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 March 31, 2010


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


for
the Transition Period from _______ to _______


Commission
File Number: 000-50155




NF
Energy Saving Corporation


(Exact
name of registrant as specified in its charter)







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





21-Jia
Bei Si Dong Road, Tie Xi Qu


Shenyang, P. R. China
110021


(Address
of Principal Executive Offices)




(8624)
2560-9750


(Registrant’s
Telephone Number, including area code)







Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. xYesoNo





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). oYes  oNo





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




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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) oYes xNo





As of April 30, 2010, the registrant had 13,315,486
shares of common stock, $0.001 par value, issued and
outstanding.









CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION




The
discussion contained in this 10-Q under the Securities Exchange Act of 1934, as
amended, contains forward-looking statements that involve risks and
uncertainties. The issuer's actual results could differ significantly from those
discussed herein. These include statements about our expectations, beliefs,
intentions or strategies for the future, which we indicate by words or phrases
such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the
Company believes," "management believes" and similar language, including those
set forth in the discussions under "Notes to Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations " as well as those discussed elsewhere in this Form 10-Q. We base our
forward-looking statements on information currently available to us, and we
assume no obligation to update them. Statements contained in this Form 10-Q that
are not historical facts are forward-looking statements that are subject to the
"safe harbor" created by the Private Securities Litigation Reform Act of
1995.









TABLE
OF CONTENTS





PART
      I – FINANCIAL INFORMATIONItem
      1. Financial Statements
            
            
            F-1Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            
            
            3Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            
            
            16Item
      4T. Controls and Procedures
            
            
            16PART
      II – OTHER INFOMRATIONItem
      1. Legal Proceedings
            
            
            17Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            
            
            17Item
      3. Defaults Upon Senior Securities
            
            
            17Item
      4. [Reserved]
            
            
            17Item
      5. Other Information
            
            
            18Item
      6. Exhibits
            
            
            18Signatures
            
            
            19




2




PART
I – FINANCIAL INFORMATION





Item
1. Financial Statements





NF
ENERGY SAVING CORPORATION




INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





PageCondensed
      Consolidated Balance Sheets as of March 31, 2010 and December 31,
      2009
            
            
            F-2Condensed
      Consolidated Statements of Operations And Comprehensive Income for the
      Three Months ended March 31, 2010 and 2009
            
            
            F-3Condensed
      Consolidated Statements of Cash Flows for the Three Months ended March 31,
      2010 and 2009
            
            
            F-4Condensed
      Consolidated Statement of Stockholders’ Equity for the Three Months ended
      March 31, 2010
            
            
            F-5Notes
      to Condensed Consolidated Financial Statements
            
            F-6
      to F-21




F-1




NF
ENERGY SAVING CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


AS
OF MARCH 31, 2010 AND DECEMBER 31, 2009


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





March
      31, 2010
            
            
            December
      31, 2009(Unaudited)
            
            
            (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            852,985
            
            
            $
            227,329Accounts
      receivable, trade
            
            
            6,973,835
            
            
            
            12,510,875Retention
      receivable
            
            
            301,637
            
            
            
            874,759Inventories
            
            
            1,220,786
            
            
            
            638,775Deferred
      tax assets
            
            
            1,408
            
            
            
            1,408Prepayments
      and other receivables
            
            
            2,708,763
            
            
            
            603,456Total
      current assets
            
            
            12,059,414
            
            
            
            14,856,602Plant
      and equipment, net
            
            
            2,109,443
            
            
            
            2,169,740Construction
      in progress
            
            
            11,281,600
            
            
            
            9,045,332TOTAL
      ASSETS
            
            $
            25,450,457
            
            
            $
            26,071,674LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable, trade
            
            $
            1,737,527
            
            
            $
            2,055,839Customer
      deposits
            
            
            122,065
            
            
            
            152,850Income
      tax payable
            
            
            59,378
            
            
            
            201,480Convertible
      promissory notes, net
            
            
            253,033
            
            
            
            -Current
      portion of obligation under finance lease
            
            
            451,009
            
            
            
            437,917Other
      payables and accrued liabilities
            
            
            571,419
            
            
            
            1,928,494Total
      current liabilities
            
            
            3,194,431
            
            
            
            4,776,580Long-term
      liabilities:Obligation
      under finance lease
            
            
            517,254
            
            
            
            675,809TOTAL
      LIABILITIES
            
            
            3,711,685
            
            
            
            5,452,389Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $0.001 par value; 50,000,000 shares authorized; 13,315,486 and
      13,315,486 shares issued and outstanding as of March 31, 2010 and December
      31, 2009
            
            
            13,315
            
            
            
            13,315Additional
      paid-in capital
            
            
            8,720,917
            
            
            
            7,969,232Statutory
      reserve
            
            
            1,449,345
            
            
            
            1,449,345Accumulated
      other comprehensive income
            
            
            1,349,001
            
            
            
            1,348,382Retained
      earnings
            
            
            10,206,194
            
            
            
            9,839,011Total
      stockholders’ equity
            
            
            21,738,772
            
            
            
            20,619,285TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            25,450,457
            
            
            $
            26,071,674




See
accompanying notes to condensed consolidated financial statements.




F-2




NF
ENERGY SAVING CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF


OPERATIONS
AND COMPREHENSIVE INCOME


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


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


(Unaudited)





Three
      months endedMarch 31,2010
            
            
            2009REVENUE,
      NETProduct
            
            $
            2,514,232
            
            
            $
            2,101,826Services
            
            
            326,251
            
            
            
            318,006Total
      operation revenues, net
            
            
            2,840,483
            
            
            
            2,419,832COST
      OF REVENUES:Cost
      of products
            
            
            1,948,347
            
            
            
            1,565,874Cost
      of services
            
            
            212,685
            
            
            
            174,496Total
      cost of revenues
            
            
            2,161,032
            
            
            
            1,740,370GROSS
      PROFIT
            
            
            679,451
            
            
            
            679,462OPERATING
      EXPENSES:Sales
      and marketing
            
            
            17,747
            
            
            
            48,825General
      and administrative
            
            
            154,740
            
            
            
            145,193Total
      operating expenses
            
            
            172,487
            
            
            
            194,018INCOME
      FROM OPERATIONS
            
            
            506,964
            
            
            
            485,444Other
      (expense) income:Interest
      income
            
            
            243
            
            
            
            7,857Other
      income
            
            
            -
            
            
            
            10,159Interest
      expense
            
            
            (80,644
            )
            
            
            -Total
      other (expense) income
            
            
            (80,401
            )
            
            
            18,016INCOME
      BEFORE INCOME TAXES
            
            
            426,563
            
            
            
            503,460Income
      tax expense
            
            
            (59,380
            )
            
            
            (61,547
            )NET
      INCOME
            
            $
            367,183
            
            
            $
            441,913Other
      comprehensive income:-
      Foreign currency translation gain
            
            
            619
            
            
            
            13,638COMPREHENSIVE
      INCOME
            
            $
            367,802
            
            
            $
            455,551Net
      income per share:–
      Basic
            
            $
            0.03
            
            
            $
            0.03–
      Diluted
            
            $
            0.03
            
            
            $
            0.03Weighted
      average shares outstanding:–
      Basic
            
            
            13,315,486
            
            
            
            13,291,387–
      Diluted
            
            
            13,499,663
            
            
            
            13,291,387




See
accompanying notes to condensed consolidated financial statements.




