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,
  2009
 
  ̈
              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 of America


(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
 ̈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).


 ̈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
                   ̈
                  Accelerated
      filer
                   ̈Non-accelerated
      filer
                   ̈
                  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)  ̈Yes   x
No





As of
July 31, 2009, the registrant had 39,872,704 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.





2





TABLE
OF CONTENTS




PART
      I – FINANCIAL INFORMATIONItem
      1. Financial Statements
                    4Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                    25Item
      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
                    37Item
      4. Submission of Matters to a Vote of Security Holders
                    37Item
      5. Other Information
                    37Item
      6. Exhibits
                    38Signatures
                    39




3





PART
I – FINANCIAL INFORMATION





Item 1.  Financial
Statements.





NF
ENERGY SAVING CORPORATION OF AMERICA





INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




PageCondensed
      Consolidated Balance Sheets as of June 30, 2009 and December 31,
      2008
                                                
                                                5Condensed
      Consolidated Statements of Operations And Comprehensive Income for the
      Three and Six Months ended June 30, 2009 and 2008
                                                
                                                6Condensed
      Consolidated Statements of Cash Flows for the Six Months ended June 30,
      2009 and 2008
                                                
                                                7Condensed
      Consolidated Statement of Stockholders’ Equity for the Six Months ended
      June 30, 2009
                                                
                                                8Notes
      to Condensed Consolidated Financial Statements
                                                
                                                9 to
      24




4





NF
ENERGY SAVING CORPORATION OF AMERICA


CONDENSED
CONSOLIDATED BALANCE SHEETS


AS
OF JUNE 30, 2009 AND DECEMBER 31, 2008


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)





June 30, 2009
                        
                        
                        December 31,2008(Unaudited)
                        
                        
                        (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        1,474,070
                        
                        
                        $
                        2,252,771Accounts
      receivable, trade
                        
                        
                        9,459,688
                        
                        
                        
                        8,907,497Inventories
                        
                        
                        837,783
                        
                        
                        
                        1,516,777Prepayments
      and other receivables
                        
                        
                        916,789
                        
                        
                        
                        652,842Total
      current assets
                        
                        
                        12,688,330
                        
                        
                        
                        13,329,887Plant
      and equipment, net
                        
                        
                        2,426,671
                        
                        
                        
                        2,393,287Construction
      in progress
                        
                        
                        6,307,824
                        
                        
                        
                        2,328,839TOTAL
      ASSETS
                        
                        $
                        21,422,825
                        
                        
                        $
                        18,052,013LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable, trade
                        
                        $
                        2,704,799
                        
                        
                        $
                        2,043,944Customer
      deposits
                        
                        
                        128,295
                        
                        
                        
                        120,836Value
      added tax payable
                        
                        
                        276,767
                        
                        
                        
                        5,886Income
      tax payable
                        
                        
                        181,840
                        
                        
                        
                        —Current
      portion of obligation under finance lease
                        
                        
                        154,867
                        
                        
                        
                        —Other
      payables and accrued liabilities
                        
                        
                        272,026
                        
                        
                        
                        333,838Total
      current liabilities
                        
                        
                        3,718,594
                        
                        
                        
                        2,504,504Long-term
      liabilities:Obligation
      under finance lease
                        
                        
                        516,533
                        
                        
                        
                        —TOTAL
      LIABILITIES
                        
                        
                        4,235,127
                        
                        
                        
                        2,504,504Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $0.001 par value; 50,000,000 shares authorized; 39,872,704 and
      39,872,704 shares issued and outstanding as of June 30, 2009 and December
      31, 2008
                        
                        
                        39,872
                        
                        
                        
                        39,872Additional
      paid-in capital
                        
                        
                        8,055,587
                        
                        
                        
                        7,706,587Statutory
      reserve
                        
                        
                        917,165
                        
                        
                        
                        917,165Accumulated
      other comprehensive income
                        
                        
                        1,328,901
                        
                        
                        
                        1,288,573Retained
      earnings
                        
                        
                        6,846,173
                        
                        
                        
                        5,595,312Total
      stockholders’ equity
                        
                        
                        17,187,698
                        
                        
                        
                        15,547,509TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                        
                        $
                        21,422,825
                        
                        
                        $
                        18,052,013





See
accompanying notes to condensed consolidated financial statements.





5





NF
ENERGY SAVING CORPORATION OF AMERICA


CONDENSED
CONSOLIDATED STATEMENTS OF


OPERATIONS
AND COMPREHENSIVE INCOME


FOR
THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





Three months ended June 30,
                            
                            
                            Six months ended June 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008REVENUE,
      NETProduct
                            
                            $
                            4,627,735
                            
                            
                            $
                            3,036,313
                            
                            
                            $
                            6,729,561
                            
                            
                            $
                            5,279,366Services
                            
                            
                            590,969
                            
                            
                            
                            837,555
                            
                            
                            
                            908,975
                            
                            
                            
                            1,168,936Projects
                            
                            
                            —
                            
                            
                            
                            422,659
                            
                            
                            
                            —
                            
                            
                            
                            713,182Total
      operation revenues, net
                            
                            
                            5,218,704
                            
                            
                            
                            4,296,527
                            
                            
                            
                            7,638,536
                            
                            
                            
                            7,161,484COST
      OF REVENUES:Cost
      of products
                            
                            
                            3,250,140
                            
                            
                            
                            2,092,071
                            
                            
                            
                            4,816,014
                            
                            
                            
                            3,752,218Cost
      of services
                            
                            
                            443,785
                            
                            
                            
                            582,581
                            
                            
                            
                            618,281
                            
                            
                            
                            792,101Cost
      of projects
                            
                            
                            —
                            
                            
                            
                            370,866
                            
                            
                            
                            —
                            
                            
                            
                            610,636Total
      cost of revenues
                            
                            
                            3,693,925
                            
                            
                            
                            3,045,518
                            
                            
                            
                            5,434,295
                            
                            
                            
                            5,154,955GROSS
      PROFIT
                            
                            
                            1,524,779
                            
                            
                            
                            1,251,009
                            
                            
                            
                            2,204,241
                            
                            
                            
                            2,006,529OPERATING
      EXPENSES:Sales
      and marketing
                            
                            
                            25,628
                            
                            
                            
                            48,921
                            
                            
                            
                            74,453
                            
                            
                            
                            62,280Research
      and development
                            
                            
                            —
                            
                            
                            
                            47,254
                            
                            
                            
                            —
                            
                            
                            
                            85,586General
      and administrative
                            
                            
                            194,053
                            
                            
                            
                            113,401
                            
                            
                            
                            339,246
                            
                            
                            
                            241,824Stock
      based compensation
                            
                            
                            349,000
                            
                            
                            
                            —
                            
                            
                            
                            349,000
                            
                            
                            
                            —Total
      operating expenses
                            
                            
                            568,681
                            
                            
                            
                            209,576
                            
                            
                            
                            762,699
                            
                            
                            
                            389,690INCOME
      FROM OPERATIONS
                            
                            
                            956,098
                            
                            
                            
                            1,041,433
                            
                            
                            
                            1,441,542
                            
                            
                            
                            1,616,839Other
      income:Interest
      income
                            
                            
                            1,148
                            
                            
                            
                            8,813
                            
                            
                            
                            9,005
                            
                            
                            
                            8,813Other
      income
                            
                            
                            5
                            
                            
                            
                            —
                            
                            
                            
                            10,164
                            
                            
                            
                            —Subsidy
      income
                            
                            
                            33,610
                            
                            
                            
                            12,141
                            
                            
                            
                            33,610
                            
                            
                            
                            16,123Total
      other income
                            
                            
                            34,763
                            
                            
                            
                            20,954
                            
                            
                            
                            52,779
                            
                            
                            
                            24,936INCOME
      BEFORE INCOME TAXES
                            
                            
                            990,861
                            
                            
                            
                            1,062,387
                            
                            
                            
                            1,494,321
                            
                            
                            
                            1,641,775Income
      tax expense
                            
                            
                            (181,912
                            )
                            
                            
                            (4
                            )
                            
                            
                            (243,460
                            )
                            
                            
                            (305
                            )NET
      INCOME
                            
                            $
                            808,949
                            
                            
                            $
                            1,062,383
                            
                            
                            $
                            1,250,861
                            
                            
                            $
                            1,641,470Other
      comprehensive income:-
      Foreign currency translation gain
                            
                            
                            26,690
                            
                            
                            
                            275,802
                            
                            
                            
                            40,328
                            
                            
                            
                            688,446COMPREHENSIVE
      INCOME
                            
                            $
                            835,639
                            
                            
                            $
                            1,338,185
                            
                            
                            $
                            1,291,189
                            
                            
                            $
                            2,329,916Net
      income per share–
      Basic
                            
                            $
                            0.02
                            
                            
                            $
                            0.03
                            
                            
                            $
                            0.03
                            
                            
                            $
                            0.05–
      Diluted
                            
                            $
                            0.02
                            
                            
                            $
                            0.03
                            
                            
                            $
                            0.03
                            
                            
                            $
                            0.05Weighted
      average shares outstanding–
      Basic
                            
                            
                            39,872,704
                            
                            
                            
                            36,033,153
                            
                            
                            
                            39,872,704
                            
                            
                            
                            34,630,241–
      Diluted
                            
                            
                            39,961,037
                            
                            
                            
                            36,033,153
                            
                            
                            
                            39,916,871
                            
                            
                            
                            34,630,241





See
accompanying notes to condensed consolidated financial statements.





