF Energy Saving Corporation, a Delaware corporation, formerly known as
NF Energy Saving Corporation of America, Diagnostic Corporation of America,
Global Broadcast Group, Inc., and Galli Process, Inc. These terms also refer to
our subsidiary corporations, Liaoning Nengfa Weiye Energy Technology Corporation
Ltd. (“Nengfa Energy”), formerly known as Liaoning Nengfa Weiye Pipe Network
Construction and Operation Co. Ltd. (“Neng Fa”), a corporation organized and
existing under the laws of the Peoples’ Republic of China, which was acquired in
November 2006, and 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, which was established in September
2007.





NF Energy
Saving Corporation 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 February 7, 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 12, 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, and on August 24, 2009, the
Company further changed its name to NF Energy Saving Corporation, in both
instances 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”), among
the Company, 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 to 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 the
Company ceased all of its other operations and adopted and implemented the
business plan of Neng Fa.





Nengfa
Energy’s area of business includes research and development, processing,
manufacturing, 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, providing comprehensive
solutions for energy-saving emission reduction. The Sales Company, which is a
subsidiary of Nenfa Energy, is 99% owned by Nengfa Energy. The Sales Company
engages in the sales and marketing of flow control equipment and products in the
PRC.





On August
26, 2009, the Company announced 3 to 1 reverse stock split. The total number of
outstanding common shares changed from 39,872,704 pre-split to 13,291,387
post-split.





NFEC
specializes in the 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,
municipal infrastructure development industries, and customized comprehensive
solutions for energy-saving emission reduction. We also are engaged in the
manufacturing and sales of the energy-saving flow control equipment. According
to analysis of ESCO Committee of China Energy Conservation Association,
currently, our flow control equipment business holds a leading position in
China. The Company has the Det Norske Veritas Management System Certificate
which certifies that our products conform to the Management System Standard
ISO9001:2000. We have been a member of the 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, the Company also received flow
control equipment contracts from seven cities in Liaoning Province for their
large water supply system. In 2009, the Company has received several flow
control equipment supply contracts, such as Xijiang diversion project of
Guandong Province, and Phase 1 of Guangdong Yuedian Huilai Power Plant. In 2010,
the Company has commenced a new Biomass energy promotion project with Fuxin
Inner Mongolia Autonomy Country.





23


Our
principal future development focus is to complete the construction of our new
energy manufacturing facility which will enhance the Company’s productivity and
expand its manufacturing capacity. The new facility will be completed by no
later than the end of 2010.In conjunction with the planned facility expansion,
we also will undertake efforts on by developing technology to optimize the
business revenue structure of the Company, and promote energy-saving
technologies efficiency as part of our sales efforts. We are aiming to become a
main supplier of new energy equipment, energy-saving equipment and flow control
devices; become a major operator of energy-saving technological transformation
projects and comprehensive management of energy-saving emission reduction
projects; and become the general contractor of energy-saving technological
transformation projects.





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 of Financial Condition and Results of Operations” 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. We undertake 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, , 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 compliance with our contract
terms; 2) our ability to compete effectively with other companies in our
industry segments; 3) our ability to raise capital or generate sufficient
working capital in order to effectuate our business plan; 4) our ability to
retain our key executives; and 5) our ability to win and perform significant
construction and infrastructure projects.





CRITICAL
ACCOUNTING POLICIES





An
appreciation of our critical accounting policies is necessary to understand our
financial results. These policies may require management to make difficult and
subjective judgments regarding uncertainties, and as a result, such estimates
may significantly impact our financial results. The precision of these estimates
and the likelihood of future changes depend on a number of underlying variables
and a range of possible outcomes. We applied our critical accounting policies
and estimation methods consistently in all periods presented.





Revenue
recognition





In
accordance with the ASC Topic 605, “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 collectability is reasonably assured.





24


The
Company’s revenue is principally derived from three primary sources: Sales of
energy saving flow control equipment, provision of energy project management and
sub-contracting services, and provision of energy-saving reconstruction
projects.





(a) Sale
of products





The
Company derives a majority of its revenues from the sale of energy saving flow
control equipment. Generally, the energy saving flow control equipment is
manufactured and configured to customer requirements. The Company typically
produces the energy saving flow control equipment for customers during a period
from one to six months. When the Company completes production in accordance with
the customer’s specification, the customer is required to inspect the finished
products at the Company’s plant to approve quality and conformity and final
acceptance. Once the product is accepted by the customer, the Company undertakes
delivery to the customer, usually within a month.





The
Company recognizes revenue from the sale of such finished products upon delivery
to the customers, when the title and risk of loss are fully transferred to the
customers. The Company records its revenues, net of value added taxes (“VAT”).
The Company is subject to VAT which is levied on the majority of the products it
sells at the rate of 17% on the invoiced value. The Company experienced no
product returns and has recorded no reserve for returns for the three months
ended June 30, 2010 and 2009.





(b)
Service revenue





Service
revenue is derived from energy-saving technical services, project management or
sub-contracting services that are not an element of the arrangement for the sale
of products. These services are generally billed on a time-cost plus basis, for
the period of service provided, which is generally from two to three
months.





Revenue
is recognized, net of business taxes, when the service is rendered and accepted
by the customer.





(c)
Project revenue





In
February 2010, NFEC, through its subsidiary Nengfa Energy, entered into a
cooperative arrangement with one of the biomass energy technology companies in
Fuxin (“Fuxin”) for the development to energy-related systems and facilities and
the provision of an economic energy saving solutions to the farmers in LaoNing
Province, the PRC for a term of 1 year. Under this project arrangement, Nengfa
Energy agreed to design, build and provide the energy-related equipments and
components, as well as provide training to Fuxin to operate these energy-related
facilities. Fuxin agreed to operate the administration of this arrangement and
provide on-site training to the farmers to operate these facilities. In
consideration for this cooperative arrangement, both parties agreed to equally
share in the sales of energy-related systems during the term of the project, in
accordance with the agreed energy-saving milestone requirement. At the end of
the project term, Nengfa agreed to transfer its ownership and proprietary right
of the energy-related system and facility to Fuxin.