F-3




NF
ENERGY SAVING CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


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


(Unaudited)





Three
      months endedMarch 31,2010
            
            
            2009Cash
      flows from operating activities:Net
      income
            
            $
            367,183
            
            
            $
            441,913Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
            
            
            72,674
            
            
            
            74,428Gain
      on disposal of plant and equipment
            
            
            (223
            )
            
            
            -Interest
      expenses, non-cash
            
            
            44,718
            
            
            
            -Change
      in operating assets and liabilities:Accounts
      receivable
            
            
            5,539,111
            
            
            
            (1,230,662
            )Retention
      receivable
            
            
            573,268
            
            
            
            -Inventories
            
            
            (581,915
            )
            
            
            (646,847
            )Prepayments
      and other receivables
            
            
            (1,958,847
            )
            
            
            (265,284
            )Accounts
      payable
            
            
            (318,645
            )
            
            
            1,240,372Customer
      deposits
            
            
            (30,809
            )
            
            
            3,050Value
      added tax receivables
            
            
            (348,160
            )
            
            
            46,968Income
      tax payable
            
            
            (142,136
            )
            
            
            -Other
      payables and accrued liabilities
            
            
            (76,653
            )
            
            
            (15,104
            )Net
      cash provided by (used in) operating activities
            
            
            3,139,566
            
            
            
            (351,166
            )Cash
      flows from investing activities:Purchase
      of plant and equipment
            
            
            (13,054
            )
            
            
            (460
            )Payments
      to construction in progress
            
            
            (3,253,693
            )
            
            
            (456,255
            )Proceeds
      from disposal of plant and equipment
            
            
            1,250
            
            
            
            -Net
      cash used in investing activities
            
            
            (3,265,497
            )
            
            
            (456,715
            )Cash
      flows from financing activities:Payments
      on finance lease
            
            
            (145,643
            )
            
            
            -Proceeds
      from convertible promissory notes
            
            
            900,000
            
            
            
            -Net
      cash provided by financing activities
            
            
            754,357
            
            
            
            -Effect
      on exchange rate change on cash and cash equivalents
            
            
            (2,770
            )
            
            
            (3,496
            )NET
      CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            625,656
            
            
            
            (811,377
            )BEGINNING
      OF PERIOD
            
            
            227,329
            
            
            
            2,252,771END
      OF PERIOD
            
            $
            852,985
            
            
            $
            1,441,394SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for income taxes
            
            $
            59,378
            
            
            $
            57Cash
      paid for interest
            
            $
            3,888
            
            
            $
            -





See
accompanying notes to condensed consolidated financial statements.




F-4




NF
ENERGY SAVING CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
THE THREE MONTHS ENDED MARCH 31, 2010


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


(Unaudited)





AccumulatedAdditional
            
            
            
            
            
            other
            
            
            
            
            
            TotalCommon
      stock
            
            
            paid-in
            
            
            Statutory
            
            
            comprehensive
            
            
            Retained
            
            
            stockholders’No.
      of shares
            
            
            Amount
            
            
            capital
            
            
            reserve
            
            
            income
            
            
            earnings
            
            
            equityBalance
      as of January 1, 2010
            
            
            13,315,486
            
            
            $
            13,315
            
            
            $
            7,969,232
            
            
            $
            1,449,345
            
            
            $
            1,348,382
            
            
            $
            9,839,011
            
            
            $
            20,619,285Beneficial
      conversion feature and warrants granted in connection with convertible
      promissory
      notes
            
            
            -
            
            
            
            -
            
            
            
            751,685
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            751,685Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            619
            
            
            
            -
            
            
            
            619Net
      income for the period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            367,183
            
            
            
            367,183Balance
      as of March 31, 2010
            
            
            13,315,486
            
            
            $
            13,315
            
            
            $
            8,720,917
            
            
            $
            1,449,345
            
            
            $
            1,349,001
            
            
            $
            10,206,194
            
            
            $
            21,738,772




See
accompanying notes to condensed consolidated financial statements.




F-5
 
  NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (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, 2009
which has been derived from audited financial statements and these unaudited
condensed consolidated financial statements reflect all normal and recurring
adjustments considered necessary to state fairly the results for the periods
presented. The results for the period ended March 31, 2010 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2010 or for any future period.





These
unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the Management’s Discussion and Analysis of
Financial Condition and Results of Operations and the audited financial
statements and notes thereto included in the Annual Report on Form 10-K for the
year ended December 31, 2009.








NOTE-2
            ORGANIZATION
      AND BUSINESS BACKGROUND





NF Energy
Saving Corporation (the “Company” or “NFEC”) was incorporated in the State of
Delaware in the name of Galli Process, Inc. on October 31, 2000. On February 7,
2002, the Company changed its name to “Global Broadcast Group, Inc.” On November
12, 2004, the Company changed its name to “Diagnostic Corporation of America.”
On March 15, 2007, the Company changed its name to “NF Energy Saving
Corporation of America.” On August 24, 2009, the Company further changed its
name to “NF Energy Saving Corporation.”





The
Company, through its subsidiaries, mainly engages in the production of heavy
industrial components and products such as valves and the provision of technical
service and re-engineering projects in the energy saving related industry in the
People’s Republic of China (the “PRC”). All the customers are located in
the PRC.





Description of
subsidiaries





Name
            
            Place
      of incorporation
              and
      kind of
              legal
      entity
            
            Principal
      activities
              and
      place of operation
            
            Particulars
      of issued/
              registered
      share
              capital
            
            Effectiveinterest
              heldLiaoning
      Nengfa Weiye Energy Technology Co. Ltd (“Nengfa Energy”)
            
            The
      PRC, a limited liability company
            
            Production
      of a variety of industrial valve components which are widely used in
      water supply and sewage system, coal and gas fields, power generation
      stations, petroleum and chemical industries in the PRC
            
            US$2,770,895
            
            100%Liaoning
      Nengfa Weiye Tei Fa Sales Co., Ltd. (“Sales Company”)
            
            The
      PRC, a limited liability company
            
            Sales
      and marketing of valves components and products in the PRC
            
            RMB5,000,000
            
            100%





NFEC and
its subsidiaries are hereinafter referred to as (the “Company”).




F-6




NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)





NOTE-3
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





The
accompanying condensed consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying condensed consolidated financial statements and
notes.





·
            Use
      of estimates





In
preparing these condensed consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities in the balance sheet and revenues and expenses during the periods
reported. Actual results may differ from these estimates.





·
            Basis
      of consolidation





The
condensed consolidated financial statements include the financial statements of
NFEC and its subsidiaries. All significant inter-company balances and
transactions within the Company have been eliminated upon
consolidation.





·
            Cash
      and cash equivalents





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





·
            Accounts
      receivable





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




F-7


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


As of
March 31, 2010 and December 31, 2009, allowance for doubtful accounts was $0 and
$0, respectively.





·
            Retention
      receivable





Retention
receivable is the amount withheld by a customer based upon 5-10% of the contract
value, until a product warranty is expired.





·
            Inventories





Inventories
are stated at the lower of cost or market value (net realizable value), cost
being determined on a weighted average method. Costs include material, labor and
manufacturing overhead costs. The Company reviews historical sales activity each
quarter to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand. The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of March 31, 2010 and December 31,
2009, the Company did not record an allowance for obsolete inventories, nor have
there been any write-offs.





·
            Plant
      and equipment





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





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





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





Depreciation
expenses for the three months ended March 31, 2010 and 2009 were $72,674 and
$74,428 respectively.





·
            Construction
      in progress





Construction
in progress is stated at cost, which includes acquisition of land use rights,
cost of construction, purchases of plant and equipment and other direct costs
attributable to the construction of a new manufacturing facility. Construction
in progress is not depreciated until such time as the assets are completed and
put into operational use. No capitalized interest is incurred during the period
of construction.




F-8


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


·
            Finance
      leases





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





·
            Impairment
      of long-lived assets





In
accordance with the provisions of ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived
Assets”, all long-lived assets such as plant and equipment held and used
by the Company and construction in progress are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
evaluated by a comparison of the carrying amount of assets to estimated
discounted net cash flows expected to be generated by the assets. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amounts of the assets exceed the fair value of
the assets. There has been no impairment as of March 31, 2010 and
2009.