6





NF
ENERGY SAVING CORPORATION OF AMERICA


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(Currency
expressed in United States Dollars (“US$”))


(Unaudited)





Six months ended June 30,2009
                                      
                                      
                                      2008Cash
      flows from operating activities:Net
      income
                                      
                                      $
                                      1,250,861
                                      
                                      
                                      $
                                      1,641,470Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
                                      
                                      
                                      148,963
                                      
                                      
                                      
                                      170,415Stock
      based compensation
                                      
                                      
                                      349,000
                                      
                                      
                                      
                                      —Change
      in operating assets and liabilities:Accounts
      receivable
                                      
                                      
                                      (540,094
                                      )
                                      
                                      
                                      (974,464
                                      )Inventories
                                      
                                      
                                      681,231
                                      
                                      
                                      
                                      100,786Prepayments
      and other receivables
                                      
                                      
                                      (263,154
                                      )
                                      
                                      
                                      (330,241
                                      )Accounts
      payable
                                      
                                      
                                      658,202
                                      
                                      
                                      
                                      (107,754
                                      )Customer
      deposits
                                      
                                      
                                      7,295
                                      
                                      
                                      
                                      108,199Value
      added tax payables
                                      
                                      
                                      270,935
                                      
                                      
                                      
                                      2,324Income
      tax payable
                                      
                                      
                                      181,825
                                      
                                      
                                      
                                      —Other
      payables and accrued liabilities
                                      
                                      
                                      (61,891
                                      )
                                      
                                      
                                      (132,019
                                      )Net
      cash provided by operating activities
                                      
                                      
                                      2,683,173
                                      
                                      
                                      
                                      478,716Cash
      flows from investing activities:Purchase
      of plant and equipment
                                      
                                      
                                      (179,070
                                      )
                                      
                                      
                                      (160,722
                                      )Payments
      to construction in progress
                                      
                                      
                                      (2,595,776
                                      )
                                      
                                      
                                      —Net
      cash used in investing activities
                                      
                                      
                                      (2,774,846
                                      )
                                      
                                      
                                      (160,722
                                      )Cash
      flows from financing activities:Payments
      on finance lease
                                      
                                      
                                      (709,373
                                      )
                                      
                                      
                                      —Proceeds
      from private placement
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,000,000Net
      cash (used in) provided by financing activities
                                      
                                      
                                      (709,373
                                      )
                                      
                                      
                                      2,000,000Effect
      on exchange rate change on cash and cash equivalents
                                      
                                      
                                      22,345
                                      
                                      
                                      
                                      202,357NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                                      
                                      
                                      (778,701
                                      )
                                      
                                      
                                      2,520,351BEGINNING
      OF PERIOD
                                      
                                      
                                      2,252,771
                                      
                                      
                                      
                                      2,240,901END
      OF PERIOD
                                      
                                      $
                                      1,474,070
                                      
                                      
                                      $
                                      4,761,252SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for income taxes
                                      
                                      $
                                      61,561
                                      
                                      
                                      $
                                      305Cash
      paid for interest
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Equipment
      purchased under finance leases
                                      
                                      $
                                      1,381,579
                                      
                                      
                                      $
                                      —





See
accompanying notes to condensed consolidated financial statements.





7





NF
ENERGY SAVING CORPORATION OF AMERICA


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
THE SIX MONTHS ENDED JUNE 30, 2009


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





Common stock
                            
                            
                            
                            
                            
                            
                            
                            
                            AccumulatedNo. of shares
                            
                            
                            Amount
                            
                            
                            Additional
                              paid-in capital
                            
                            
                            Statutory
                              reserve
                            
                            
                            other
                              comprehensive
                              income
                            
                            
                            Retained
                              earnings
                            
                            
                            Total
                              stockholders’
                              equityBalance
      as of January 1, 2009
                            
                            
                            39,872,704
                            
                            
                            $
                            39,872
                            
                            
                            $
                            7,706,587
                            
                            
                            $
                            917,165
                            
                            
                            $
                            1,288,573
                            
                            
                            $
                            5,595,312
                            
                            
                            $
                            15,547,509Foreign
      currency translation adjustment
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            40,328
                            
                            
                            
                            —
                            
                            
                            
                            40,328Warrants
      issued for services
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            349,000
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            349,000Net
      income for the period
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,250,861
                            
                            
                            
                            1,250,861Balance
      as of June 30, 2009
                            
                            
                            39,872,704
                            
                            
                            $
                            39,872
                            
                            
                            $
                            8,055,587
                            
                            
                            $
                            917,165
                            
                            
                            $
                            1,328,901
                            
                            
                            $
                            6,846,173
                            
                            
                            $
                            17,187,698





See
accompanying notes to condensed consolidated financial statements.





8





NF
ENERGY SAVING CORPORATION OF AMERICA


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009


(Currency
expressed in United States Dollars (“US$”))


(Unaudited)





NOTE-1
              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, 2008
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, 2009 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2009 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, 2008.





NOTE-2
              ORGANIZATION
      AND BUSINESS BACKGROUND





NF Energy
Saving Corporation of America (the “Company” or “NFES”) was incorporated in the
State of Delaware in the name of Galli Process, Inc. on October 31, 2000. On
February 7, 2002, the Company changed its name to “Global Broadcast Group, Inc.”
On November 3, 2004, the Company changed its name to “Diagnostic Corporation of
America.” On March 15, 2007, the Company further changed to its existing
name.





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”).





Liaoning
Nengfa Weiye Energy Technology Co. Ltd. (“Nengfa Energy”) (formerly Neng Fa
Weiye Pipe Network Construction and Operation Co., Ltd.) is a wholly-owned
subsidiary of the Company. Nengfa Energy is a energy-saving valve and
intelligent flow control system manufacturer and involved in the production of a
variety of flow control components, including industrial valve, hydraulic
system and electric control system which are widely used in water supply and
sewage system, coal and gas fields, power generation stations, petroleum and
chemical industries. All the customers are located in the PRC.





Liaoning
Nengfa Weiye Tie Fa Sales Co., Ltd. (“Sales Company”) is a subsidiary 99% owned
by Nengfa Energy in the PRC. Sales Company was incorporated as a limited
liability company under the laws of the PRC with a registered capital of
$683,620 (equivalent to RMB 5,000,000) on September 5, 2007. It is mainly
engaged in the sales and marketing of valves components and products in the
PRC.





NFES,
Nengfa Energy and Sales Company are hereinafter referred to as (the
“Company”).




9





NF
ENERGY SAVING CORPORATION OF AMERICA


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009


(Currency
expressed in United States Dollars (“US$”))


(Unaudited)





NOTE-3
              SUMMARY
      OF SIGNIFICANT ACCOUNTING
POLICIES





l
              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 period
reported. Actual results may differ from these estimates.





l
              Basis
      of consolidation





The
condensed consolidated financial statements include the financial statements of
NFES and its subsidiaries, Nengfa Energy and Sales Company.





All
significant inter-company balances and transactions within the Company have been
eliminated upon consolidation.





l
              Cash
      and cash equivalents





Cash and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of six months or less as of the purchase
date of such investments.





l
              Accounts
      receivable





Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customer’s current
credit worthiness and the economic environment. As of June 30, 2009, the Company
has determined that no allowance for doubtful accounts is
necessary.





l
              Inventories





Inventories
are stated at the lower of cost or market (net realizable value), cost being
determined on a weighted average method. Costs include material, labor and
manufacturing overhead costs. The Company quarterly reviews historical sales
activity to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand. The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of June 30, 2009, the Company did
not record an allowance for obsolete inventories, nor have there been any
write-offs.





l
              Plant
      and equipment, net





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




Depreciablelife
                
                ResidualvaluePlant
      and machinery
                3 –
      20 years
                
                
                5
                %Furniture,
      fixture and equipment
                5 –
      8 years
                
                
                5
                %





10





NF
ENERGY SAVING CORPORATION OF AMERICA


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009


(Currency
expressed in United States Dollars (“US$”))


(Unaudited)





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





l
              Construction
      in progress





Construction
in progress is stated at cost, which includes the cost of construction,
acquisition of plant and equipment and other direct costs attributable to the
construction. Construction in progress is not depreciated until such time as the
assets are completed and put into operational use.





l
            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 APB Opinion No. 21, “Interest on Receivables and Payables”.





l
              Impairment
      of long-lived assets





In
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, all long-lived assets such as plant and
equipment held and used by the Company and construction in progress are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is evaluated by a comparison of the carrying amount of assets
to estimated discounted net cash flows expected to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets exceed the
fair value of the assets. There has been no impairment as of June 30,
2009.





l
              Revenue
      recognition





In
accordance with the SEC’s Staff Accounting Bulletin No. 104, “Revenue Recognition”, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling price
is fixed or determinable and collectibility is reasonably assured.





(a)
            Sale
      of products





The
Company derives revenues from the sale of self-manufactured products relating to
industrial valves components and wind-energy equipments. 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.





11





NF
ENERGY SAVING CORPORATION OF AMERICA


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009


(Currency
expressed in United States Dollars (“US$”))


(Unaudited)





The
Company recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced no
product returns and has recorded no reserve for sales returns for the six months
ended June 30, 2009 and 2008.





(b)
            Service
      revenue





Service
revenue is primarily derived from energy-saving technical services that are not
an element of an arrangement for the sale of products. These services are
generally billed on a time-cost plus basis. Revenue is recognized, net of
business taxes when service is rendered and accepted by the
customers.





(c)
            Project
      revenue





The
Company applies the percentage-of-completion method under SOP 81-1 “Accounting for Performance of
Construction-Type and Production-Type Contracts”, to recognize revenues
for energy-saving re-engineering projects that require significant modification
or customization or installation subject to the customers. The Company records a
provision in those instances in which the Company believes a contract will
probably generate a net loss and the Company can reasonably estimate this loss.
If the Company cannot reasonably estimate the loss, the Company limits the
amount of revenue that the Company recognizes to the costs the Company has
incurred, until the Company can estimate the total loss. Advance payments from
customers and amounts billed to clients in excess of revenue recognized are
recorded as receipt in advance. For the six months ended June 30, 2009, the
Company did not recognize any project revenue.