For the
six months ended June 30, 2010, Nengfa Energy is recalled project income of
$375,157 from the cooperative arrangement which it recognized as project revenue
in the statement of operations under the installment method.





(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, do not bear interest and are due
within the contractual payment terms, generally 30 to 90 days from shipment.
Credit is extended based on evaluation of a customer’s financial condition, the
customer’s credit-worthiness and their payment history. Accounts receivable
outstanding longer than the contractual payment terms are considered past due.
Past due balances over 90 days and over a specified amount are reviewed
individually for collectability. At the end of each period, the Company
specifically evaluates each individual customer’s financial condition, credit
history, and the current economic conditions to monitor the progress of the
collection of accounts receivable. The Company will consider an allowance for
doubtful accounts for any estimated losses resulting from the inability of its
customers to make required payments. For the receivables that are past due or
not being paid according to payment terms, the appropriate actions are taken to
exhaust all means of collection, including seeking legal resolution in a court
of law.





25


The
payment terms for our accounts receivable from each source of revenue is set
forth below:





Revenue items
            
            General payment terms:1.
            Sales
      of products
            
            (a)10%
      of the contract value will be paid by the customer upon signing the
      contract.
              
              (b)50%
      of the contract value will be paid by the customer after the physical
      inspection (with a credit term from 30 to 90 days).
              
              (c)30
      to 35% of the contract value will be paid upon the delivery to the
      customer (with a credit term from 30 to 90 days).
              
              (d)5
      to 10% of the contract value will be paid within 12 months (from the
      delivery date) as warranty retention for the product.2.
            Services
            
            (a)10
      to 15 % of the contract value will be paid by the customer upon signing
      the contract.
              
              (b)The
      remaining contract value will be paid by the customer upon the completion
      of the service (with a credit term from 30 to 90 days).3.
            Projects
            
            Payments
      based on the achievement of certain milestones to be made over the term of
      the project.





In
general, accounts receivables with aging within 90 days, between 91 and 180
days, and between 181 and 360 days represent approximately 30-40%, 50-60%, and
5%-15%, respectively, of the total accounts receivable. The Company is highly
aware the risk of default, and as a result, we actively monitor accounts
receivable with aging above 1 year and accounting for at least 1% of the total
accounts receivable.





For most
of our contracts, our customers are generally large or stated-owned construction
contractors or developers mainly engaged in government-sponsored infrastructure
projects such as large hydraulic/aqua-engineering projects, power plants and
urban sewage network projects in the PRC. Usually, these infrastructure projects
are undertaken in a number of phrases over a certain period of time. Our flow
control equipment components are generally considered as major or significant
components in the development phase of these infrastructure projects. In our
industry practice, we are paid by these construction contractors and/or
developers when they have been paid by the local government or state-owned
enterprises after the full inspection of each milestone during the construction
phrase. Given that the construction of these infrastructure projects are very
large in size and complex and requires a high quality level in completion, the
inspection process may take a considerable amount of time. Therefore, we may not
collect the accounts receivable on a timely manner or only after a period longer
than our agreed payment terms.





We have a
high level of assurance on the recoverability of these accounts receivable,
based on our ongoing assessment of the customer’s credit-worthiness and their
payment history. These customers are usually large state-owned corporations with
good credit ratings. At the end of each period, we specifically evaluate the
structure and collectability of accounts receivable and for receivables that are
past due or not being paid according to the payment terms, we take appropriate
action to exhaust all means of collection, including seeking legal resolution in
a court of law. For customers with large amounts of accounts receivable, we may
take other steps, such as limiting sales and changing payment terms and
requesting forms of security. We will consider an adjustment to the allowance
for doubtful accounts for any estimated losses resulting from the inability of
our customers to make required payments.





Account
balances are charged off against the allowance for doubtful accounts after all
means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance sheet credit
exposure related to its customers.





Product
warranty





Under the
terms of the contracts, the Company offers its customers a free 12-months of
product warranty on a case-by–case basis, depending upon the type of customer,
and the nature and size of the infrastructure project. Under such arrangements,
a portion of the project contract balance (usually 5-10% of contract value) is
withheld by a customer for 12 months, until the product warranty has expired.
The Company has not experienced any material returns under this warranty
provision. As such, no reserve for product warranty has been provided for the
three months and six months ended June 30, 2010.





26


Inventories





Inventories
are stated at the lower of cost or market (net realizable value), with the cost
being determined on a weighted average method. Costs include material, labor and
manufacturing overhead costs. Quarterly, the Company reviews historical sales
activity to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand. The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of June 30, 2010, the Company did
not record an allowance for obsolete inventories, nor have there been any
write-offs.





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
      valuePlant
      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 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.





Finance
leases





Leases
that transfer substantially all the rewards and risks of ownership to the
lessee, other than legal title, are accounted for as finance leases.
Substantially all of the risks or benefits of ownership are deemed to have been
transferred if any one of the four criteria is met: (i) transfer of ownership to
the lessee at the end of the lease term, (ii) the lease containing a bargain
purchase option, (iii) the lease term exceeding 75% of the estimated economic
life of the leased asset, and (iv) the present value of the minimum lease
payments exceeding 90% of the fair value. At the inception of a finance lease,
the Company as the lessee records an asset and an obligation at an amount equal
to the present value of the minimum lease payments. The leased asset is
amortized over the shorter of the lease term or its estimated useful life if
title does not transfer to the Company, while the leased asset is depreciated in
accordance with the Company’s normal depreciation policy if the title is to
eventually transfer to the Company. The periodic lease payments made during the
lease term are allocated between a reduction in the obligation and interest
element using the effective interest method in accordance with the provisions of
Accounting Standards Codification (“ASC”) Subtopic 835-30, “Imputation of
Interest”.