·
            Revenue
      recognition





The
Company offers the following products and services to its
customers:





(a)
            Sales
      of energy saving flow control equipment(b)
            Provision
      of energy project management and sub-contracting
service(c)
            Provision
      of energy-saving reconstruction
projects





In
accordance with the ASC Topic 605, “Revenue Recognition”, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling price
is fixed or determinable and collectibility is reasonably assured.





(a)
            Sale
      of products





The
Company derives a majority of revenues from the sale of energy saving flow
control equipment. Generally, these energy saving flow control equipment are
manufactured and configured to customer requirements. The Company typically
produces and builds the energy saving flow control equipment for customers in a
period from 1 to 6 months. When the Company completes the production in
accordance with the customer’s specification, the customer is required to
inspect the finished products at the Company’s plant to ensure full satisfaction
with the quality of the products and adherence to product specifications. Once
the product is accepted by the customer, the Company makes delivery to the
customer, usually within a month.





The
Company recognizes revenue from the sale of such finished products upon delivery
to the customers, whereas the title and risk of loss are fully transferred to
the customers. The Company records its revenues, net of value added taxes
(“VAT”). The Company is subject to VAT which is levied on the majority of its
products at the rate of 17% on the invoiced value of sales. The Company
experienced no product returns and has recorded no reserve for sales returns for
the three months ended March 31, 2010 and 2009.




F-9


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


(b)
            Service
      revenue





Service
revenue is primarily derived from energy-saving technical services or project
management or sub-contracting services that are not an element of an arrangement
for the sale of products. These services are generally billed on a time-cost
plus basis, for a period of service time from 2 to 3 months. Revenue is
recognized, net of business taxes when service is rendered and accepted by the
customers.





(c)
            Project
      revenue





For the
energy-saving reconstruction projects, the Company follows the
percentage-of-completion method under ASC Topic 605-35, “Construction-Type and
Production-Type Contracts”, to recognize
revenues for energy-saving reconstruction projects that require significant
modification or customization or installation to the customer’s specifications
for a term of service exceeding 12 months. Advance payments from customers and
amounts billed to clients in excess of revenue recognized are recorded as
receipt in advance. For the three months ended March 31, 2010, 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.





·
            Comprehensive
      income





ASC Topic
220,“Comprehensive
Income”, establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income as defined includes all changes in equity during a period from non-owner
sources. Accumulated other comprehensive income, as presented in the
accompanying condensed consolidated statement of stockholders’ equity, consists
of changes in unrealized gains and losses on foreign currency translation. This
comprehensive income is not included in the computation of income tax expense or
benefit.





·
            Income
      taxes





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





For the
three months ended March 31, 2010 and 2009, the Company did not have any
interest and penalties associated with tax positions. As of March 31, 2010, the
Company did not have any significant unrecognized uncertain tax
positions.




F-10


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


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 a foreign tax authority. For the
three months ended March 31, 2010, the Company filed and cleared a 2009 PRC tax
return with the requisite tax authority.





·
            Product
      warranty





Under the
terms of its contracts, the Company offers customers free 12-months of product
warranty on a case-by-case basis, depending upon the type of customers, nature
and size of the infrastructure projects. Under such arrangements, a portion of
the project contract balance (usually 5-10% of contract value) is withheld by a
customer for 12 months, until the product warranty has expired. 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
accounted for in the three months ended March 31, 2010.





·
            Stock-based
      compensation





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





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





·
            Net
      income per share





The
Company calculates net income per share in accordance with ASC Topic 260,“Earnings per Share.” Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.





·
            Foreign
      currencies translation





Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting
exchange differences are recorded in the 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 their 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 ASC Topic 830-30 “Translation of Financial
Statement”,using the exchange rate on
the balance sheet date. Revenues and expenses are translated at average rates
prevailing during the period. The gains and losses resulting from the
translation of financial statements of foreign subsidiaries are recorded as a
separate component of accumulated other comprehensive income within the
statement of stockholders’ equity.




F-11


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


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




March
      31,2010
            
            
            March
      31, 2009Period-end
      rate: RMB:US$1 exchange rate
            
            
            6.8361
            
            
            
            6.8456Average
      rate: RMB:US$1 exchange rate
            
            
            6.8360
            
            
            
            6.8466





·
            Related
      parties





Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operational decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.





·
            Segment
      reporting





ASC Topic
280, “Segment
Reporting” establishes standards for reporting information about
operating segments on a basis consistent with the Company’s internal
organization structure as well as information about geographical areas, business
segments and major customers in financial statements. The Company operates in
two reportable operating segments in the PRC.





·
            Fair
      value measurement





ASC Topic
820 “Fair Value Measurements
and Disclosures” ("ASC 820"), establishes a new framework for measuring
fair value and expands related disclosures. Broadly, ASC 820 framework requires
fair value to be determined based on the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants. ASC 820 establishes a three-level valuation
hierarchy based upon observable and non-observable inputs. These tiers
include: Level 1, defined as observable inputs such as quoted prices in active
markets; Level 2, defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.





For
financial assets and liabilities, fair value is the price the Company would
receive to sell an asset or pay to transfer a liability in an orderly
transaction with a market participant at the measurement date. In the absence of
active markets for the identical assets or liabilities, such measurements
involve developing assumptions based on market observable data and, in the
absence of such data, internal information that is consistent with what market
participants would use in a hypothetical transaction that occurs at the
measurement date.





·
            Financial
      instruments





Cash and
cash equivalents, accounts and retention receivables, prepayments and other
receivables, accounts payable, customer deposits, income tax payable, other
payable and accrued liabilities are carried at cost which approximates fair
value. The estimated fair value of convertible promissory notes and obligations
under a finance lease was approximately $1.9 million as of March 31, 2010, based
on current market prices or interest rates. Any changes in fair value of assets
or liabilities carried at fair value are recognized in other comprehensive
income for each period.




F-12


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


·
            Recent
      accounting pronouncements





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





In June
2009, the Financial Accounting Standards Board (“FASB”) expanded ASC 810-10, to
provide guidance for variable interest entities (VIEs). The change modifies our
approach for determining the primary beneficiary of a VIE by assessing whether
we have control over such entities. This change is effective for us on July 1,
2010. The Company is currently evaluating the requirements of the VIE provisions
of ASC 810-10, but does not expect a material impact on its condensed
consolidated financial statements.





In
October 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-13,
“Revenue Recognition”
(Topic 605). The accounting standard update addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services separately rather than as a combined unit. Specifically, this subtopic
addresses how to separate deliverables and how to measure and allocate
arrangement consideration to one or more units of accounting. ASU 2009-13 will
be effective for us on July 1, 2010. The Company is currently evaluating the
requirements of ASU 2009-13, but does not expect a material impact on its
condensed consolidated financial statements.





FASB ASC
810, “Consolidation”
(“ASC 810”), establishes accounting and reporting standards for minority
interests, which are recharacterized as noncontrolling interests. ASC 810 was
revised so that noncontrolling interests are classified as a component of equity
separate from the parent’s equity; purchases or sales of equity interests that
do not result in a change in control are accounted for as equity transactions;
net income attributable to the noncontrolling interest are included in
consolidated net income in the statement of operations; and upon a loss of
control, the interest sold, as well as any interest retained, is recorded at
fair value, with any gain or loss recognized in earnings. This revision was
effective for the Company as of January 1, 2009. It applies prospectively,
except for the presentation and disclosure requirements, for which it applies
retroactively. In addition, ASC 810, amends the consolidation guidance
applicable to variable interest entities. The amendments will significantly
affect the overall consolidation analysis under ASC 810. This phase of ASC 810
became effective for the Company on January 1, 2010 and did not impact the
Company’s consolidation conclusions for its variable interest
entities.