(d)
            Interest
      income





Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.





l
              Income
      taxes





The
Company accounts for income tax using SFAS No. 109 “Accounting for Income
Taxes”, which requires the asset and liability approach for financial
accounting and reporting for income taxes. Under this approach, deferred income
taxes are provided for the estimated future tax effects attributable to
temporary differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases, and for the expected future tax
benefits from loss carry-forwards and provisions, if any. Deferred tax assets
and liabilities are measured using the enacted tax rates expected in the years
of recovery or reversal and the effect from a change in tax rates is recognized
in the statement of operations and comprehensive (loss) income in the period of
enactment. A valuation allowance is provided to reduce the amount of deferred
tax assets if it is considered more likely than not that some portion of, or all
of the deferred tax assets will not be realized.




12




NF
ENERGY SAVING CORPORATION OF AMERICA


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009


(Currency
expressed in United States Dollars (“US$”))


(Unaudited)





The
Company also adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), on January 1, 2007. FIN 48 prescribes a more
likely than not threshold for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition of income tax assets and
liabilities, classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with tax
positions, accounting for income taxes in interim periods, and income tax
disclosures. In accordance with FIN 48, the Company also adopted the policy of
recognizing interest and penalties, if any, related to unrecognized tax
positions as income tax expense. For the six months ended June 30, 2009 and
2008, the Company did not have any interest and penalties associated with tax
positions. As of June 30, 2009, the Company did not have any significant
unrecognized uncertain tax positions.





The
Company conducts major businesses in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax authority. For the
period ended June 30, 2009, the Company filed and cleared 2008 PRC tax return by
the tax authority.





l
              Product
      warranty





Under the
terms of the contracts, the Company will provide a product warranty to its
customers for a period of twelve months, free of charge and then at the
discretion of the customers, enter into maintenance contracts. The Company has
not experienced any material returns where it was under obligation to honor this
standard warranty provision. As such, no reserve for product warranty has been
provided in the result of operations for the six months ended June 30,
2009.





l
              Stock
      based compensation





The
Company adopts SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS
No. 123(R)") using the fair value method. Under SFAS No. 123(R), the stock-based
compensation is measured using the Black-Scholes Option-Pricing model on the
date of grant.





For
non-employee stock-based compensation, the Company adopts EITF Issue No. 96-18,
“Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services” and EITF Issue No. 00-18, “Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than
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, which ever is more readily
determinable in accordance with SFAS 123(R).





l
              Foreign
      currencies translation





Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the 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 its local currency, the Renminbi Yuan ("RMB"), which
is functional currency as being the primary currency of the economic
environment in which these entities operate.




13





NF
ENERGY SAVING CORPORATION OF AMERICA


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009


(Currency
expressed in United States Dollars (“US$”))


(Unaudited)





In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with SFAS No. 52, “Foreign
Currency Translation”, using the exchange rate
on the balance sheet date. Revenues and expenses are translated at average rates
prevailing during the period. The gains and losses resulting from translation of
financial statements of foreign subsidiaries are recorded as a separate
component of accumulated other comprehensive income within the statement of
stockholders’ equity.





Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective period:


2009
                  
                  
                  2008Period-end
      RMB:US$1 exchange rate
                  
                  
                  6.8432
                  
                  
                  
                  7.0726Average
      monthly RMB:US$1 exchange rate
                  
                  
                  6.8448
                  
                  
                  
                  6.8718





l
              Fair
      value measurement





Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (FAS
157), for all financial instruments and non-financial instruments accounted for
at fair value on a recurring basis. Effective January 1, 2009, the Company
adopted SFAS 157 for all non-financial instruments accounted for at fair value
on a non-recurring basis. SFAS 157 establishes a new framework for measuring
fair value and expands related disclosures. Effective April 1, 2009, the Company
adopted FASB FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. Adoption of
the FSP had an insignificant effect on the Company’s financial
statements.





FAS 157
establishes a new framework for measuring fair value and expands related
disclosures. Broadly, FAS 157 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. FAS 157 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.





l
              Recent
      accounting pronouncements





The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.





14




NF
ENERGY SAVING CORPORATION OF AMERICA
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)
 
 In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP FAS 107-1 and
APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments.” This FSP amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” and Accounting Principles Board (“APB”) Opinion
No. 28, “Interim Financial
Reporting.” (“FAS 107”) This FSP requires publicly-traded entities
to disclose in the body or in the accompanying notes of its summarized financial
information for interim reporting periods and in its financial statements for
annual reporting periods, the fair value of all financial instruments for which
it is practicable to estimate that value, whether recognized or not recognized
in the statement of financial position, as required by FAS 107. This FSP is
effective for interim and annual reporting periods ending after June 15, 2009.
The Company adopted FSP FAS 107-1 and APB 28-1 for the period ending June 30,
2009.
 
 In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“FAS 165”), which
establishes general standards of accounting for, and requires disclosure of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. The Company adopted the provisions of
FAS 165 for the quarter ended June 30, 2009. The adoption of FAS 165 did not
have a material effect on the consolidated financial statements.
 
 In
June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets, an amendment to SFAS No.140” (“FAS 166”). FAS 166
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entity’s continuing
involvement in and exposure to the risks related to transferred financial
assets. FAS 166 is effective for fiscal years beginning after November 15,
2009. The Company will adopt FAS 166 in fiscal 2010 and is evaluating
the impact it will have on the consolidated results of the Company.
 
 In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“FAS 167”). The amendments include: (1) the elimination of
the exemption for qualifying special purpose entities, (2) a new approach for
determining who should consolidate a variable-interest entity, and (3) changes
to when it is necessary to reassess who should consolidate a variable-interest
entity. FAS 167 is effective for the first annual reporting period beginning
after November 15, 2009 and for interim periods within that first annual
reporting period. The Company will adopt FAS 167 in fiscal 2010 and is
evaluating the impact it will have on the consolidated results of the
Company.
 
 In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification TMand the
Hierarchy of Generally Accepted Accounting Principles—areplacement of FASB Statement No.
162” (“FAS 168”). FAS 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” and establishes the “FASB Accounting Standard
Codification TM ” (“Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with generally accepted
accounting principles in the United States. All guidance contained in the
Codification carries an equal level of authority. On the effective date of FAS
168, the Codification will supersede all then-existing non-SEC accounting and
reporting standards. All other nongrandfathered non-SEC accounting literature
not included in the Codification will become nonauthoritative. FAS 168 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The Company has evaluated this new statement, and has
determined that it will not have a significant impact on the determination or
reporting of the financial results.
 
 NOTE-4
                  INVENTORIES
 
 Inventories
consisted of the following:
 
 15
 
 NF
ENERGY SAVING CORPORATION OF AMERICA
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)
 
 June 30, 2009
                            
                            
                            December 31, 2008(Unaudited)
                            
                            
                            (Audited)Raw
      materials
                            
                            $
                            498,849
                            
                            
                            $
                            720,460Work-in-process
                            
                            
                            302,319
                            
                            
                            
                            569,450Finished
      goods
                            
                            
                            36,615
                            
                            
                            
                            226,867$
                            837,783
                            
                            
                            $
                            1,516,777
 
 For the
three and six months ended June 30, 2009 and 2008, no allowance for obsolete
inventories was recorded by the Company.
 
 NOTE-5
                  PREPAYMENTS
      AND OTHER RECEIVABLES
 
 Prepayments
and other receivables consisted of the following:
 
 June 30, 2009
                            
                            
                            December 31, 2008(Unaudited)
                            
                            
                            (Audited)Prepayment
      to vendors for raw materials
                            
                            $
                            653,400
                            
                            
                            $
                            473,064Prepayment
      to equipment vendors
                            
                            
                            38,072
                            
                            
                            
                            126,930Prepaid
      operating expenses
                            
                            
                            4,208
                            
                            
                            
                            26,354Other
      receivables
                            
                            
                            1,965
                            
                            
                            
                            26,494Tendering
      deposit
                            
                            
                            219,144
                            
                            
                            
                            —$
                            916,789
                            
                            
                            $
                            652,842
 
 NOTE-6
                  PLANT
      AND EQUIPMENT, NET
 
 Plant and
equipment, net, consisted of the following:
 
 June 30, 2009
                            
                            
                            December 31, 2008(Unaudited)
                            
                            
                            (Audited)Plant
      and machinery
                            
                            $
                            3,324,823
                            
                            
                            $
                            2,967,425Furniture,
      fixture and equipment
                            
                            
                            61,656
                            
                            
                            
                            58,170Foreign
      translation difference
                            
                            
                            4,359
                            
                            
                            
                            181,8143,390,838
                            
                            
                            
                            3,207,409Less:
      accumulated depreciation
                            
                            
                            (963,084
                            )
                            
                            
                            (778,988
                            )Less:
      foreign translation difference
                            
                            
                            (1,083
                            )
                            
                            
                            (35,134
                            )Plant
      and equipment, net
                            
                            $
                            2,426,671
                            
                            
                            $
                            2,393,287
 
 Depreciation
expenses for the three months ended June 30, 2009 and 2008 were $74,535 and
$83,262, respectively.
 
 16
 
 NF
ENERGY SAVING CORPORATION OF AMERICA
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)
 
 Depreciation
expenses for the six months ended June 30, 2009 and 2008 were $148,963 and
$170,415, respectively.
 
 NOTE-7
                  CONSTRUCTION
      IN PROGRESS
 
 Since
2008, the Company was approved by the local government to construct a new
manufacturing facility for energy-saving products and equipments in Yingzhou
District Industrial Park, Tieling City, Liaoning Province, the PRC. The
construction consists of two phases, whereas the first phase is related to the
development of critical component on wind electricity and intelligent flow
control systems. Another purpose is to increase the production capacity of
energy-saving valves. It is expected to be fully completed till 2010. The
estimated investment of the first phase in 2009 is approximately $5
million (not including land use rights of approximately $2 million). As of
June 30, 2009, the Company capitalized $6,307,824 as construction in
progress.
 