Stock-based
compensation





The
Company adopts ASC Topic 718, “Stock Compensation”,(“ASC
718”) using the fair value method. Under ASC Topic 718, the stock-based
compensation is measured using the Black-Scholes Option-Pricing model on the
date of grant.





For
non-employee stock-based compensation, the Company adopts ASC Subtopic 505-50,
“Equity-Based Payments to Non-Employees” Stock-based compensation related to
non-employees is accounted for based on the fair value of the related stock or
options or the fair value of the services on the grant date, whichever is more
readily determinable in accordance with ASC 718.





In
accordance with ASC Topic 470-20 “Debt with conversion and other
options”, the warrants and related convertible notes should be accounted
for as two separate instruments (equity and debt instruments). The accounting
for these instruments reflects the notion that the consideration received upon
issuance must be allocated between equity and debt components. Proceeds from the
sale of a debt instrument with stock purchase warrants are allocated to the two
elements, based on the relative fair values of the debt instruments without the
warrants themselves at time of issuance. The portion of the proceeds allocated
to the warrants is accounted for as paid-in capital. The remainder of the
proceeds is allocated to the debt instruments portion of the transaction This
usually results in a discount, which is to be amortized over the period of debt
using the interest method.





27


Income
Taxes





The
Company adopts ASC Topic 740, “Income Taxes” regarding
accounting for uncertainty in income taxes which prescribes the recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken on a tax return. In
addition, the guidance requires the determination of whether the benefits of tax
positions will be more likely than not sustained upon an audit based upon the
technical merits of the tax position. For tax positions that are determined to
be more likely sustainable than not upon audit, the Company recognizes the
largest amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not
determined to be more likely sustainable than not upon audit, the Company does
not recognize any portion of the benefit in the financial statements. The
guidance provides for de-recognition, classification, penalties and interest,
accounting in interim periods and disclosure.





For the
three months and six months ended June 30, 2010 and 2009, the Company did not
have any interest and penalties associated with tax positions. As of June 30,
2010, the Company did not have any significant unrecognized uncertain tax
positions.





The
Company conducts its majority of business in the PRC and is subject to tax in
that jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by a foreign tax authority. For the
period ended June 30, 2010, the Company filed and cleared its 2009 PRC tax
return by such tax authority.





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 condensed consolidated statement of
operations.





The
reporting currency of the Company is the United States dollar (“US$”). The
Company’s subsidiaries in the PRC, Nengfa Energy and Sales Company maintain
their books and records in the local currency of the PRC, Renminbi (“RMB”),
which is 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, “Translationof Financial Statement”, using the exchange rate on
the balance sheet date. Revenues and expenses are translated at average rates
prevailing during the period. The gains and losses resulting from translation of
financial statements of foreign subsidiaries are recorded as a separate
component of accumulated other comprehensive income within the statement of
stockholders’ equity.





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





June
      30, 2010
            
            
            June
      30, 2009Period-end
      RMB:US$1 exchange rate
            
            
            6.8086
            
            
            
            6.8432Average
      monthly RMB:US$1 exchange rate
            
            
            6.8348
            
            
            
            6.8448




RESULTS
OF OPERATIONS


FOR
THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009





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 $7,217,969 and $10,058,452 for the three months and six months
ended June 30, 2010, respectively, as compared to $ 5,218,704 and $7,638,536 for
the corresponding period in 2009. Total revenues increased by $1,999,265 and
$2,419,916, a 38% and 32% increase for the three and six months ended June 30,
2010, respectively, as compared to total revenues for the three and six months
ended June 30, 2009. These increase were due to a significant increases in
service and project revenue.





28


2010 is
the last year of the “Eleventh Five-Year” emission reduction targets. It is also
the first year for China to put forward its 40-45% emission reduction target,
which is a point of emphasis for the Chinese government.  Mr. Zhang
Shaochun, the Vice Minister of Finance for the central government, has stated
that the special funding for the energy-saving emission reduction industry will
be up to 500 billion RMB, 70% more than the prior year. The government intends
to promote large-scaled energy-saving and efficiency products and will support
key energy-saving emission reduction projects.





In a 2010
government report from the office of the Chinese Premier, Wen Jiabao, it was
stated that: “We shall put greater efforts on development of low-carbon
technologies, promotion of efficient energy-saving technologies, and actively
develop new energy and renewable energy....”  The report further stated
that the country “...should attempt to engage in construction characterized by
industrial carbon emissions system and consumption patterns.” This indicates
that in 2010 and thereafter low carbon initiatives “...will become a new impetus
and engine for economic development, and it will become a new weathervane for
construction of leading industrial systems and consumption
patterns.”





The
Ministry of Finance is increasing investment in the development of a low-carbon
economy. The government see promotion of energy-efficiency resulting in economic
benefits and promoting growth in higher value technologies and industries.
Therefore the expectation is that government support for energy saving projects
will be widespread and touch on many aspects of the economy, including geo-water
sources, energy management contracts, efficient motors and other energy-saving
elements in the industry. This will promote the development of energy
efficiency, industrial energy efficiency and energy-efficient power transmission
and distribution.





On April
6, 2010, the State Council of China approved the “Opinion on Accelerating the
Implementation of Energy Management Contract to Promote the Development of
Energy Service Industry,” (“the Opinion”)  which was proposed by the
National Development and Reform Commission, the Ministry of Finance, People’s
Bank of China and the State Taxation Administration. A series of new tax
benefits will stimulate China’s domestic energy conservation projects and
services development. NF Energy will further develop its energy conservation
projects by using “Energy Management Contract” (“EMC”) and “Energy Performance
Certificate” models.