In
January 2010, the FASB issued an amendment to the fair value measurement and
disclosure standard improving disclosures about fair value measurements. This
amended guidance requires separate disclosure of significant transfers in and
out of Levels 1 and 2 and the reasons for the transfers. The amended guidance
also requires that in the Level 3 reconciliation, the information about
purchases, sales, issuances and settlements be disclosed separately on a gross
basis rather than as one net number. The guidance for the Level 1 and 2
disclosures was adopted on January 1, 2010, and did not have an impact on our
consolidated financial position, results of operations or cash flows. The
guidance for the activity in Level 3 disclosures is effective January 1, 2011,
and will not have an impact on our consolidated financial position, results of
operations or cash flows as the amended guidance provides only disclosure
requirements. The Company had no significant transfers between Level 1, 2 or 3
inputs during the quarter ended March 31, 2010.





In
February 2010, the FASB issued amended guidance on subsequent events. Under this
amended guidance, SEC filers are no longer required to disclose the date through
which subsequent events have been evaluated in originally issued and revised
financial statements. This guidance was effective immediately and the Company
adopted these new requirements for the quarter ended March 31,
2010.




F-13


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)




NOTE-4
            INVENTORIES





Inventories
consisted of the following:





March
      31,2010
            
            
            December
      31,2009(Unaudited)
            
            
            (Audited)Raw
      materials
            
            $
            756,797
            
            
            $
            512,903Work-in-process
            
            
            397,758
            
            
            
            122,123Finished
      goods
            
            
            66,231
            
            
            
            3,749$
            1,220,786
            
            
            $
            638,775





For the
three months ended March 31, 2010 and 2009, no allowance for obsolete
inventories was recorded by the Company.





NOTE-5
            PREPAYMENTS
      AND OTHER RECEIVABLES





Prepayments
and other receivables consisted of the following:





March
      31,2010
            
            
            December
      31,2009(Unaudited)
            
            
            (Audited)Prepayment
      to vendors for raw materials
            
            $
            2,507,294
            
            
            $
            545,102Prepayment
      to equipment vendors
            
            
            6,583
            
            
            
            7,115Prepaid
      operating expenses
            
            
            84,247
            
            
            
            34,801Value-added
      tax receivable
            
            
            85,889
            
            
            
            -Other
      receivables
            
            
            24,750
            
            
            
            16,438$
            2,708,763
            
            
            $
            603,456




NOTE-6
            CONSTRUCTION
      IN PROGRESS





In 2008,
the Company was approved by the local government to construct a new
manufacturing facility for energy-saving products and equipment in Yingzhou
District Industrial Park, Tieling City, Liaoning Province, the PRC. Total
estimated construction cost of a new manufacturing facility is approximately $16
million (including land use rights of approximately $3 million). The
construction project is expected to be fully completed in late 2010. As of March
31, 2010, the Company incurred and capitalized $11,281,600 as construction in
progress.




F-14


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


NOTE-7
            OTHER
      PAYABLES AND ACCRUED LIABILITIES





Other
payables and accrued liabilities consisted of the following:





March
      31,2010
            
            
            December
      31,2009(Unaudited)
            
            
            (Audited)Rent
      payable
            
            $
            51,199
            
            
            $
            40,221Payable
      to the PRC government for land use rights
            
            
            -
            
            
            
            1,018,682Value
      added tax payable
            
            
            -
            
            
            
            263,834Provision
      for contingent liability
            
            
            200,000
            
            
            
            200,000Accrued
      operating expenses
            
            
            310,953
            
            
            
            372,324Other
      payable
            
            
            9,267
            
            
            
            33,433$
            571,419
            
            
            $
            1,928,494




NOTE-8
            PROMISSORY
      NOTES PAYABLE





On
February 24, 2010 and March 4, 2010, the Company sold, through a private
placement to two accredited investors, convertible promissory notes (the
“Notes”) in the aggregate principal amount of $960,000 and warrants (the
"Warrants") to purchase 160,000 shares of its common stock, par value $0.001 per
share ("Common Stock"). The Company intends to use the net proceeds of
approximately $900,000 from the private placement for working capital and
general corporate purposes.





The Notes
bear simple interest at the rate of 6% per year and, absent an “event of
default,” are payable in shares of the Company’s Common Stock. Provided an
"event of default" has not occurred and is not then continuing, the Notes will
convert upon the earlier to occur of (i) the commencement of trading of the
Company's Common Stock on a major US stock exchange, or (ii) one year after
issuance. Upon conversion, the holders of the Notes shall receive such number of
shares of Common Stock equal to the quotient obtained by dividing (a) the
then-outstanding principal amount and accrued but unpaid interest on the Notes
by (b) the then-current conversion price, which initially shall be $3.00 per
share. The conversion price is subject to adjustment for stock dividends,
splits, combinations and similar events. The Notes are secured by a security
interest in and lien upon all of the Company’s assets.





The
Warrants, which are exercisable for shares of Common Stock at an initial
exercise price of $4.00 per share, are not exercisable until three months after
issuance and will terminate five years thereafter. The exercise price is subject
to adjustment for stock dividends, splits, combinations and similar events. The
Company has agreed to provide the investors with “piggy-back” registration
rights with respect to the shares of Common Stock issuable upon conversion of
the Notes and exercise of the Warrants.





The
Company has engaged an independent valuer to perform the valuation of the Notes,
and the Company determined that, in accordance with ASC Topic 470-20, “Debt with conversion and other
options”, the warrants and related convertible notes should be accounted
for as two separate instruments (equity and debt instruments). The accounting
for these instruments reflects the notion that the consideration received upon
issuance must be allocated between equity and debt components. Proceeds from the
sale of a debt instrument with stock purchase warrants are allocated to the two
elements, based on the relative fair values of the debt instrument without the
warrants and of the warrants themselves at time of issuance. The portion of the
proceeds allocated to the warrants is accounted for as paid-in capital. The
remainder of the proceeds is allocated to the debt instrument portion of the
transaction as debt discount.





March
      31,2010Notional
      amount of the convertible promissory notes payable, net of
      expenses
            
            
            960,000Less:
      warrant portion
            
            
            (285,342
            )Less:
      debt discount, unamortized
            
            
            (421,625
            )$
            253,033





F-15


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


The Notes
are discounted for the fair value of warrants on the grant date using
Black-Scholes Option Pricing Model under ASC Topic 718, with the following
assumptions. The discount is being amortized over the life of the debentures
using the effective interest method. For the three months period ended March 31,
2010, the Company recognized $44,718 as amortization of debt discount and
recorded as interest expense in the statement of operations.





Expected
      life (in years)
            
            
            5Volatility
            
            
            63.38%-65.46
            %Risk
      free interest rate
            
            
            0.32
            %Dividend
      yield
            
            
            0
            %Weighted
      average fair value
            
            
            1.76-1.89




NOTE-9
            OBLIGATION
      UNDER FINANCE LEASE





The
Company purchased certain equipment under finance lease agreements with an
effective interest rate of 8.6% per annum, due through May 25, 2012, with
principal and interest payable monthly.





The
obligation under the finance lease is as follows:





March
      31, 2010Finance
      lease
            
            $
            968,263Less:
      current portion
            
            
            (451,009
            )Non-current
      portion
            
            $
            517,254





The
maturities of the finance lease obligation for the next three years are as
follows:





Year ending
      March 31:2011
            
            $
            524,4472012
            
            
            490,9322013
            
            
            48,942Total
      finance leases obligation
            
            
            1,064,321Less:
      interest
            
            
            (96,058
            )Present
      value of minimum obligation
            
            $
            968,263





The
obligation under finance leases were guaranteed by the Company’s directors, Mr.
Gang Li and Ms. Li Hua Wang. Certain plant and machinery amounting to $2,064,910
held under finance leases are capitalized as construction in
progress.





NOTE-10
            INCOME
      TAXES





NFEC is
registered in the State of Delaware and is subject to the tax laws of United
States of America.