 NOTE-8
                  OTHER
      PAYABLES AND ACCRUED
LIABILITIES
 
 Other
payables and accrued liabilities consisted of the following:
 
 June 30, 2009
                            
                            
                            December 31, 2008(Unaudited)
                            
                            
                            (Audited)Rent
      payable
                            
                            $
                            18,262
                            
                            
                            $
                            40,121Provision
      for contingent liability
                            
                            
                            200,000
                            
                            
                            
                            200,000Accrued
      expenses
                            
                            
                            41,238
                            
                            
                            
                            42,719Payable
      to equipment vendors
                            
                            
                            —
                            
                            
                            
                            38,196Other
      payable
                            
                            
                            12,526
                            
                            
                            
                            12,802$
                            272,026
                            
                            
                            $
                            333,838
 
 NOTE-9
                  OBLIGATION
      UNDER FINANCE LEASE
 
 The
Company purchased certain equipment under a capital lease arrangement with an
effective interest rate of 8.59% per annum, due May 25, 2012 and repayable
principal and interest monthly.
 
 The
obligation under the finance lease is as follows:
 June 30, 2009Finance
      lease
                      
                      $
                      671,400Less:
      current portion
                      
                      
                      (154,867
                      )Non-current
      portion
                      
                      $
                      516,533
    17
 
 NF
ENERGY SAVING CORPORATION OF AMERICA
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)
 
 Years ending June 30:2010
                      
                      $
                      210,4422011
                      
                      
                      293,2782012
                      
                      
                      268,839Total
      finance leases obligation
                      
                      
                      772,559Less:
      interest
                      
                      
                      (101,159
                      )Present
      value of net minimum obligation
                      
                      $
                      671,400
 
 The
Company’s certain equipments are held under finance lease and the related
depreciation is included in depreciation expense (see Note 6).
 
 NOTE-10
                  INCOME
      TAXES
 
 NFES is
registered in the State of Delaware and is subject to the tax laws of United
States of America.
 
 As of
June 30, 2009, the operation in the United States of America has incurred
$1,376,231 of cumulative net operating losses which can be carried forward to
offset future taxable income. The net operating loss carryforwards begin to
expire in 2029, if unutilized. The Company has provided for a full valuation
allowance against the deferred tax assets of $481,681 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
Company’s effective income tax rates for the six months ended June 30, 2009 and
2008 were 16.3% and 0%.
 
 NOTE-11
                  STOCK
      BASED COMPENSATION
 
 In June
2009, the Company entered into various agreements with Investor Relations (IR)
firms, in which the Company agreed to issue the aggregate 450,000 warrants to
the IR firms. The warrants have an exercise price of $0.60 per share and become
exercisable at the effective date. The warrants expire 5 years after becoming
exercisable and all of the warrants have fully vested.
 
 Transactions
involving warrants issued to IR firms during the period ended June 30, 2009 are
summarized as follows (warrants were not issued to employees):
 
 18
 
 NF
ENERGY SAVING CORPORATION OF AMERICA
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)
 
 Warrants outstandingNumber of
                        warrants
                      
                      
                      Exercise
                        price range
                        per share
                      
                      
                      Weighted
                        average
                        exercise
                        price per
                        share
                      
                      
                      Weighted
                        average
                        grant-date
                        fair value per
                        shareBalance
      as of December 31, 2008
                      
                      
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —Warrants
      granted in 2009
                      
                      
                      450,000
                      
                      
                      
                      0.60
                      
                      
                      
                      0.60
                      
                      
                      
                      0.78Warrants
      cancelled
                      
                      
                      —
                      
                      
                      
                      
                      
                      
                      
                      —
                      
                      
                      
                      —Warrants
      exercised
                      
                      
                      —
                      
                      
                      
                      
                      
                      
                      
                      —
                      
                      
                      
                      —Balance
      as of June 30, 2009
                      
                      
                      450,000
                      
                      
                      $
                      0.60
                      
                      
                      $
                      0.60
                      
                      
                      $
                      0.78
 
 The
Company adopted SFAS No. 123(R), “Share-Based Payment” using
the Black-Scholes Option Pricing Model to measure the fair value of warrants on
the grant date, with the following weighted average assumptions:
 
 Expected
      life (in years)
                        
                        
                        5Volatility
                        
                        
                        456.53
                        %Risk
      free interest rate
                        
                        
                        2.52% - 2.89
                        %Dividend
      yield
                        
                        
                        0
                        %Weighted
      average fair value
                        
                        
                        0.78
 
 The
Company recognized $349,000 as stock based compensation at their fair values for
the six months ended June 30, 2009.
 
 NOTE-12
                  SEGMENT
      INFORMATION
 
 The
Company’s business units have been aggregated into two reportable segments:
Heavy manufacturing business and Energy-saving related business. Manufacturing
business included the production of valves components and the provision of valve
improvement and engineering services. Energy-saving related business included
the production of wind-energy equipment, provision of energy-saving related
re-engineering and technical services and long-term construction project. The
Company operates these segments in the PRC and all of the identifiable assets of
the Company are located in the PRC during the periods presented.
 
 The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 3). The Company had no
inter-segment sales for the six months ended June 30, 2009 and 2008. 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, 2009 and
2008:
 
 Three months ended June 30, 2009Valves
                        manufacturing
                        business
                      
                      
                      Energy-saving
                        related business
                      
                      
                      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
                      
                      
                      
                      3,693,925Gross
      profit
                      
                      $
                      1,524,766
                      
                      
                      $
                      13
                      
                      
                      $
                      1,524,779
 
 19
 
 NF
ENERGY SAVING CORPORATION OF AMERICA
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)
 
 Six months ended June 30, 2009Valves
                        manufacturing
                        business
                      
                      
                      Energy-saving
                        related business
                      
                      
                      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
                      
                      
                      
                      5,434,295Gross
      profit
                      
                      $
                      2,179,428
                      
                      
                      $
                      24,813
                      
                      
                      $
                      2,204,241
 
 Three months ended June 30, 2008Valves
                        manufacturing
                        business
                      
                      
                      Energy-saving
                        related business
                      
                      
                      TotalOperating
      revenues, net:-
      Products
                      
                      $
                      3,036,313
                      
                      
                      $
                      —
                      
                      
                      $
                      3,036,313-
      Services
                      
                      
                      —
                      
                      
                      
                      837,555
                      
                      
                      
                      837,555-
      Projects
                      
                      
                      —
                      
                      
                      
                      422,659
                      
                      
                      
                      422,659Total
      operating revenues
                      
                      
                      3,036,313
                      
                      
                      
                      1,260,214
                      
                      
                      
                      4,296,527Cost
      of revenues
                      
                      
                      2,092,071
                      
                      
                      
                      953,447
                      
                      
                      
                      3,045,518Gross
      profit
                      
                      $
                      944,242
                      
                      
                      $
                      306,767
                      
                      
                      $
                      1,251,009
 
 Six months ended June 30, 2008Valves
                        manufacturing
                        business
                      
                      
                      Energy-saving
                        related business
                      
                      
                      TotalOperating
      revenues, net:-
      Products
                      
                      $
                      5,279,366
                      
                      
                      $
                      —
                      
                      
                      $
                      5,279,366-
      Services
                      
                      
                      —
                      
                      
                      
                      1,168,936
                      
                      
                      
                      1,168,936-
      Projects
                      
                      
                      —
                      
                      
                      
                      713,182
                      
                      
                      
                      713,182Total
      operating revenues
                      
                      
                      5,279,366
                      
                      
                      
                      1,882,118
                      
                      
                      
                      7,161,484Cost
      of revenues
                      
                      
                      3,752,218
                      
                      
                      
                      1,402,737
                      
                      
                      
                      5,154,955Gross
      profit
                      
                      $
                      1,527,148
                      
                      
                      $
                      479,381
                      
                      
                      $
                      2,006,529
 
 20
 
 NF
ENERGY SAVING CORPORATION OF AMERICA
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)
 
 NOTE-13
                  CONCENTRATIONS
      OF RISK
 
 The
Company is exposed to the following concentrations of risk:
 
 For the
three and six months ended June 30, 2009, 100% of the Company’s assets were
located in the PRC and 100% of the Company’s revenues and purchases were derived
from customers and vendors located in the PRC.
 