On June
3, 2010, the Ministry of Finance of the Peoples’ Republic of China and the
National Development and Reform Commission jointly released a notice policy
“Interim measurements to manage financial incentive funding on Energy Management
Contract”. The policy states that the Ministry of Finance will reward the energy
conservation companies who process industrial energy conservation projects by
using the EMC model and sharing the energy efficiency benefit, with an annual
energy saved between 500 tons of standard coal and 1,000 tons of standard coal.
The reward standard is 240 RMB per ton of standard coal save. The policies
should stimulate the willingness of industrial companies to undertake energy
conservation projects, and should greatly benefit Nengfa Energy’s energy saving
business which fits within the government stimulus policies for building energy
saving infrastructure projects for municipalities and industrial companies. We
expect significant growth in all our lines of business in 2010.





The
Company plans to restructure its business mix during 2010. The Company expects
increasing revenue from higher margin energy conservation projects and services
as this segment grows to 30% of total revenues by 2010 from 15% of revenues in
2009, while having steady revenue growth from the sale of our products. Due to
market demand, we expect to increase delivery of our flow control equipment in
third and fourth quarter of 2010, the increase of project revenue has shown that
the Company is undertaking a good development as planned.





Product
Revenues





Product
revenues are derived principally from the sale of self-manufactured products
relating to energy- saving flow control equipment and new energy related
equipment. Product revenues were $3,650,612 and $6,915,157, respectively, or 51%
and 61% of total revenues for the three and six months ended June 30, 2010, as
compared to $4,627,735 and $6,164,844, respectively or 89% and 88% of total
revenues, for the corresponding period in 2009. Product revenues decreased by
$977,123 and $564,717, respectively, a 21% and 8% decrease, over the
corresponding periods in 2009. This decrease is primarily due to most of the
Company’s orders are being delivered in third and fourth quarters of 2010. The
Company’s total revenue for the whole year is following a steady upward
trend.





29


Service
Revenues





Service
revenues are derived principally from energy-saving technical services and
product collaboration processing services. These services are generally billed
on a time-cost plus basis. Revenue is recognized, net of business taxes when
service is rendered and accepted by the customers. Service revenues were
$3,192,200 and $3,518,451, respectively, or 44% and 35%of total revenues, for
the three and six months ended June 30, 2010, as compared to $590,969 and
$908,975, respectively, or 11% and 12% of total revenues, for the corresponding
period in 2009. Service revenues increased by $2,601,231 and $2,609,476,
respectively, a 440% and 287% increase over the same period in 2009. This
increase is primarily due to the increase in service contracts.





Project
Revenues





Project
revenues are derived principally from energy-saving, re-engineering projects
that require significant modification, customization and installation. The
Company applies the percentage-of-completion method to recognize project
revenues. Project revenues were $375, 157, or 5% and 4% of the total revenues
for the three and six months ended June 30, 2010. For the same period ended in
2009, there was no project revenue. The Company has been continuously conducting
energy-saving projects’ developments; actively developing energy conservation
and energy saving projects and restructuring the Company’s business mix. In
February 2010, NFEC, through its subsidiary Nengfa Energy, entered into a
cooperative arrangement with one of the biomass energy technology companies in
Fuxin (“Fuxin”) for the development to energy-related systems and
facilities and the provision of an economic energy saving solutions to the
farmers in LaoNing Province, the PRC for a term of 1 year. Under this project
arrangement, Nengfa Energy agreed to design, build and provide the
energy-related equipments and components, as well as provide training to Fuxin
to operate these energy-related facilities. Fuxin agreed to operate the
administration of this arrangement and provide on-site training to the farmers
to operate these facilities. In consideration for this cooperative arrangement,
both parties agreed to equally share in the sales of energy-related system
during the term of the project, in accordance with the agreed energy-saving
milestone requirement. At the end of the project term, Nengfa Energy agreed to
transfer its ownership and proprietary right to the energy-related system and
facility to Fuxin.





For the
six months ended June 30, 2010, Nengfa Energy is recognized $375,157 as project
revenue from the cooperative arrangement in the statement of operation under the
installment method.





COSTS
AND EXPENSES





Cost
of Revenues





Cost of
revenues consists primarily of material costs, direct labor, depreciation and
manufacturing overhead, which are directly attributable to the manufacture of
products and the rendering of services. Total cost of revenues was $5,194,725
and $7,355,757, respectively, for the three and six months ended June 30, 2010,
as compared to $3,693,925 and $5,434,295, respectively, for the corresponding
three month period in 2009, an increase of $1,500,800 and $1,921,462, or
approximately 41% and 35%. This increase was primarily due to the increase
services provided and projects commenced during this period.





The
overall gross profit for the Company was $2,023,244 (28% margin) and $2,702,695
(27% margin), respectively, for the three and six months ended June 30, 2010, as
compared to $1,524,779 (29% margin) and $2,204,241 (29% margin), respectively,
for the corresponding three and six month period in 2009, a increase of $498,465
and $498,454, respectively. The reason for the increase in gross profit was due
to an increase of product sold gross profit. Because the steel structured
casting processes for some of the service contracts are simpler than others, the
related gross margin for these contracts is lower. Therefore the average overall
gross margin decreased 1% and 2%, respectively, for three and six month ended
June 30, 2010, compare to the corresponding period in 2009.





Cost
of Products





Total
cost of products was $2,315,196 and $4,264,543, respectively, for the three and
six months ended June 30, 2010, as compared to $3,250,140 and $4,816,014,
respectively, for the corresponding three and six month period in 2009, a
decrease of $933,944 and $551,471, respectively, or approximately 29% and 11%.
This decrease is primarily due to the decrease in the number of products
delivered in this period. In addition, for some contracts with regular product
orders, the raw material waste is less. Therefore, the cost was relatively
low.





30


The gross
profit for products was $1,334,416 (37% margin and 65% of total gross profit)
and $1,900,301 (31% margin and 70% of total gross profit ), respectively, for
the three and six months ended June 30, 2010, as compared to, $1,377,595 (30%
margin and 90% of total gross profit) and $1,913,547 (28% margin and 87% of
total gross profit), respectively, for the corresponding three and six month
period in 2009, a decrease of $43,179 and $13,246 or approximately 3% and 1%.
This decrease is primarily due to the decrease in product revenues being greater
than the decrease in cost of products.