As of
March 31, 2010, the operations in the United States of America incurred
$1,397,034 of cumulative net operating losses which can be carried forward to
offset future taxable income. The net operating loss carry forwards begin to
expire in 2030, if unutilized. The Company has provided for a full valuation
allowance against the deferred tax assets of $474,991 on the expected future tax
benefits from the net operating loss carry forwards as the management believes
it is more likely than not that these assets will not be realized in the
future.




F-16


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


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





The
reconciliation of income tax rate to the effective income tax rate for the three
months ended March 31, 2010 and 2009 is as follows:





Three
      months endedMarch 31,2010
            
            
            2009Income
      before income taxes from PRC operation
            
            $
            521,178
            
            
            $
            492,640Statutory
      income tax rate
            
            
            25
            %
            
            
            25
            %Income
      tax expense at statutory rate
            
            
            130,295
            
            
            
            123,160Non-deductible
      item
            
            
            (5,767
            )
            
            
            -Effect
      from tax holiday
            
            
            (65,148
            )
            
            
            (61,613
            )Income
      tax expense
            
            $
            59,380
            
            
            $
            61,547








NOTE-11
            STOCK
      BASED COMPENSATION





In June
2009, the Company entered into various agreements with certain Investor
Relations (IR) firms, in which the Company agreed to issue warrants to purchase
an aggregate of 450,000 shares of its common stock 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 three months ended March 31,
2010 are summarized as follows (warrants were not issued to
employees):





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 January 1, 2010
            
            
            58,334
            
            
            $
            1.80
            
            
            $
            1.80
            
            
            $
            3.17Warrants
      granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      cancelled
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      as of March 31, 2010
            
            
            58,334
            
            
            $
            1.80
            
            
            $
            1.80
            
            
            $
            3.17




F-17


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


The
Company adopted ASC 718 using the Black-Scholes Option Pricing Model to
measure the fair value of warrants on the grant date, with the following
assumptions:





Expected
      life (in years)
            
            
            5Volatility
            
            
            340.61%-
      456.53
            %Risk
      free interest rate
            
            
            2.28%
      - 2.89
            %Dividend
      yield
            
            
            0
            %




NOTE-12
            SEGMENT
      INFORMATION





·
            Segment
      reporting





The
Company’s business units have been aggregated into two reportable segments, as
defined by ASC Topic 280:





·
            Heavy
      manufacturing business – production of valves components and the provision
      of valve improvement and engineering
services;





·
            Energy-saving
      related business – production of wind-energy equipment, provision of
      energy-saving related re-engineering and technical services and long-term
      construction project.





The
Company operates these business segments in the PRC and all of the identifiable
assets of the Company are located in the PRC during the periods
presented.





The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 3). The Company had no
inter-segment sales for the three months ended March 31, 2010 and 2009. The
Company’s reportable segments are strategic business units that offer different
products and services. They are managed separately because each business
requires different technology and marketing strategies. Summarized financial
information concerning the Company’s reportable segments is shown in the
following table for the three months ended March 31, 2010 and 2009:




Three
      months endedMarch 31, 2010Valves
              manufacturing
      business
            
            
            Energy-saving
      related business
            
            
            TotalOperating
      revenues, net:-
      Products
            
            $
            2,274,524
            
            
            $
            239,708
            
            
            $
            2,514,232-
      Services
            
            
            326,251
            
            
            
            -
            
            
            
            326,251Total
      operating revenues
            
            
            2,600,775
            
            
            
            239,708
            
            
            
            2,840,483Cost
      of revenues
            
            
            (1,930,073
            )
            
            
            (230,959
            )
            
            
            (2,161,032
            )Gross
      profit
            
            
            670,702
            
            
            
            8,749
            
            
            
            679,451Depreciation
            
            
            64,526
            
            
            
            8,148
            
            
            
            72,674Total
      assets
            
            
            22,675,489
            
            
            
            2,774,968
            
            
            
            25,450,457Expenditure
      for long-lived assets
            
            $
            3,266,747
            
            
            
            -
            
            
            
            3,266,747




F-18




NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


Three
      months endedMarch 31, 2009Valves
              manufacturing
      business
            
            
            Energy-saving
      relatedbusiness
            
            
            TotalOperating
      revenues, net:-
      Products
            
            $
            1,998,293
            
            
            $
            103,533
            
            
            $
            2,101,826-
      Services
            
            
            318,006
            
            
            
            -
            
            
            
            318,006Total
      operating revenues
            
            
            2,316,299
            
            
            
            103,533
            
            
            
            2,419,832Cost
      of revenues
            
            
            (1,661,637
            )
            
            
            (78,733
            )
            
            
            (1,740,370
            )Gross
      profit
            
            
            654,662
            
            
            $
            24,800
            
            
            $
            679,462Depreciation
            
            
            73,613
            
            
            
            815
            
            
            
            74,428Total
      assets
            
            
            19,580,166
            
            
            
            205,709
            
            
            
            19,785,875Expenditure
      for long-lived assets
            
            $
            456,715
            
            
            
            -
            
            
            
            456,715




NOTE-13
            CONCENTRATIONS
      OF RISK





The
Company is exposed to the following concentrations of risk:





For the
three months ended March 31, 2010, 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 months ended March 31, 2010 and 2009, the customer who accounts for 10% or
more of the Company’s revenues and its outstanding balances as at period-end
dates, are presented as follows:





Three
      months endedMarch 31, 2010
            
            
            March
      31,2010Customers
            
            Revenues
            
            Percentage
              of
      revenues
            
            
            Accounts
              receivableCustomer
      A
            
            $
            785,181
            
            28%
            
            
            $
            918,652Customer
      B
            
            
            549,127
            
            19%
            
            
            
            642,472Customer
      C
            
            
            302,570
            
            11%
            
            
            
            32,182Customer
      D
            
            
            285,816
            
            10%
            
            
            
            3,059Total:
            
            $
            1,922,694
            
            68%
            
            Total:
            $
            1,596,365





For the
three months ended March 31, 2009, one customer represented more than 10% of the
Company’s revenue. This customer accounts for 73% of revenue amounting to
$1,755,122 and $8,275,329 of accounts receivable.





(b)         Major
vendors





For the
three months ended March 31, 2010, one vendor represents more than 10% of the
Company’s purchases. This vendor accounts for 62% of the Company’s purchase
amounting to $1,562,649, with $102,539 of accounts payable.




F-19


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


For the
three months ended March 31, 2009, the vendor who accounts for 10% or more of
the Company’s purchases and its outstanding balances as at period-end dates, are
presented as follows:





Three
      months endedMarch 31, 2009
            
            
            March
      31,2009Vendors
            
            Purchases
            
            Percentage
              of
      purchases
            
            
            Accounts
              payableVendors
      A
            
            $
            541,049
            
            30%
            
            
            $
            817,904Vendors
      B
            
            
            524,216
            
            29%
            
            
            
            524,292Vendors
      C
            
            
            252,169
            
            14%
            
            
            
            252,205Total:
            
            $
            1,317,434
            
            73%
            
            Total:
            $
            1,594,401





(c)         Credit
risk





Financial
instruments that are potentially subject to credit risk consist principally of
trade receivables. The Company believes the concentration of credit risk in its
trade receivables is substantially mitigated by its ongoing credit evaluation
process and relatively short collection terms. The Company does not generally
require collateral from customers. The Company evaluates the need for an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.





(d)
            Interest
      rate risk





As the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.





The
Company’s interest-rate risk arises from borrowing under its finance lease. The
Company manages interest rate risk by varying the issuance and maturity dates
variable rate debt, limiting the amount of variable rate debt, and continually
monitoring the effects of market changes in interest rates. As of March 31,
2010, borrowing under finance lease was at fixed rates.





(e)         Exchange
rate risk





The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets and
liabilities are denominated in RMB. As a result, the Company is exposed to
foreign exchange risk as its revenues and results of operations may be affected
by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates
against US$, the value of RMB revenues and assets as expressed in US$ financial
statements will decline. The Company does not hold any derivative or other
financial instruments that expose to substantial market risk.