 (a)         Major
customers
 
 For the
three and six months ended June 30, 2009 and 2008, customers who account for 10%
or more of revenues and their outstanding balances as at period-end dates, are
presented as follows:
 
 Three months ended June 30, 2009
                        
                        
                        
                        June 30, 2009Customers
                        
                        Revenues
                        
                        
                        Percentage
                          of revenues
                        
                        
                        
                        Accounts
                          receivable, tradeCustomer
      C
                        
                        $
                        3,403,588
                        
                        
                        
                        65
                        %
                        
                        
                        
                        7,219,505Customer
      D
                        
                        
                        549,735
                        
                        
                        
                        11
                        %
                        
                        
                        
                        257,349Total:
                        
                        $
                        3,953,323
                        
                        
                        
                        76
                        %
                        Total:
                        
                        
                        7,476,854
 
 Six months ended June 30, 2009
                                              
                                              
                                              
                                              June 30, 2009Customers
                                              
                                              Revenues
                                              
                                              
                                              Percentage
                                                of revenues
                                              
                                              
                                              
                                              Accounts
                                                receivable, tradeCustomer
      C
                                              
                                              $
                                              5,158,710
                                              
                                              
                                              
                                              68
                                              %
                                              
                                              
                                              $
                                              7,219,505Total:
                                              
                                              $
                                              5,158,710
                                              
                                              
                                              
                                              68
                                              %
                                              Total:
                                              
                                              $
                                              7,219,505
 
 ThreemonthsendedJune30,2008
                        
                        
                        
                        June 30, 2008Customers
                        
                        Revenues
                        
                        
                        Percentage
                          of revenues
                        
                        
                        
                        Accounts
                          receivable, tradeCustomer
      A
                        
                        $
                        426,724
                        
                        
                        
                        10
                        %
                        
                        
                        $
                        837,481Customer
      B
                        
                        
                        648,623
                        
                        
                        
                        15
                        %
                        
                        
                        
                        592,747Customer
      C
                        
                        
                        2,455,184
                        
                        
                        
                        57
                        %
                        
                        
                        
                        2,720,899Total:
                        
                        $
                        3,530,531
                        
                        
                        
                        82
                        %
                        Total:
                        
                        $
                        4,151,127
 
 SixmonthsendedJune30,2008
                        
                        
                        
                        June 30, 2008Customers
                        
                        Revenues
                        
                        
                        Percentage
                          of revenues
                        
                        
                        
                        Accounts
                          receivable, tradeCustomer
      A
                        
                        $
                        713,899
                        
                        
                        
                        10
                        %
                        
                        
                        $
                        837,481Customer
      B
                        
                        
                        874,927
                        
                        
                        
                        12
                        %
                        
                        
                        
                        592,747Customer
      C
                        
                        
                        4,620,642
                        
                        
                        
                        65
                        %
                        
                        
                        
                        2,720,899Total:
                        
                        $
                        6,209,468
                        
                        
                        
                        87
                        %
                        Total:
                        
                        $
                        4,151,127
 
 21
 
 NF
ENERGY SAVING CORPORATION OF AMERICA
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)
 
 (b)         Major
vendors
 
 For the
three and six months ended June 30, 2009 and 2008, vendors who account for 10%
or more of purchases and their outstanding balances as at period-end dates, are
presented as follows:
 
 Three months ended June 30, 2009
                          
                          
                          
                          June 30, 2009Vendors
                          
                          Purchases
                          
                          
                          Percentage of
                            purchases
                          
                          
                          
                          Accounts payableVendor
      B
                          
                          $
                          426,964
                          
                          
                          
                          17
                          %
                          
                          
                          $
                          348,160Vendor
      E
                          
                          
                          543,491
                          
                          
                          
                          22
                          %
                          
                          
                          
                          250,555Total:
                          
                          $
                          970,455
                          
                          
                          
                          39
                          %
                          Total:
                          
                          $
                          598,715
 
 Six months ended June 30, 2009
                        
                        
                        
                        June 30, 2009Vendors
                        
                        Purchases
                        
                        
                        Percentage of
                          purchases
                        
                        
                        
                        Accounts payableVendor
      B
                        
                        $
                        968,013
                        
                        
                        
                        23
                        %
                        
                        
                        $
                        348,160Vendor
      D
                        
                        
                        530,264
                        
                        
                        
                        13
                        %
                        
                        
                        
                        121,292Vendor
      E
                        
                        
                        543,491
                        
                        
                        
                        13
                        %
                        
                        
                        
                        250,555Total:
                        
                        $
                        2,041,768
                        
                        
                        
                        49
                        %
                        Total:
                        
                        $
                        720,007
 
 Three months ended June 30, 2008
                        
                        
                        
                        June 30, 2008Vendors
                        
                        Purchases
                        
                        
                        Percentage of
                          purchases
                        
                        
                        
                        Accounts payableVendor
      B
                        
                        $
                        240,117
                        
                        
                        
                        11
                        %
                        
                        
                        $
                        245,498Vendor
      C
                        
                        
                        250,443
                        
                        
                        
                        11
                        %
                        
                        
                        
                        —Total:
                        
                        $
                        490,560
                        
                        
                        
                        22
                        %
                        Total:
                        
                        $
                        245,498
 
 Six months ended June 30, 2008
                        
                        
                        
                        June 30, 2008Vendors
                        
                        Purchases
                        
                        
                        Percentage of
                          purchases
                        
                        
                        
                        Accounts payableVendor
      A
                        
                        $
                        730,197
                        
                        
                        
                        17
                        %
                        
                        
                        $
                        —Vendor
      B
                        
                        
                        1,402,461
                        
                        
                        
                        32
                        %
                        
                        
                        
                        245,498Total:
                        
                        $
                        2,132,658
                        
                        
                        
                        49
                        %
                        Total:
                        
                        $
                        245,498
 
 (c)         Credit
risk
 
 Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of trade accounts receivable. The Company
performs ongoing credit evaluations of its customers' financial condition, but
does not require collateral to support such receivables.
 
 22
 
 NF
ENERGY SAVING CORPORATION OF AMERICA
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)
 
 (d)         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.
 
 (e)         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.
 
 NOTE-14
                  COMMITMENTS
      AND CONTINGENCIES
 
 (a)
                Operating
      lease commitments
 
 The
Company leased an office premise under a non-cancelable operating lease
agreement for a renewal period of one year, due February 9, 2010. The annual
lease payment is $43,829 (RMB300,000).
 
 (b)
                Capital commitments
 
 Starting
from 2008, the local government has approved the Company to establish a new
manufacturing facility for energy-saving products and equipments in
Yingzhou District Industrial Park, Tieling City, Liaoning Province,
the PRC. The construction consists of two phases, whereas the first phase is
related to the development of critical component on wind electricity and
intelligent flow control systems. Another purpose is to increase the
production capacity of energy-saving valves. It is expected to be fully
completed till 2010. The estimated investment of the first phase in 2009 is
approximately $5 million (not including land use rights of approximately $2
million).
 
 As of
June 30, 2009, the Company incurred approximately $6 million and recorded as
construction in progress with no significant contingent payments related to the
third party contractors.
 
 23
 
 NF
ENERGY SAVING CORPORATION OF AMERICA
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)
 
 (c)
                Litigation
 
 On May
21, 2007, a civil complaint Robert Dawley vs NF Energy Saving Corp. of America,
etal. was filed in the United States District Court, Middle District of Florida,
Orlando, Civil No. 6:07-cv-872-Orl-18DAB. The complaint accuses the defendants
of breaching a contract for payment of money that was signed by Sam Winer,
former Chief Executive Officer, before the commencement of the company’s reverse
merger with the current subsidiary. After being initially dismissed by the
Court, the action was authorized to proceed on November 16, 2007. The trial was
held in the United States District Court, Middle District of Florida, Orlando on
October 16, 2008. The District Court issued a Judgment on December 11, 2008
awarding the plaintiff the sum of $400,000 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 2008. The parties have completed
briefing the appeal and are waiting for the court’s decision on the appeal. At
this point, the Company does not believe that the judgment would have a material
impact on the Company.
 
 24
 
 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,” “NFES” and the "Company"
means, NF Energy Saving Corporation of America, a Delaware corporation, formerly
known as Diagnostic Corporation of America, Global Broadcast Group, Inc., and
Galli Process, Inc. These terms also refer to our subsidiary corporation,
Liaoning Nengfa Weiye Energy Technology Corporation Ltd. (“Nengfa Energy”),
formerly known as Liaoning Nengfa Weiye Pipe Network Construction and Operation
Co. Ltd., a corporation organized and existing under the laws of the Peoples’
Republic of China (“Neng Fa”) acquired in November 2006.
 
 NF Energy
Saving Corporation of America was incorporated under the laws of the State of
Delaware in the name of Galli Process, Inc. on October 31, 2000 for the
purpose of seeking and consummating a merger or acquisition with a business
entity organized as a private corporation, partnership, or sole proprietorship.
On December 31, 2001, Galli Process, Inc. became a majority owned
subsidiary of City View TV, Inc., a Florida corporation (“City View”). On
January 31, 2002, Galli Process, Inc. changed its name to Global Broadcast
Group, Inc. On March 1, 2002, City View merged into Global Broadcast Group,
Inc., which was the surviving entity. On November 3, 2004, the Company
changed its name to Diagnostic Corporation of America. On March 15, 2007, we
changed our name to NF Energy Saving Corporation of America to more accurately
reflect our business after a stock exchange transaction with Neng Fa. Our
principal place of business is 21-Jia Bei Si Dong Road, Tie Xi Qu, Shenyang, P.
R. China 110021. Our telephone number is (8624) 2560-9750.
 
 On November 15, 2006, we executed a
Plan of Exchange ("Plan of Exchange"), between and among us, Neng Fa, the
shareholders of Neng Fa (the "Neng Fa Shareholders") and Gang Li, our Chairman
and Chief Executive Officer ("Mr. Li").
 
 Pursuant to and at the closing of the
Plan of Exchange, which occurred on November 30, 2006, we issued the Neng Fa
Shareholders 12,000,000 shares of our common stock, or 89.4% of our then
outstanding common stock, in exchange for all of the shares of capital stock of
Neng Fa owned by the Neng Fa shareholders. Immediately upon the closing, Neng Fa
became our 100% owned subsidiary, and we ceased all of our current remaining
operations and adopted and implemented the business plan of Neng
Fa.
 
 On
September 5, 2007 we established a new sales company “Liaoning Nengfa Weiye Tie
Fa Sales Co., Ltd” (“Sales Company”), a limited liability corporation organized
and existing under the laws of the Peoples’ Republic of China. The sales company
is a subsidiary 99% owned by NF Energy.  The sales company engaged in
the sales and marketing of valves components and products in the
PRC.
  On
January 31, 2008 to better reflect our energy technology business we changed the
name of our 100% own subsidiary “Liaoning Nengfa Weiye Pipe Network Construction
and Operation Co. Ltd” to “Liaoning Nengfa Weiye Energy Technology Company Ltd.”
(Nengfa Energy). Nengfa Energy’s area of business include research and
development,  processing , manufacturing,  and marketing and
distribution of energy saving flow control equipment; manufacturing, marketing
and distribution of energy equipment, wind power equipment and fittings;
energy saving technical reconstruction; and energy saving technology consulting
services.
 