Cost
of Services





The cost
of services was $2,572,151 and $2,784,836, respectively for the three and six
months ended June 30, 2010, as compared to $443,785 and $618,281, respectively,
for the corresponding three and six month period in 2009, an increase of
$2,128,366 and $2,166,555 or approximately 480% and 350%. This increase is
primarily due to an increase in service contracts.





The gross
profit for services was $620,049 (19% margin and 31% of the total gross profit)
and $733,615(21% margin and 27% of the total gross profit), respectively, for
the three and six months ended June 30, 2010., as compared to $147,184 (25%
margin and 10% of total gross profit) and $290,694 (32% margin and 13% of total
gross profit) for the corresponding period in 2009, an increase of $472,865 and
$442,921, respectively, or approximately 321% and 152%. This increase is
primarily due to the significant increase in service contract revenue. The gross
margin decreased due to a relative high percentage of production collaboration
processing service contracts compare to the total service revenue. These
contracts have lower gross margin, which led the overall decrease in service
gross margin.





Cost
of Projects





In 2007,
the Company began contracting for energy-saving re-engineering projects that
require significant modification, customization and/or complex installation. The
cost of projects was $306,378 for the three and six months ended June 30, 2010.
There was no project implemented in the same period accordingly in 2009.
Therefore the cost was zero.





The gross
profit for projects was $68,779 (18% margin and 3% of total gross margin) and
$68,779 (18% margin and 3% of total gross margin) for the three and six months
ended June 30, 2010, respectively. This increase is primarily due to an increase
in project revenue. The cost of the project in this period was primarily the
equipment purchasing cost. In China, the benefit sharing period for energy
saving or energy conservation projects are usually 5 to 10 years, with a gross
margin between 35%-40%. The project we had in this period only shares 50% of the
first year energy saving benefit, although the gross margin is relatively lower
than general energy conservation projects, the return and payment are stable.
The Company continuously develops other energy-saving projects, to ensure a
steady growth in project revenue.





Operating
Expenses





Total
operating expenses were $213,675 and $386,162 for the three month and six month
ended June 30, 2010, as compared to $568,681 and $762,699 for the corresponding
three month and six month period in 2009, respectively, a decrease of $355,006
and $376,537, or approximately 62% and 49%. This decrease is primarily due to
there being no stock based compensation incurred during this period, and
relatively lower sales and marketing expenses.





Selling
and Marketing Expenses





Sales and
marketing expenses were $14,905 and $32,652 for the three and six month ended
June 30, 2010, as compared to $25,628 and $74,453 for the corresponding three
and six month period in 2009, respectively, a decrease of $10,723 and $41,801 or
approximately 42% and 56%. This decrease is primarily due to an increased number
of contracts with lower gross margin during this period. These contracts have
relative lower selling and marketing expenses, and therefore reduced the total
amount of selling and marketing expenses. While the Company’s products sold, and
projects’ revenue increasing through the rest of year 2010, the selling and
marketing expenses will increase accordingly.





31


General
and Administrative Expenses





General
and administrative expenses were $198,770 and $353,510 for the three months and
six months ended June 30, 2010, as compared to $194,053 and $339,246 for the
corresponding three and six month period in 2009, respectively, an increase of
$4,717 and $14,264 or approximately 2% and 4%. The reason of this increase was
due to, the Company issuing $0.96 million of convertible notes to two qualified
investors in February and March 2010. During the three and six month ended June
30, 2010, the Company amortized $14,959 cost of financing. Additionally, due to
a general increase in prices in this period, the Company’s transaction costs
increased as well, the Company also paid a director remuneration amounting
62,000 for six month period.





INCOME
FROM OPERATIONS





Income
from operations was $1,809,569 and $2,316,533, for the three and six months
ended June 30, 2010, respectively, as compared to $956,098 and $1,441,542
for the corresponding three and six month period in 2009, respectively, an
increase of $853,471 and $874,991, respectively, or approximately 89%and 61%.
This increase is primarily due to the 33% increase in gross revenue and the 62%
decrease in operating expenses. The decrease for the six months ended
June 30, 2010, from the corresponding period in 2009 primarily consists of
a zero expense in stock based compensation expense incurred for the six months
ended 2009 for a commitment to issue warrants to purchase up to 450,000 shares
of common stock to several investors relations firms for their work on behalf of
the Company in the coming years. The number of shares subject to these warrants
was adjusted to 150,000 as the result of a 3 to 1 reverse stock split effective
on August 26, 2009.  Subsequent to the ended by September 30, 2009,
warrants for the exercise of 47,222 shares of common stock (on a post-share
split basis) were cancelled by mutual agreement with the warrant holders. By
June, 2010, the Company’s previous Investor Relation contract has expired, all
issued service warrants has been calculated by using Black-Scholes model, and
amortized in previous quarters. Therefore, there was no stock based compensation
in this period.





Other
(expense) Income





Other
expense for the three and six months ended June 30, 2010 was $153,785 and
$234,186, respectively , as compared to other income of $34,763 and $52,779,
respectively, for the corresponding three and six month period in 2009, an
absolute difference of $188,548 and $286,965. This difference is primarily due
to accumulated $181,696 in interest expense, resulting from the issuance of
$960,000 convertible promissory notes during the first quarter of 2010, as well
as $49,679 in interest expense, resulting from a financial lease for two
machines used in the production of our products, incurred during the first
quarter 2010, compared to $33,610 of subsidy income recognized in the in the
first quarter of 2009, and a decrease in interest income as bank saving interest
was lower than financial transaction cost.





Income
Tax Expense





For the
three and six months ended June 30, 2010, income tax expense was $285,465 and
$344,845, respectively, as compare to $181,912 and $243,460 for the
corresponding three and six month period in 2009,respectively. The Company
continues to enjoy the tax holiday in the PRC due to Nengfa Energy’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 12.5% for the following three years.