(f)         Economic
and political risks





The
Company's operations are conducted in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.





The
Company's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation.




F-20
 
 NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)


NOTE-14
            COMMITMENTS
      AND CONTINGENCIES





(a)
            Operating
      lease commitments





The
Company is committed under a non-cancelable operating lease with fixed monthly
rentals, due through February 9, 2011.Costs incurred under the operating lease,
which are considered equivalent to the market rate, are recorded as rental
expense and totaled approximately $9,143 and $7,303 for the three months ended
March 31, 2010 and 2009.





As of
March 31, 2010, the future minimum rental payments due under this non-cancelable
operating lease in the next twelve months is $38,400.





(b)
            Capital
      commitments





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





As of
March 31, 2010, the Company is committed to the future contingent payments of
approximately $1 million on the purchase of new plant and equipment and third
party contractors in the next twelve months.





(c)
            Litigation





On May
21, 2007, a civil complaint Robert Dawley vs NF Energy Saving Corp., et al. was
filed in the United States District Court, Middle District of Florida, Orlando,
Civil No. 6:07-cv-872-Orl-18DAB. The complaint accuses the defendants of
breaching a contract for payment of money that was signed by Sam Winer, former
Chief Executive Officer, before the commencement of the Company’s reverse
merger. After being initially dismissed by the Court, the action was authorized
to proceed on November 16, 2007. The trial was held in the United States
District Court, Middle District of Florida, Orlando on October 16, 2008. The
District Court issued a Judgment on December 11, 2008 awarding the plaintiff the
sum of $400,000 against the Company, plus prejudgment interest in the amount of
$132,822, with continuing interest of $132 per day on the $400,000 obligation
until it is paid. The Court further adjudged that the plaintiff shall surrender
his stock upon payment of the $400,000. In the event the plaintiff fails to
surrender his stock after payment, the Company may cancel the stock. Any
payments or collection under the Judgment shall be credited first to
interest.





On
January 6, 2009, the Company filed a notice of appeal 09-10140-B in the United
States of Court of Appeals for the 11th Circuit from the District Court’s
judgment.. The Company has also accrued $200,000 for this contingent liability
to the statement of operation in fiscal year 2008. In addition, the Company’s
directors, Mr. Gang Li and Ms. Li Hua Wang have personally agreed to guarantee
all contingent liabilities and costs to be incurred from this litigation
claim.





On April
1, 2010, the Eleventh Circuit issued a unanimous opinion reversing the District
Court’s Judgment on the grounds that Dawley was not entitled to the relief that
he sought and that the law did not support the District Court’s Judgment against
NF Energy.  The Eleventh Circuit, to the contrary, entered Judgment in NF
Energy’s favor. NF Energy has filed a Bill of Costs seeking an award of its
costs on appeal, which totals less than $1,000, from Dawley.





Counsel
for Dawley has filed a Petition for Re-Hearing by the Eleventh Circuit panel
that heard the appeal. At this point, the Company does not believe that the
judgment would have a material impact or significant contingencies to the
Company.




F-21


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





GENERAL
DESCRIPTION OF BUSINESS





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





NF Energy
Saving Corporation was incorporated under the laws of the State of Delaware in
the name of Galli Process, Inc. on October 31, 2000 for the purpose of
seeking and consummating a merger or acquisition with a business entity
organized as a private corporation, partnership, or sole proprietorship. On
December 31, 2001, Galli Process, Inc. became a majority owned subsidiary
of City View TV, Inc., a Florida corporation (“City View”). On February 7, 2002,
Galli Process, Inc. changed its name to Global Broadcast Group, Inc. On
March 1, 2002, City View merged into Global Broadcast Group, Inc., which
was the surviving entity. On November 12, 2004, the Company changed its
name to Diagnostic Corporation of America. On March 15, 2007, we changed our
name to NF Energy Saving Corporation of America, and on August 24, 2009, the
Company further changed its name to NF Energy Saving Corporation, in both
instances to more accurately reflect our business after a stock exchange
transaction with Neng Fa. Our principal place of business is 21-Jia Bei Si Dong
Road, Tie Xi Qu, Shenyang, P. R. China 110021. Our telephone number is (8624)
2560-9750.





On
November 15, 2006, we executed a Plan of Exchange ("Plan of Exchange"), among
the Company, Neng Fa, the shareholders of Neng Fa (the "Neng Fa Shareholders")
and Gang Li, our Chairman and Chief Executive Officer ("Mr. Li").





Pursuant
to and at the closing of the Plan of Exchange, which occurred on November 30,
2006, we issued to the Neng Fa Shareholders 12,000,000 shares of our common
stock, or 89.4% of our then outstanding common stock, in exchange for all of the
shares of capital stock of Neng Fa owned by the Neng Fa shareholders.
Immediately upon the closing, Neng Fa became our 100% owned subsidiary, and the
Company ceased all of its other operations and adopted and implemented the
business plan of Neng Fa.




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




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




3




NFEC
specializes in the energy technology business. We provide energy saving
technology consulting, optimization design services, energy saving
reconstruction of pipeline networks and contractual energy management services
for China’s electric power, petrochemical, coal, metallurgy, construction,
municipal infrastructure development industries, and customized comprehensive
solutions for energy-saving emission reduction. We also are engaged in the
manufacturing and sales of the energy-saving flow control equipment. According
to analysis of ESCO Committee of China Energy Conservation Association,
currently, our flow control equipment business holds a leading position in
China. The Company has the Det Norske Veritas Management System Certificate
which certifies that our products conform to the Management System Standard
ISO9001:2000. We have been a member of the Chicago Climate Exchange since 2006.
In 2007, Nengfa Energy received contracts for three sections of the prominent
project “Redirect the water from the Rivers in the South to the North Middle
Section Jingshi Section Water Supply Engineering Project”. This project was
completed and passed inspection in 2008. In 2008, the Company also received flow
control equipment contracts from seven cities in Liaoning Province for their
large water supply system. In 2009, the Company has received several flow
control equipment supply contracts, such as Xijiang diversion project of
Guandong Province, and Phase 1 of Guangdong Yuedian Huilai Power
Plant.





Our
principal future development focus is to complete the construction of our new
energy manufacturing facility which will enhance the Company’s productivity and
expand the manufacturing capacity. The new facility will be completed the latest
by the end of 2010.In conjunction with the planned facility expansion, we also
will undertake efforts on technology development to optimize the business
revenue structure of the Company, and promote energy-saving technologies
efficiency as part of our sales efforts. We are aiming to become a main supplier
of new energy equipment, energy-saving equipment and flow control devices;
become a major operator of energy-saving technological transformation projects
and comprehensive management of energy-saving emission reduction projects; and
become the general contractor of energy-saving technological transformation
projects.





FORWARD
LOOKING STATEMENTS





Certain
statements in this report, including statements of our expectations, intentions,
plans and beliefs, including those contained in or implied by "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Notes to Consolidated Financial Statements, are "forward-looking
statements", within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), that are subject to certain events, risks
and uncertainties that may be outside our control. The words “believe”,
“expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. We undertake no obligation to update or revise any
forward-looking statements. These forward-looking statements include statements
of management's plans and objectives for our future operations and statements of
future economic performance, information regarding our expansion and possible
results from expansion, our expected growth, our capital budget and future
capital requirements, the availability of funds and our ability to meet future
capital needs, the realization of our deferred tax assets, and the assumptions
described in this report underlying such forward-looking statements. Actual
results and developments could differ materially from those expressed in or
implied by such statements due to a number of factors, including, without
limitation, those described in the context of such forward-looking statements,
our expansion and acquisition strategy, our ability to achieve operating
efficiencies, our dependence on network infrastructure, capacity,
telecommunications carriers and other suppliers, industry pricing and technology
trends, evolving industry standards, domestic and international regulatory
matters, general economic and business conditions, the strength and financial
resources of our competitors, our ability to find and retain skilled personnel,
the political and economic climate in which we conduct operations and the risk
factors described from time to time in our other documents and reports filed
with the Securities and Exchange Commission (the "Commission"). Additional
factors that could cause actual results to differ materially from the
forward-looking statements include, but are not limited to: 1) our ability to
successfully develop, manufacture and deliver our products on a timely basis and
in compliance with our contract terms; 2) our ability to compete effectively
with other companies in our industry segments; 3) our ability to raise capital
or generate sufficient working capital in order to effectuate our business plan;
4) our ability to retain our key executives; and 5) our ability to win and
perform significant construction and infrastructure projects.