 Nengfa
Energy specializes in energy technology business.  We provide energy
saving technology consulting, optimization design services, energy saving
reconstruction of pipeline networks and contractual energy management services
for China’s electric power, petrochemical, coal, metallurgy, construction, and
municipal infrastructure development industries. We are also engaged in the
manufacturing and sales of the energy-saving flow control equipment. At present,
our valve business holds a leading position in China. Our company has the Det
Norske Veritas Management System Certificate that certifies our products conform
to the Management System Standard ISO9001:2000. We have been a member of Chicago
Climate Exchange since 2006. In 2007 Nengfa Energy received contracts for three
sections of the prominent project “Redirect the water from the Rivers in the
South to the North Middle Section Jingshi Section Water Supply Engineering
Project”. This project was completed and passed inspection in
2008.  In 2008 our Company also received flow control equipment
contracts from seven cities in Liaoning Province for their large water supply
system.
 
 25
 
 Our main
development directions in the future include the expansion of our capabilities
for technology consulting and production of equipment and pipe network for
building energy efficient infrastructures for municipalities, to provide
comprehensive technology solutions for regional energy conservation and emission
reduction, and to conduct research and development and the manufacturing of
equipment and fittings for wind power plants.
 
 FORWARD
LOOKING STATEMENTS
  Certain statements in this report,
including statements of our expectations, intentions, plans and beliefs,
including those contained in or implied by "Management's Discussion and
Analysis" and the Notes to Consolidated Financial Statements, are
"forward-looking statements", within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are
subject to certain events, risks and uncertainties that may be outside our
control. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”,
“will”, and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date on which they are made. 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 strategy, our ability to obtain
projects in the energy savings segment, our ability to achieve operating
efficiencies, our dependence on a limited number of customers and suppliers,
government policies and incentives, industry technology trends, and standards,
taxation relief and reductions and other regulatory matters, general economic
and business conditions, the strength and financial resources of our
competitors, our ability to find and retain skilled personnel, the political and
economic climate in which we conduct operations and the risk factors described
from time to time in our other documents and reports filed with the Securities
and Exchange Commission (the "Commission"). Additional factors that could cause
actual results to differ materially from the forward-looking statements include,
but are not limited to: 1) our ability to successfully develop, manufacture and
deliver our products on a timely basis and in the prescribed condition; 2)
market acceptance of our products and services and our ability to compete
effectively with other companies in the same industry; 3) our ability to raise
sufficient capital in order to effectuate our business plan; and 4) our ability
to retain our key executives.
 
 CRITICAL
ACCOUNTING POLICIES
 
 An
appreciation of our critical accounting policies is necessary to understand our
financial results. These policies may require management to make difficult and
subjective 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.
 
 26
 
 Revenue
recognition
 
 In
accordance with the SEC’s Staff Accounting Bulletin No. 104, “Revenue Recognition”, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling price
is fixed or determinable and collectability is reasonably assured.
 
 (a)  Sale
of products
 
 The
Company derives revenues from the sale of self-manufactured products relating to
industrial valves components and wind-energy critical equipments. 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 recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced no
product returns and has recorded no reserve for sales returns for the six months
ended June 30, 2009 and 2008.
 
 (b)  Service
revenue
 
 Service
revenue is primarily derived from energy-saving technical services that are not
an element of an arrangement for the sale of products. These services are
generally billed on a time-cost plus basis. Revenue is recognized, net of
business taxes when service is rendered and accepted by the
customers.
 
 (c)  Project
revenue
 
 The
Company applies the percentage-of-completion method under SOP 81-1 “Accounting for Performance of
Construction-Type and Production-Type Contracts”, to recognize revenues
for energy-saving re-engineering projects that require significant modification
or customization or installation subject to the customers. The Company records a
provision in those instances in which the Company believes a contract will
probably generate a net loss and the Company can reasonably estimate this loss.
If the Company cannot reasonably estimate the loss, the Company limits the
amount of revenue that the Company recognizes to the costs the Company has
incurred, until the Company can estimate the total loss. Advance payments from
customers and amounts billed to clients in excess of revenue recognized are
recorded as receipt in advance. For the six months ended June 30, 2009, the
Company did not recognize any project revenue.
 
 (d)  Interest
income
 
 Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.
 
 Accounts
receivable
 
 Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customer’s current
credit worthiness and the economic environment. As of June 30, 2009, the Company
has determined that no allowance for doubtful accounts is
necessary.
 
 27
 
 Inventories
 
 Inventories
are stated at the lower of cost or market (net realizable value), cost being
determined on a weighted average method. Costs include material, labor and
manufacturing overhead costs. The Company quarterly reviews historical sales
activity to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand. The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of June 30, 2009, 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:
 
 Depreciablelife
                    
                    ResidualvaluePlant
      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.
 
 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 APB Opinion No. 21, “Interest on Receivables and
Payables”.
 
 Stock based
compensation
 
 The
Company adopts SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS
No. 123(R)") using the fair value method. Under SFAS No. 123(R), the stock-based
compensation is measured using the Black-Scholes Option-Pricing model on the
date of grant.
 
 For
non-employee stock-based compensation, the Company adopts EITF Issue No. 96-18,
“Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services” and EITF Issue No. 00-18, “Accounting Recognition for Certain
Transactions involving
Equity Instruments Granted to Other Than 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 SFAS
123(R).
 
 28
 
 Income
Taxes
 
 The
Company accounts for income tax using SFAS No. 109 “Accounting for Income
Taxes”, which requires the asset and liability approach for financial
accounting and reporting for income taxes. Under this approach, deferred income
taxes are provided for the estimated future tax effects attributable to
temporary differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases, and for the expected future tax
benefits from loss carry-forwards and provisions, if any. Deferred tax assets
and liabilities are measured using the enacted tax rates expected in the years
of recovery or reversal and the effect from a change in tax rates is recognized
in the statement of operations and comprehensive (loss) income in the period of
enactment. A valuation allowance is provided to reduce the amount of deferred
tax assets if it is considered more likely than not that some portion of, or all
of the deferred tax assets will not be realized.
 
 The
Company also adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), on January 1, 2007. FIN 48 prescribes a more
likely than not threshold for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods, and income tax disclosures. In accordance
with FIN 48, the Company also adopted the policy of recognizing interest and
penalties, if any, related to unrecognized tax positions as income tax expense.
For the six months ended June 30, 2009 and 2008, the Company did not have any
interest and penalties associated with tax positions. As of June 30, 2009, the
Company did not have any significant unrecognized uncertain tax
positions.
 
 The
Company conducts major businesses in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax authority. For the
period ended June 30, 2009, the Company filed and cleared 2008 PRC tax return by
the 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 its local currency, the Renminbi Yuan ("RMB"), which
is functional currency as being the primary currency of the economic
environment in which these entities operate.
 
 In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with SFAS No. 52, “Foreign
Currency Translation”, using the exchange rate on the balance sheet date.
Revenues and expenses are translated at average rates prevailing during the
period. The gains and losses resulting from translation of financial statements
of foreign subsidiaries are recorded as a separate component of accumulated
other comprehensive income within the statement of stockholders’
equity.
 
 Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective period:
 2009
                      
                      
                      2008Period-end
      RMB:US$1 exchange rate
                      
                      
                      6.8432
                      
                      
                      
                      7.0726Average
      monthly RMB:US$1 exchange rate
                      
                      
                      6.8448
                      
                      
                      
                      6.8718
 
 29





RESULTS
OF OPERATIONS


FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008




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 $5,218,704 and $7,638,536 for the three and six months ended
June 30, 2009, respectively, as compared to $4,296,527 and $7,161,484 for
the corresponding periods in 2008. Total revenues increased by $922,177 and
$477,052, a 21% and 7% increase, for the three and six months ended June 30,
2009, as compared to total revenues for the three and six months ended June 30,
2008.





In 2008,
the Chinese government announced more flexible monetary policies and financial
policies. The Chinese government will invest close to 4 trillion RMB to
stimulate domestic demand and has announced ten policies to promote growth. The
Chinese government plans to strongly expand policies for domestic projects on
civil engineering, basic infrastructure, constructions for environmental
protection and reconstruction to promote economic stability and growth. The
Chinese government’s policies to stimulate the Chinese economy by its spending
on basic infrastructure and constructions for environmental protection should
benefit Nengfa Energy’s energy saving business which fits within some of the government stimulus policies
on building energy saving infrastructure for municipalities and industrial
companies. As a result, we expect growth
for all areas of our business in 2009 and 2010,
although therecanbe no assurance that we will be successful in our
energy savings project line of business.





Product
Revenues




Product revenues are derived
principally from the sale of self-manufactured products relating to industrial
valves components and wind-energy equipments. Product revenues were $4,627,735
and $6,729,561, or 88.68% and 88.10% of total revenues for the three and six
months ended June 30, 2009, as compared to $3,036,313 and $5,279,366, or
70.67% and 73.72% of total revenues for both the corresponding periods in 2008.
Product revenues increased by $1,591,422, a 52% increase, to $4,627,735 for
the three months ended June 30, 2009 and increased by $1,450,195, a 27%
increase, to $6,729,561 for the six months ended June 30, 2009 as compared
to the corresponding three and six month periods in 2008. The Company has
several very large contracts which require a longer period of time to produce
the valves and flow equipment needed for such projects. We expect that the
revenues will be realized in future periods when these large contracts are
completed.