As of
June 30, 2010, the operations in the United States of America have resulted in
$1,603,931 of cumulative net operating losses, which can be carried forward to
offset future taxable income. The net operating loss carry forward will begin to
expire in 2030, if not utilized. The Company has provided for a valuation
allowance against the deferred tax assets of $545,336 on the expected future tax
benefits from the net operating loss carry forward as management believes it is
more likely than not that these assets will not be realized in the
future.





Effective
from January 1, 2008, the Corporate Income Tax Law of the People’s Republic of
China (the “New CIT Law”) became operative. Under the New CIT Law, Nengfa
Energy, as a foreign investment enterprise, continues to enjoy the unexpired tax
holiday of 50%-reduction on the unified income tax through 2011, subject to a
transitional policy. The Sales Company is a domestic company, which is subject
to the unified statutory income tax rate of 25%.





The
Company’s effective income tax rates for the three months and six months ended
June 30, 2010 were 12.5%.





32


NET
INCOME





Net
income for the three and six months ended June 30, 2010 was $1,370,319 and
$1,737,502, approximately 19% and 17% of the total revenue, respectively, as
compared to $808,949 and $1,250,861, approximately 16% and 16% of the total
revenue, respectively, for the corresponding three and six month period in 2009,
an increase of $561,370 and $486,641 or approximately 69% and 39%. This increase
is primarily due to a restructured business mix in the Company’s whole business,
resulting in service and project revenue increasing significantly, as well as
the Company has improved its internal control such that its costs and expenses
have decreased.





LIQUIDITY
AND CAPITAL RESOURCES





Operating
activities





For the
six months ended June 30, 2010, net cash provided by operating activities was
$1,922,555. This was attributable primarily to net income of 1,737,502, adjusted
by non-cash items of depreciation of $145,395, non-cash interest expense of
$160,984 and a $121,103 decrease in working capital. The decrease in working
capital in the first six months of 2010 was due primarily to the decrease in
accounts receivable by $3,159,179 and decrease in retention receivable by
$469,637, a increase in customer deposits by $467,627, an increase in income tax
payable by $44,417, which was offset by an increase in inventories by
$1,322,393, the increase in prepayment $1,389,196 and increase in other
receivable by $1,013,717, a decrease in the accounts payable by $181,458, and a
decrease in other payables and accrued liabilities by $1,368,916 in this
period.





By June
30, 2010, the account receivable was $9,392,115, which had decreased by
$3,159,179, from $12,510,875 at the beginning of 2010. By the December 31, 2010,
the outstanding account receivable was due to a number of large State owned
projects experienced delayed installation of the systems in which our products
are used and therefore the whole system’s operating tests were not completed,
and as a result, the payment for the products which we provided to these
projects was also delayed. According to our contract, we recognize revenue once
a customer has inspected and has accepted the products and we have delivered the
products to the customer. One of our customers is one of the contractors to the
large state owned infrastructure projects, and our products are a small part of
these projects’ installation. The Company’s receipt of payment schedule was
impacted, not due to the Company’s products, but due to the customer of the
Company meeting its project installation schedule and completion of the whole
system operating test. Although the delayed payment represents a customer breach
of contract, we are willing to coordinate with the contractor to resolve this
issue. Although the account receivable has decreased by June 30, 2010, with an
expected increase in the Company’s revenue though out of the year, the account
receivable may increase according to the contracts’ terms.





Most of
our customers make payments in accordance with the agreed payment terms in a
timely manner. In rare cases, we may offer extended payment terms to certain
customers for equipment sales. These customers are usually large state-owned
corporations with good credit ratings. At the end of each period, we evaluate
the structure and collectability of accounts receivable and for those
receivables that are past due or not being paid according to the payment terms,
we takes appropriate actions to exhaust all means of collection, including
seeking legal resolution in a court of law, for its collection
efforts.





At June
30, 2010, the Company had accounts receivable of $9,392,115, 86%, 9%and 5% of
the accounts receivable are product revenue accounts receivable, service revenue
account receivable and project revenue account receivable, respectively. The
accounts receivable with aging within 90 days, between 91 and 180 days, and
between 181 and 365 days, and above 365 days are $4,871,701, $1,677,790,
$2,643,937 and $198,687, respectively, representing 52%, 18%, 28% and 2% of the
total account receivables, respectively, as of June 30, 2010. The Company
restricted the accounts receivable with aging above 1 year within 1% of the
total account receivables. The Company does not have any off-balance-sheet
credit exposure related to its customers. The detailed account receivable aging,
starting from the invoice date, by June 30, 2010 is as following:





Revenue
      Sources:
            
            Account
      Receivables
            
            
            Aging
      of1-90 days
            
            
            Aging
      of 91-180 days
            
            
            Aging
      of 181-365 days
            
            
            Above365
      daysProducts
            
            
            8,107,111
            
            
            
            3,628,001
            
            
            
            1,667,790
            
            
            
            2,633,888
            
            
            
            167,432Services
            
            
            844,385
            
            
            
            803,081
            
            
            
            -
            
            
            
            10,049
            
            
            
            31,255Projects
            
            
            440,619
            
            
            
            440,619
            
            
            
            -
            
            
            
            -Total
            
            
            9,392,115
            
            
            
            4,871,701
            
            
            
            1,667,790
            
            
            
            2,643,937
            
            
            
            198,687




33




We offer
the customers a free 12-months of 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 a customer for 12 months, until
the product warranty has expired. On June 30 2010, the retention receivables
were $406,993.


In
addition, it is the Company practice to build up a larger inventory to be able
to fulfill its contracts during the installation of the large infrastructure
projects. The increase in inventories of $1,322,393 reflects a reasonable
inventory level which corresponds to pre-purchased raw materials to be able to
fulfill manufacturing requirement in third and fourth quarter; and a number of
contracts for products which have not been delivered or recognized as revenue by
June 30, 2010. The reason for the large increase in the prepayments and other
receivables of $1,389,196 as compared to year end December 31, 2009, is due to
increases in prepayments to vendors for raw materials, and prepayment to
projects. During this period, an increase in customer deposits of $467,627 was
due to increase in contracts.