4





CRITICAL
ACCOUNTING POLICIES





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





Revenue
recognition





In
accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes
revenue when persuasive evidence of an arrangement exists, transfer of title has
occurred or services have been rendered, the selling price is fixed or
determinable and collectability is reasonably assured.





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





(a) Sale
of products





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





The
Company recognizes revenue from the sale of such finished products upon delivery
to the customers, when the title and risk of loss are fully transferred to the
customers. The Company records its revenues, net of value added taxes (“VAT”).
The Company is subject to VAT which is levied on the majority of the products it
sells at the rate of 17% on the invoiced value. The Company experienced no
product returns and has recorded no reserve for returns for the three months
ended March 31, 2010 and 2009.





(b)
Service revenue





Service
revenue is derived from energy-saving technical services, project management
or


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





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





(c)
Project revenue





For
energy-saving reconstruction projects, the Company follows the
percentage-of-completion method under ASC Subtopic 605-35, “Construction-Type and
Production-Type Contracts” to recognize revenues for energy-saving
reconstruction projects that require significant modification or customization
or installation for a term of service period exceeding 12 months. Advance
payments from customers and amounts billed to clients in excess of revenue
recognized are recorded as receipt in advance. For the three months ended March
31, 2009, the Company did not recognize any project revenue.




5




(d)
Interest income





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





Accounts
receivable





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





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





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





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





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




6





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





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





Product
warranty





Under the
terms of the contracts, the Company offers the customers a free 12-months of
product warranty on a case-by–case basis, depending upon the type of customer,
and the nature and size of the infrastructure project. Under such arrangements,
a portion of the project contract balance (usually 5-10% of contract value) is
withheld by a customer for 12 months, until the product warranty has expired.
The Company has not experienced any material returns under this warranty
provision. As such, no reserve for product warranty has been provided for the
three months ended March 31, 2010.





Inventories





Inventories
are stated at the lower of cost or market (net realizable value), with the cost
being determined on a weighted average method. Costs include material, labor and
manufacturing overhead costs. Quarterly, the Company reviews historical sales
activity to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand. The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of March 31, 2010, the Company did
not record an allowance for obsolete inventories, nor have there been any
write-offs.





Plant and
equipment, net





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





Depreciable
      life
            
            Residual
      valuePlant
      and machinery
            
            3 –
      20 years
            
            5%Furniture,
      fixture and equipment
            
            5 –
      8 years
            
            5%





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




7





Finance
leases





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





Stock-based
compensation





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





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





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





Income
Taxes





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





For the
three months ended March 31, 2010 and 2009, the Company did not have any
interest and penalties associated with tax positions. As of March 31, 2010, the
Company did not have any significant unrecognized uncertain tax
positions.




8




The
Company conducts its majority of business in the PRC and is subject to tax in
that jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by a foreign tax authority. For the
period ended March 31, 2010, the Company filed and cleared its 2009 PRC tax
return by such tax authority.





Foreign currencies
translation





Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the condensed consolidated statement of
operations.





The
reporting currency of the Company is the United States dollar ("US$"). The
Company's subsidiaries in the PRC, Nengfa Energy and Sales Company maintain
their books and records in the local currency of the PRC, Renminbi ("RMB"),
which is the primary currency of the economic environment in which these
entities operate.





In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with ASC Topic 830-30, “Translationof Financial Statement”, using the exchange rate on
the balance sheet date. Revenues and expenses are translated at average rates
prevailing during the period. The gains and losses resulting from translation of
financial statements of foreign subsidiaries are recorded as a separate
component of accumulated other comprehensive income within the statement of
stockholders’ equity.





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




March31,
              2010
            
            
            March
      31,
              2009Period-end
      RMB:US$1 exchange rate
            
            
            6.8361
            
            
            
            6.8456Average
      monthly RMB:US$1 exchange rate
            
            
            6.8360
            
            
            
            6.8466




RESULTS
OF OPERATIONS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009





The
following discussion should be read in conjunction with the financial statements
included in this report and is qualified in its entirety by the
foregoing.





REVENUES





Total
revenues were $2,840,483 for the three months ended March 31, 2010, as
compared to $2,419,832 for the corresponding period in 2009. Total revenues
increased by $420,651, a 17% increase for the three months ended March 31, 2010,
as compared to total revenues for the three months ended March 31,
2009.





In the
middle of 2008, the Chinese government announced more flexible monetary policies
and financial policies. The Chinese government then indicated it will invest
close to 4 trillion RMB to stimulate domestic demand and announced ten policies
to promote growth. The Chinese government undertook to promote economic
stability and growth through domestic projects on civil engineering, basic
infrastructure, constructions for environmental protection and reconstruction.
2010 is the last year of the "Eleventh Five-Year" emission reduction targets. It
is also the first year for China to put forward its 40-45% emission reduction
target, which is a point of emphasis for the Chinese government.  Mr.
Zhang Shaochun, the Vice Minister of Finance for the central government, has
stated that the special funding for the energy-saving emission reduction
industry will be 70% more than the prior year, which will be up to 500 billion
RMB. The government intends to promote large-scaled energy-saving and efficiency
products and will support key energy-saving emission reduction
projects.




9





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





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





On April
6, 2010, State Council of China approved the “Opinion on Accelerating the
Implementation of Energy Management Contract to Promote the Development of
Energy Service Industry,” (“the Opinion”)  which was proposed by the
National Development and Reform Commission, the Ministry of Finance, People’s
Bank of China and the State Taxation Administration. A series of new tax
benefits will stimulate China’s domestic energy conservation projects and
services development. The policies should greatly benefit Nengfa Energy’s energy
saving business which fits within the government stimulus policies for building
energy saving infrastructure projects for municipalities and industrial
companies. We expect significant growth in all our lines of business in
2010.





Product
Revenues





Product
revenues are derived principally from the sale of self-manufactured products
relating to energy- saving flow control equipment and wind-energy equipment.
Product revenues were $2,514,232, or 89% of total revenues for the three months
ended March 31, 2010, as compared to $2,101,826, or 87% of total revenues,
for the corresponding period in 2009. Product revenues increased by $412,406, a
20% increase, over the same period in 2009. This increase is primarily due to
the increase in new contracts for the products.





Service
Revenues





Service
revenues are derived principally from energy-saving technical services that are
not an element of an arrangement for the sale of products. These services are
generally billed on a time-cost plus basis. Revenue is recognized, net of
business taxes when service is rendered and accepted by the customers. Service
revenues were $326,251, or 11% of total revenues, for the three months ended
March 31, 2010, as compared to $318,006, or 13% of total revenues, for the
corresponding period in 2009. Service revenues increased by $8,245, a 3%
increase over the same period in 2009. This increase is primarily due to the
increase in service contracts.





Project
Revenues





Project
revenues are derived principally from energy-saving, re-engineering projects
that require significant modification, customization and installation. The
Company applies the percentage-of-completion method to recognize project
revenues. There was no project revenue for the three months ended March 31,
2010, or the same period ended in 2009. The Company is conducting feasibility
studies with respect to several energy-saving projects, and we anticipate that
project revenues will be reported in future periods if the projects are
implemented as expected.