Service
Revenues




Service
revenues are derived principally from technical services that are not an element
of an arrangement for the sale of products. These services are generally billed
on a time-cost plus basis. Revenue is recognized, net of business taxes when
service is rendered and accepted by the customers. Service revenues were
$590,969 and $908,975, or 11.32% and 11.90% of total revenues for the three and
six months ended June 30, 2009, as compared to $ 837,555 and $1,168,936, or
19.49% and 16.32% of total revenues for both the corresponding periods in 2008.
Service revenues decreased by $246,586, a 29% decrease, to $590,969 for the
three months ended June 30, 2009 and decreased by $259,961, a 22% decrease,
to 908,975 for the six months ended June 30, 2009 as compared to the
corresponding three and six month periods in 2008.


30


Project
Revenues




Project
revenues are derived principally from for energy-saving re-engineering projects
that require significant modification or customization or installation subject
to the customers. The Company applies the percentage-of-completion method to
recognize project revenues. There was no project revenue for the three and six
months ended June 30, 2009. Project revenues were $422,659 and $713,182, or
$9.84% and 9.96% of total revenues for the three and six months ended
June 30, 2008. Project revenues decreased by $422,659, a 100%
decrease, to $0 for the three months ended June 30, 2009 and decreased
by $713,182, a 100% decrease, to $0 for the six months ended June 30, 2009
as compared to the corresponding three and six month periods in
2008.





The
Company is conducting feasibility study and is in
the process ofnegotiating several projects. Therewouldbe no
assurance that the Company will win contracts for any of the projects on which
it is studying or negotiating.Project revenues, if any, will be
reported in the future periods. ..




COSTS
AND EXPENSES





Cost
of Revenues




Cost of product revenues consists
primarily of material costs, direct labor, depreciation and manufacturing
overheads, which are directly attributable to the manufacture of products and
the rendering of services. Total cost of revenues was $3,693,925 and $5,434,295
for the three and six months ended June 30, 2009, respectively, as compared
to $3,045,518 and $5,154,955 for the corresponding three and six month periods
in 2008. The total cost of revenues increased by $648,407 (21%) and $279,340
(5%) for the three and six months ended June 30, 2009, as compared to total cost
of revenues for the corresponding three and six months periods in 2008. The
increase in total cost of revenues was due to the increase in operating revenues
during this period.





The overall gross profit for the
Company was $1,524,779 (29.22%) and $2,204,241 (28.86%) for the three and six
months ended June 30, 2009 respectively. Profit margin increased by $273,770, a
21.88% increase, to $1,524,779, for the three months ended June 30, 2009 and
increased by $197,712, a 9.85 % increase, to $2,204,241 for the six months ended
June 30, 2009 as compared to the corresponding three and six month periods
in 2008.





Cost
of Products




Total
cost of products was $3,250,140 and $4,816,014, or 87.99% and 88.62% of total
cost of  revenues, for the three and six months ended June 30, 2009
respectively as compared to $2,092,071 and $3,752,218, or 68.69% and 72.79% of
total cost of revenues, for the corresponding three and six month periods in
2008. The cost of products increased by $1,158,069 to $3,250,140, an increase of
55% of total cost of revenues, for the three months ended June 30, 2009, as
compared to the corresponding period in 2008. The cost of products increased by
$1,063,796 to $4,816,014, an increase of 28% of total costs of revenues, for the
six months ended June 30, 2009 as compared to the corresponding period in
2008.





The gross
profit for products was $1,377,595 and $1,913,547, or 29.77% and 28.43% for the
three and six months ended June 30, 2009 respectively as compared to $944,242
and $1,527,148, or 31.1% and 28.93% for the corresponding three and six month
periods in 2008. Gross profit increased by $433,353 to $1,377,595, a decrease of
1%, for the three months ended June 30, 2009, as compared to the
corresponding period in 2008. Gross profit increased by $386,399 to $1,913,547,
a decrease of 0.49%, for the six months ended June 30, 2009, as compared to
the corresponding period in 2008. The increase in gross profit for products is
due to increase in product revenues.


31




Cost
of Service




The cost
of service was $443,785 and $618,281, or 12.01% and 11.38% of total cost of
revenues, for the three and six months ended June 30, 2009 respectively as
compared to $582,581 and $792,101, or 19.13 % and 15.37 % of total cost of
revenues, for the corresponding three and six month period in 2008. The cost of
service decreased by $138,796 to $443,785, a decrease of 24% of total cost of
services, for the three months ended June 30, 2009, as compared to the
corresponding period in 2008. The cost of service decreased by $173,820 to
$618,281, a decrease of 22% of total cost of service, for the six months ended
June 30, 2009, as compared to the corresponding period in
2008.





The gross
profit for service was $147,184 and $290,694, or 24.91% and 31.98% for the three
and six months ended June 30, 2009 respectively as compared to $254,974 and
$376,835, or 30.44% and 32.24% for the corresponding three and six month periods
in 2008. Gross profit decreased by $107,790 to $147,184, a decrease of 6%, for
the three months ended June 30, 2009, as compared to the corresponding
period in 2008. Gross profit decreased by $86,141 to $290,694, a decrease of
0.26%, for the six months ended June 30, 2009, as compared to the
corresponding period in 2008. The decrease in gross profit and gross profit
margin for service is due to the decrease in service revenues not offset by the
decrease in cost of services.





Cost
of Projects





In 2007
the Company began contracting energy-saving re-engineering projects that require
significant modification or customization or installation subject to the
customers. The cost of projects was $0 and $0 of total cost of revenues, for the
three and six months ended June 30, 2009 respectively as compared to $370,866
and $610,636, or 12.18 % and 11.85% of total cost of revenues, for the
corresponding three and six month periods in 2008. The cost of service decreased
by $370,866 to $0, a decrease of 100% of total cost of projects, for the three
months ended June 30, 2009, as compared to the corresponding period in
2008. The cost of projects decreased by $610,636 to $0, a decrease of 100% of
total cost of projects, for the six months ended June 30, 2009, as compared
to the corresponding period in 2008.




The gross
margin for projects was $0 and $0 for the three and six months ended June 30,
2009 respectively, as compared to $51,793 and $102,546, or 12.25% and 14.38%,
for the corresponding three and six month periods in 2008. Gross profit
decreased by $51,793 to $0, a decrease of 100%, for the three months ended
June 30, 2009, as compared to the corresponding period in 2008. Gross
profit decreased by $102,546 to $0, a decrease of 100%, for the six months ended
June 30, 2009, as compared to the corresponding period in
2008.




There were no cost of projectsfor the three
and six months ended June 30, 2009.Notwithstanding the absence of revenues in this line of
business, as we are investigating several projects and negotiating for some of
them, we believe that there is the opportunity for the Company toearn revenues in future periods for this line of
business.  There can be no assurance that the Company will be
successful in these endeavors or this line of business.





Operating
Expenses




Total
operating expenses was $568,681 and $762,699, or 10.90% and 9.98% of total
revenues, for the three and six months ended June 30, 2009 respectively as
compared to $209,575 and $389,689, or 4.88% and 5.44% of total revenues, for the
corresponding three and six month periods in 2008. Total operating expenses
increased by $359,106 to $568,681 for the three months ended June 30, 2009,
and increased by $373,010 to $762,699 for the six months ended June 30,
2009, as compared to the corresponding three and six month periods in 2008. The
increase for the three and six months ended June 30, 2009 from the
corresponding period in 2008 primarily consists of a $349,000 increase in stock
based compensation expense incurred in 2009 for a commitment to issue 450,000
shares of stock warrants to several investors relations firms for their work for
the company in the coming years.


32


Selling
and marketing expenses




On
September 5, 2007 the Company established a new subsidiary, Liaoning Nengfa
Weiye Tie Fa Sales Co., Ltd., to engage in the sales and marketing of valves
products in the PRC. Sales and marketing expenses was $25,628 and $74,453, or
0.49% and 0.97% of total revenues, for the three and six months ended June 30,
2009 respectively as compared to $48,921 and $62,280, or 1.14% and 0.87% of
total revenues, for the corresponding three and six month periods in
2008.




Sales and
marketing expenses decreased by $23,293 to $25,628 for the three months ended
June 30, 2009, and increased by $12,173 to $74,453 for the six months ended
June 30, 2009, as compared to the corresponding three and six month periods
in 2008. The increase for the six months ended June 30, 2009 from the
corresponding period in 2008 are due to increased sales and marketing activities
during this period.





Research
and development expenses





The
Company incurred research and development expenses to study the possibility of
using the Company’s existing manufacturing facilities and valve production
expertise to produce equipment and fittings for wind power plants. The R&D
effort enabled the Company to create a new line of business to tap into a large
demand for the equipment needed for new wind power plants that have been planned
in PRC.





The
company incurred no research and development expenses for the three and six
months ended June 30, 2009. Research and development expense was $47,253 and
$85,585, or 1.10% and 1.20% of total revenues, for the three and six months
ended June 30, 2008 respectively. Research and development expenses decreased by
$47,253 to $0 for the three months ended June 30, 2009, and decreased by
$85,585 to $0 for the six months ended June 30, 2009, as compared to the
corresponding three and six month periods in 2008. Our company engaged in
intensive research and development activities during 2007 and 2008 to study the
possibility of using the company’s existing manufacturing facilities and valve
production expertise to produce equipment for wind power plants. The decrease in
research and development expenses for the three and six months ended
June 30, 2009 from the corresponding periods in 2008 is due to that the
Company has completed this phase of the research and development  in
2008.





General
and administrative expenses




General and administrative expenses was
$194,053 and $339,246, or 3.72% and 4.44% of total revenues, for the three and
six months ended June 30, 2009 respectively as compared to $113,401 and
$241,824, or 2.64% and 3.38 % of total revenues, for the corresponding three and
six month periods in 2008. General and administrative expenses increased by
$80,652 to $194,053 for the three months ended June 30, 2009, and increased
by $97,422 to $339,246 for the six months ended June 30, 2009, as compared
to the corresponding three and six month periods in 2008.The increase for the three
and six months ended June 30, 2009 from the corresponding period in 2008
were both due to an increase in personnel expenses.