For the
six months ended June 30, 2009, net cash provided by operating activities was
$2,683,173. This was primarily attributable to our net income of $1,250,861,
adjusted by non-cash items of depreciation of $148,963 and stock based
compensation of $349,000, and a $934,349 increase in working capital. The
increase in working capital in the first six months of 2009 were due primarily
to the decrease in inventories by $681,231, the increase in accounts payable by
$658,202, customer deposits by $7,295, and income tax payable by 181,825,
partially offset by the increase in accounts receivable by $540,094,
prepayments, and other receivables by $7,781, and other payables and accrued
liabilities by $61,891 in this period.





The large
increase in accounts receivable of $540,094, an increase of 6% over the accounts
receivables balances of $8,907,497 at December 31, 2008, is mainly due to
several large contracts. For these large contracts, the construction and
installation period is much longer. The collection period for receivables is
also longer. In addition, we have to produce a larger inventory in order to
prepare for the installation anticipated for these large projects. The decrease
in inventories of $681,231 reflects the lower inventory level the company
maintains for the current sales level. The reason for the large increase in the
prepayments and other receivables of $263,154, a 40.3% increase over the
prepayments and other receivables balance of $652,842 at December 31, 2008 is
due to increases in prepayment to vendors for raw materials, prepayment to
equipment vendors and prepaid operating expense. The increase in accounts
payable of $658,202 corresponds to the increased purchase of materials required
for the production for several large contracts. The increase in customer
deposits of $7,295 is due to the increase in sales this period. The increase in
income tax payable of $181,825 is because the Company started to pay a reduced
income tax rate in PRC in 2009 whereas the Company enjoyed tax holidays in 2008.
The decrease of $61,891 in other payables and accrued liabilities is due to the
decrease in welfare payable and other accrued expenses.





Investing
activities





In 2008,
the Company was approved by the local government to construct a new
manufacturing facility for energy-saving products and equipment in Yingzhou
District Industrial Park, Tieling City, Liaoning Province, in the PRC. Total
estimated construction cost of the new manufacturing facility is approximately
$16 million (including land use rights for approximately $3 million). The
construction project is expected to be fully completed in late
2010.





For the
six months ended June 30, 2010, net cash used in investing activities was
$2,775,310, and was primarily attributable to the purchase of plant and
equipment for $16,728 and the payments for construction in progress of
$2,759,833. There were proceeds of $1,251 from the disposal of plant and
equipment.





As of
June 30, 2010, the Company has incurred and capitalized $11,853,759 as
construction in progress.





The
Company currently rents its manufacturing facility from a third party. The
current facility has a designed capacity of approximately 6,000 tons per year.
During the months ended December 31, 2009, the Company utilized approximately
average of 70% of its capacity. The new energy equipment manufacturing facility
currently under construction will have two high standard numerical control
machines installed, plus the current equipment, which will be moved to the new
facility. If fully operated, the new facility will have a designed capacity to
manufacture approximately 20,000 tons of flow control equipments on a yearly
basis, and will also be able to manufacture 300 sets of key components of wind
power equipment or other new energy related equipments annually. Upon
completion, the estimated manufacturing capacity of the new facility will be
more than three times the capacity of the Company’s current
facility.





34


The new
facility and the installation of new and high quality machines should enhance
the Company’s equipment manufacturing capacity and improve the productivity and
precision level of its products. Furthermore, the Company will have the ability
to expand the sale of its flow control equipment products into other
markets.





Financing
activities





For the
three months ended June 30, 2010, net cash provided by financing activities was
$1,132,227, of which $294,493 was attributable to the payments on finance lease
and $900,000 was generated by a private placement financing of convertible
promissory notes. The Company also received $526,720 note payable from Liaoning
Dongda Nengfa Weiye Energy Saving Technology Engineering Design & Research
Institute





During
the first quarter of 2010, the Company sold, through a private placement to two
accredited investors, convertible promissory notes in the aggregate principal
amount of $960,000 and warrants to purchase 160,000 shares of its common stock,
par value $0.001 per share. The notes bear simple interest at the rate of 6% per
year and, absent an “event of default,” are payable in shares of the Company’s
common stock. Provided an “event of default” has not occurred and is not then
continuing, the notes will convert upon the earlier to occur of (i) the
commencement of trading of the Company’s common stock on a major US stock
exchange, or (ii) one year after issuance. Upon conversion, the holders of the
notes shall receive such number of shares of common stock equal to the quotient
obtained by dividing (a) the then-outstanding principal amount and accrued but
unpaid interest on the note by (b) the then-current conversion price, which
initially shall be $3.00 per share. The conversion price is subject to
adjustment for stock dividends, splits, combinations and similar events. The
notes are secured by a security interest in and lien upon all of the Company’s
assets. The warrants, which are exercisable for shares of common stock at an
initial exercise price of $4.00 per share, are not exercisable until three
months after issuance and will terminate five years thereafter. The exercise
price is subject to adjustment for stock dividends, splits, combinations and
similar events. The Company has agreed to provide the investors with
“piggy-back” registration rights with respect to the shares of common stock
issuable upon conversion of the notes and exercise of the warrants





As the
Company adopts ASC Topic 470-20 “ Debt with conversion and other
options”, the convertible notes are recorded in accordance with this
topic. Although this accounting treatment has affected our balance sheet and
income statement by increasing the stock based compensation and non-cash
interest expense, it will not affect our cash flow.





On July
27, 2010, the Company signed a two year unsecured credit facility with a
domestic bank to borrow up to RMB 40 million (approximately $5.88 million based
upon current exchange rates).Under the agreement, NF Energy will be able to draw
up to a maximum of RMB 40 million ($5.88 million) over a 24 month period ending
June 28, 2012. Outstanding balances under the facility will accrue interest at a
rate of 1.3 times the Bank of China benchmark lending rate.  Any
amounts of principal repaid may be redrawn during the 24 month period. Drawings
under the facility will be used to complete NF Energy’s new manufacturing plant,
increasing capacity from 6,000 tons to 20,000 tons per year, and for general
corporate purposes. The Company has not yet drawn down on this
facility.