INCOME
FROM OPERATIONS




As a result of the foregoing, for the
three and six months ended June 30, 2009, income from operations was
$956,098 and $1,441,542, 18.32% and 18.87% of total revenues, as compared to
$1,041,434 and $1,616,840,  24.24% and 22.58% of total revenues, for
the three and six months ended June 30, 2008. Our income from operations
decreased by $85,336 to $956,098, for the three months ended June 30, 2009,
and decreased by $175,298 to $1,441,542, for the six months ended June 30,
2009, as compared to the corresponding three and six month periods in
2008.


33


Income
tax expense





For the
three and six months ended June 30, 2009, income tax expense was $181,912 and
$243,460, as compared to $4 and $305 for the three and six months ended June 30,
2008. The Company is enjoying the tax holiday in PRC due to NFES's foreign
company status. During 2007, the Tieling city local government tax bureau in the
PRC approved Nengfa Energy as a foreign investment enterprise. Hence,
retroactively effective from January 1, 2007, Nengfa Energy is entitled to a
two-year exemption from corporate income tax and a reduced corporate income tax
rate of 12.5% for the following three years.





As of
June 30, 2009, the operation in the United States of America has incurred
$1,376,231 of cumulative net operating losses which can be carried forward to
offset future taxable income. The net operating loss carryforwards begin to
expire in 2029, if unutilized. The Company has provided for a full valuation
allowance against the deferred tax assets of $481,681 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
Company’s effective income tax rates for the six months ended June 30, 2009 and
2008 were 16.3% and 0%.





NET
INCOME





As a
result of the foregoing, we had net income of $808,949 and $1,250,861, 15.50%
and 16.38% of total revenues, for the three and six months ended June 30,
2008, as compared to net income of $1,062,383 and $1,641,470, 24.73% and 22.92%
of total revenues, for the three and six months ended June 30, 2008. Our
net income decreased by $253,434 (24%) to $808,949 for the three months ended
June 30, 2009, and decreased by $390,609 (24%) to $1,250,861 for the six
months ended June 30, 2009, as compared to the corresponding three and six
month periods in 2008.





LIQUIDITY
AND CAPITAL RESOURCES





Operating
activities





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 $148,963 and stock based compensation
$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, value added tax payable by 270,935, and income tax payable
by 181,825, partially offset by the increase in accounts receivable by $540,094,
prepayments, and other receivables by $263,154, 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 a 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 and value added tax payables of $270,935 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 are due to the decrease in welfare
payable and other accrued expenses.


34





For the
six months ended June 30, 2008, net cash provided by operating activities was
$478,716. This was primarily attributable to our net income of $1,641,470,
adjusted by non-cash items of depreciation $170,415, and a $1,333,169 decrease
in working capital. The decrease in working capital in the first six months of
2008 were due primarily to the increase in accounts receivable by $974,464,
prepayments, and other receivables by $330,241, and the decrease in accounts
payable by $107,754, and other payables and accrued liabilities by $132,019,
partially offset by the decrease in inventories by $100,786, increase in
customer deposits by $108,199 and value added tax payable by $2,324 in this
period.





The large
increase in accounts receivable of $974,464, an increase of 24.0% over the
accounts receivables balances at December 31, 2007, is mainly due to the sales
growth during the period. The decrease in inventories of $100,786 reflects a
lower inventory level the company maintains for the current sales level. The
reason for the large increase in the prepayments and other receivables of
$330,241, a 54.5% increase over the prepayments and other receivables balance of
$605,989 at December 31, 2007 is that the Company expects the cost of the
raw-material will increase in the coming year. In order to hedge the increase in
raw material costs, the company has signed more purchase contracts in advance
with the suppliers and hence increasing the prepayments. The decrease in
accounts payable of $107,754 corresponds to more efficient payment of the
accounts payable during the period. The increase in customer deposits of
$108,199 is due to the increase in sales. The decrease of $132,019 in other
payables and accrued liabilities are due to the decrease in welfare payable,
payables to equipment vendors and other accrued expenses. A decrease of $2,324
in value added tax payable is due to reduced value added tax payable this
period.





Investing
activities




For the
six months ended June 30, 2009, net cash used in investing activities was
$2,774,846, and was primarily attributable to the purchase of plant and
equipment for $179,070 and the payments to construction in progress of
$2,595,776. For the six months ended June 30, 2008, net cash used in investing
activities was $160,722, and was primarily attributable to the purchase of plant
and equipment.




In 2008,
the Company was approved by the local government to construct a new
manufacturing facility for energy-saving products and equipments in Yingzhou
District Industrial Park, Tieling City, Liaoning Province, the PRC. The
construction project consists of two phases, whereas the first phase is related
to the development of new manufacturing facilities on the production of valves
components and energy-saving equipments and it is expected to be fully completed
till 2010. The estimated investment of the first phase in 2009 is
approximately $5 million (not including land use rights of approximately $2
million). As of June 30, 2009, the Company capitalized $6,307,824 as
construction in progress.





Financing
activities





For the
six months ended June 30, 2009, net cash provided by financing activities was
$709,373 attributable to the payments on finance lease. For the six months ended
June 30, 2008, net cash provided by financing activities was $2,000,000
attributable to the issuance of common stock to two investors from a convertible
note.


35


On April 28, 2008, the Company entered
into a Securities Purchase Agreement with the Investors to consummate a private
placement of 6,645,376 shares of restricted common stock for an aggregate
purchase price of $2,000,000 at a 50-trading days weighted average market quoted
price of $0.30 per share. Each of the Investors acquired one half of these
shares of common stock, or 3,322,688 shares. As a result of this transaction,
each of the investors owns 8.33% of the issued and outstanding common stock of
the Company. The proceeds were used to fund the working capital. The Company
also entered into various covenants with the Investors, including its (i)
obtaining a listing on a United States stock exchange not later than December
31, 2009, (ii) developing a step by step energy saving and emission reduction
business plan as a products and service provider in consultation with the
Investors, (iii) limiting business arrangements with affiliates, and (iv)
establishing good corporate governance and seeking good financial
development.





We anticipate we will need additional
working capital in 2009 and thereafter to
fund our company’s business plans to help the Company to establish a
manufacturing base for new energy equipment, to develop comprehensive energy
saving infrastructure projects for municipalities, and to maintain our lead
position in flow control equipment manufacturing. We may decide to pursue
additional investments or debt financing to obtain additional cash resources to
fund our company’s new business and other future developments. Therewouldbe no
assurance that the Company will be able to obtain the sought funds, or if
offered that they will be on acceptable terms.  Therefore, therewouldbe no assurance that the Company will be able to finance its planned
expansion.





Inflation




We believe that the relatively moderate
rate of inflation over the past few years has not had a significant impact on
our results of operations.At present we are able to increase our prices due to the rising prices of raw
materials.





OFF-BALANCE
SHEET ARRANGEMENTS





We do not have any material off-balance
sheet arrangements.





IMPACT
OF RECENTLY ISSUED NEW ACCOUNTING STANDARDS





We do not expect adoption of recently
issued accounting pronouncements to have a significant impact on our results of
operations, financial position or cash flow.





Item
3. Quantitative and Qualitative Disclosures About Market Risk





Not
Applicable.





Item
4T. Controls and Procedures.




(a) Evaluation of
Disclosure Controls and Procedures.  Our chief executive
officer and chief financial officer evaluated the effectiveness of our
disclosure controls and procedures as of June 30, 2009. The term “disclosure
controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of June 30, 2009, our
chief executive officer and chief financial officer concluded that, as of such
date, our disclosure controls and procedures were effective.


36




b) 
Changes in Internal Controls




No change
in our internal control over financial reporting occurred during the fiscal
quarter ending June 30, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.




PART
II. OTHER INFORMATION





Item
1.  Legal Proceedings.





On May
21, 2007, a civil complaint Robert Dawley vs NF Energy Saving Corp. of America,
etal. was filed in the United States District Court, Middle District of Florida,
Orlando, Civil No. 6:07-cv-872-Orl-18DAB. The complaint accuses the defendants
of breaching a contract for payment of money that was signed by Sam Winer,
former Chief Executive Officer, before the commencement of the Company’s reverse
merger with the current subsidiary. After being initially dismissed by the
Court, the action was authorized to proceed on November 16, 2007. The trial was
held in the United States District Court, Middle District of Florida, Orlando on
October 16, 2008. The District Court issued a judgment on December 11, 2008
awarding the plaintiff the sum of $400,000 against the Company, plus prejudgment
interest in the amount of $132,821.92, with continuing interest of $131.51 per
day on the $400,000 obligation until it is paid. The Court further adjudged that
the plaintiff shall surrender his stock upon payment of the $400,000. 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 parties currently are briefing the appeal. The Company has
also accrued $200,000 for this contingent liability to the statement of
operation in 2008. The parties have completed briefing the appeal and are
waiting for the court’s decision on the appeal. At this point, the Company does
not believe that the judgment would have a material impact on the
Company.





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





In June
2009, the Company agreed to issue warrants to purchase 450,000 shares of common
stock, exercisable for five years, at an
exercise price of $0.60.  The warrants were issued and the underlying
shares will be issued on the basis of an exemption from registration, as sales
to sophisticated persons. The warrants were issued in connection withservices to be
provided by the warrant holders.





Item
3.  Defaults Upon Senior Securities.




None.





Item
4.  Submission of Matters to a Vote of Security Holders.




None.





Item
5.  Other Information.




None.




37




Item 6.  Exhibits.




The list of Exhibits , required by Item
601 of Regulation S-K, 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 of America(Registrant)Date:
      August 7, 2009
                          
                          By:
                          /s/
      Gang LiGang
      LiChairman,
      Chief Executive Officer and PresidentDate: August 7, 2009
                          
                          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 of the
      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 the Sarbanes-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