We
anticipate we will need additional working capital in 2010 and beyond to fund
the Company’s new business plans to establish a manufacturing base for new
energy equipment and to develop comprehensive energy saving infrastructure
projects for municipalities and energy conservation projects that include blast
furnace power generation, low concentration coal bed methane power generation
and bio-mass power generation. Furthermore, we may consider expanding the
Company’s business lines. In order to maintain our lead position in energy-
efficient flow control equipment manufacturing,we anticipate a continued and steady growth
of the manufacture and sale of our flow control equipment. We may decide to
pursue additional investments through the sale of equity or equity linked
securities or debt financing to obtain the additional cash resources to fund our
business and other future developments; however, there can be no assurance that
we will be able to obtain additional funds on terms acceptable to the Company or
at all. If we cannot obtain debt or equity financing to fund our working capital
needs, our business development plan may be delayed and we may not be able to
achieve the estimated revenue growth from service and projects or we may not be
able to achieve our total revenues projections for this year.





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.





35


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.





Item
3. Quantitative and Qualitative Disclosures About Market Risk





Not
Applicable.





Item
4T. Controls and Procedures.





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 June 30, 2010. 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. Based on
the evaluation of our disclosure controls and procedures as of June 30, 2010,
our chief executive officer and chief financial officer concluded that, as of
such date, our disclosure controls and procedures were effective.





36


Changes in
Internal Controls





No change
in our internal control over financial reporting occurred during the quarter
covered by this report that has materially affected, or is reasonably likely to
affect, our internal control over financial reporting.





PART
II. OTHER INFORMATION





Item
1. Legal Proceedings.





On May
21, 2007, a civil complaint Robert Dawley v. 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 accused the
defendant of breaching a contract for payment of money that was signed by Sam
Winer, former Chief Executive Officer of the Company, before the commencement of
the Company’s reverse merger. After being initially dismissed by the court, the
action was authorized to proceed on November 16, 2007. A 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 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 certain shares of common stock he holds in the Company
upon payment of the $400,000. In the event the plaintiff fails to surrender the
specified shares of 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 Court of Appeals for the 11th Circuit from the District Court’s judgment.
The Company has also accrued $200,000 for this contingent liability to the
statement of operation in 2008. In addition, two of the Company’s executive
officers and directors, Mr. Gang Li and Ms. Li Hua Wang have personally agreed
to guarantee and bear all contingent liabilities and costs to be incurred from
this litigation claim.





On April
1, 2010, the Eleventh Circuit issued a unanimous opinion reversing the District
Court’s Judgment on the grounds that Dawley was not entitled to the relief that
he sought and that the law did not support the District Court’s Judgment against
NF Energy. The Eleventh Circuit, to the contrary entered Judgment in NF Energy’s
favor. Subsequently, the United States District Court for the Middle District of
Florida, acting upon instructions from the Court of Appeal, entered a Bill of
Costs against Robert Dawley on June 24, 2010, totaling $2,088.





Mr.
Dawley has orally advised the Company that he has filed a Petition for Writ of
Certiorari of the Eleventh Circuit’s Opinion and Judgment with the Supreme Court
of the United States.  However, to date, the Company has received no
indication that the Supreme Court has accepted any filings by Mr. Dawley or has
scheduled any response to his Petition.  The Company therefore has not
taken any action with respect to any such Petition.





On or
about July 1, 2010, Mr. Dawley apparently commenced a second action before the
United States District Court for the Middle District of Florida, entitled Robert
Dawley v. NF Energy Corp. of America, et al.  In addition to the Company,
Mr. Dawley has named as defendants Mr. Gang Li and the Company’s litigation
counsel.  Mr. Dawley asserts, among other things, that Defendants committed
fraud with respect to the same agreements as were the subject of the prior
action.  He also complains that he is entitled to have a restrictive legend
removed from certain stock certificates that the predecessor company had issued
to him in exchange for an additional capital contribution.  Though he has
served copies of the Complaint, he has yet to serve a Summons requiring the
Defendants to respond to the Complaint.





The
Company believes that the second action by Mr. Dawley has no merit, is barred by
the Judgment entered by the Court of Appeal in the prior action and, in any
event, fails to state fraud claims with the specificity required by law. 
Mr. Dawley has refused to withdraw the complaint, and so it is the Company’s
intention to ask the Court to strike the complaint and issue monetary sanctions
against Mr. Dawley equivalent to the amount of the Company’s attorneys’ fees and
costs incurred as a result of the second action.





Though
the Company believes that its contemplated motion has merit, the Company cannot
predict with certainty that the Court will agree.  Accordingly, the Company
does not express any opinion as to the likelihood of its motion’s success. 
In the event that the Court does deny the motion, it is the Company’s intent to
continue its efforts to prevail against Mr. Dawley on behalf of all the named
Defendants to the second action.





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





Not
Applicable.





37


Item
3. Defaults Upon Senior Securities.





None.





Item
4. [Reserved]








Item
5. Other Information.





None.





Item
6. Exhibits.





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




38





SIGNATURES





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




NF
      Energy Saving Corporation(Registrant)Date:
      August 16, 2010
              By:
              /s/
      Gang LiGang
      LiChairman,
      Chief Executive Officer and President




Date:
      August 16 2010
              By:
              /s/
      Li Hua WangLi
      Hua WangChief
      Financial Officer(Principal
      Financial and Accounting Officer)




39




INDEX
TO EXHIBITS






Exhibit
    No.
            
            Description31.1
            
            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 ofthe
      Sarbanes-Oxley Act of 200231.2
            
            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 theSarbanes-Oxley
      Act of 200232.1
            
            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 200232.2
            
            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




40