10





COSTS
AND EXPENSES





Cost
of Revenues





Cost of
revenues consists primarily of material costs, direct labor, depreciation and
manufacturing overhead, which are directly attributable to the manufacture of
products and the rendering of services. Total cost of revenues was $2,161,032
for the three months ended March 31, 2010, as compared to $1,740,370 for the
corresponding three month period in 2009, an increase of $420,662 or
approximately 24%. This increase was primarily due to the increase in products
sold during this period.





The
overall gross profit for the Company was $679,451 (24% margin) for the three
months ended March 31, 2010, as compared to $679,462 (28% margin) for the
corresponding three month period in 2009, a decrease of $11. Although operating
revenue in the first quarter of 2010 increased steadily by 17% over the prior
period, the cost of revenue increased by 24% over the prior period, resulting in
a 4% decrease in the gross profit margin from the 2009 period to 2010
period.





Cost
of Products





Total
cost of products was $1,948,347 for the three months ended March 31, 2010, as
compared to $1,565,874 for the corresponding three month period in 2009, an
increase of $382,473 or approximately 24%. This increase is primarily due to the
increase in the number of products sold.





The gross
profit for products was $565,885(23%) for the three months ended March 31, 2010,
as compared to $535,952(25%) for the corresponding three month period in 2009,
an increase of $29,933 or approximately 6%. This increase is primarily due to
the increase in product revenues being greater than the increase in cost of
products.





Cost
of Services





The cost
of services was $212,685 for the three months ended March 31, 2010, as compared
to $174,496 for the corresponding three month period in 2009, an increase of
$38,189 or approximately 22%. This increase is primarily due to an increase in
service contracts.





The gross
profit for services was $113,566 for the three months ended March 31, 2010, as
compared to $143,510 for the corresponding period in 2009, a decrease of $29,944
or approximately 21%. This decrease is primarily due to the period-over-period
increase in cost of services exceeding the period-over-period increase in
services revenues.





Operating
Expenses





Total
operating expenses were $172,487 for the three months ended March 31, 2010, as
compared to $194,018 for the corresponding three month period in 2009, a
decrease of $21,531, or approximately 11%. This decrease is primarily due to the
decrease in selling and marketing expenses.





Selling
and Marketing Expenses





Sales and
marketing expenses were $17,747 for the three months ended March 31, 2010, as
compared to $48,825 for the corresponding three month period in 2009, a decrease
of $31,078 or approximately 64%. This decrease is primarily due to an increased
number of contracts with lower gross margin during this period. These contracts
have relative lower selling and marketing expenses, and therefore reduced the
total amount of selling and marketing expenses.





11





General
and Administrative Expenses





General
and administrative expenses were $154,740 for the three months ended March 31,
2010, as compared to $145,193 for the corresponding three month period in 2009,
an increase of $,9,547 or approximately 7%.





INCOME
FROM OPERATIONS





Income
from operations was $506,964, for the three months ended March 31, 2010, as
compared to $485,444 for the corresponding three month period in 2009, an
increase of $21,520 or approximately 4%. This increase is primarily due to the
11% decrease in operating expenses.





Other
(expense) Income





Other
expense for the three months ended March 31, 2010 was $80,401, as compared to
other income of $18,016 for the corresponding three month period in 2009, an
absolute difference of $98,417. This difference is primarily due to $44,718 in
interest expense, resulting from the issuance of $960,000 of convertible
promissory notes during the first quarter of 2010, as well as $30,043 in
interest expense, resulting from a financial lease for two machines used in the
production of our products, incurred during the first quarter 2010, compared to
$10,159 of other income recognized in the in the first quarter of
2009.





Income
Tax Expense





For the
three months ended March 31, 2010 and corresponding three month period in 2009,
income tax expense was $59,380 and $61,547, respectively. The Company continues
to enjoy the tax holiday in the PRC due to Nengfa Energy's foreign company
status. During 2007, the Tieling City local government tax bureau in the PRC
approved Nengfa Energy as a foreign investment enterprise. Hence, retroactively
effective from January 1, 2007, Nengfa Energy is entitled to a two-year
exemption from corporate income tax and a reduced corporate income tax rate of
12.5% for the following three years.





As of
March 31, 2010, the operations in the United States of America have resulted in
$1,397,034 of cumulative net operating losses, which can be carried forward to
offset future taxable income. The net operating loss carry forward will begin to
expire in 2029, if not utilized. The Company has provided for a valuation
allowance against the deferred tax assets of $474,991 on the expected future tax
benefits from the net operating loss carry forward as management believes it is
more likely than not that these assets will not be realized in the
future.





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





The
Company’s effective income tax rates for the three months ended March 31, 2010
were 12.5%.





NET
INCOME





Net
income for the three months ended March 31, 2010 was $367,183, as compared to
$441,913 for the corresponding three month period in 2009, a decrease of $74,730
or approximately 17%. This decrease is primarily due to a $30,286 increase in
interest expense in the period as a result of a financial lease for two
numerical control machines used in the production of our products, and the
issuance of $960,000 of convertible promissory notes on February 24, 2010 and
March 4, 2010, for which a non-cash interest expense of $ 44,718 was recognized
in the three month period ended March 31, 2010.




12





LIQUIDITY
AND CAPITAL RESOURCES





Operating
activities





For the
three months ended March 31, 2010, net cash provided by operating activities was
$3,139,566. This was attributable primarily to net income of $367,183, adjusted
by non-cash items of depreciation of $72,674, non-cash interest expense of
$44,718 and a $2,655,214 increase in working capital. The increase in working
capital in the first three months of 2010 was due primarily to the decrease in
accounts receivable by $5,539,111 and decrease in retention receivable by
$573,268, an increase in inventories by $581,915, the increase in prepayment and
other receivable by $1,936,703, a decrease in the accounts payable by $318,645,
a decrease in customer deposits by $30,809, an increase in value added tax
receivable by $348,160 and income tax payable of $142,136, and an increase in
other payables and accrued liabilities by $76,653 in this period.





On
December 31, 2009, our outstanding accounts receivable was $12,510,875, which
was due to the delay in the installation and operational testing of a number of
products. For these contracts, the term of revenue recognition stated that
part of payment had to be made after the installation and operating test.
Therefore the delay in installation resulted in delayed payments and a
significant amount of accounts receivable. By March 31, 2010, some of these
delayed products have been installed and operating tests have been completed,
and payments have been made. Therefore the amount of accounts receivable at
March 31, 2010 had decreased by $5,539,111 from December 31, 2009. This money
was used for the facility construction and project prepayment.  For
the three month period ended March 31, 2010, the Company had accounts receivable
turnover of 309 days.





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





At March
31, 2010, the Company had accounts receivable of $6,973,835, 96% and 4% of the
accounts receivable are product revenue accounts receivable and service revenue
account receivable, respectively. The accounts receivable with aging within 90
days, between 91 and 180 days, and between 181 and 365 days, and above 365 days
are $2,111,063, $4,081,290, $555,793 and $217,689, respectively, representing
30%, 59%, 8% and 3% of the total accounts receivable, respectively, as of March
31, 2010. The Company restricted the accounts receivable with aging above 1 year
within 1% of the total account receivables. The Company does not have any
off-balance-sheet credit exposure related to its customers. The detailed account
receivable aging, starting from the invoice date, by March 31, 2010 is as
following:





Revenue
      Sources:
            
            Account
      Receivables
            
            
            Aging
      of
              1-90
      days
            
            
            Aging
      of
              91-180
      days
            
            
            Aging
      of
              181-365
      days
            
            
            Above
              365
      daysProducts
            
            $
            6,705,943
            
            
            $
            1,956,245
            
            
            $
            4,052,321
            
            
            $
            500,269
            
            
            $
            217,689Services
            
            $
            267,892
            
            
            $
            162,818
            
            
            $
            28,969
            
            
            $
            55,524
            
            
            
            -Projects
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            6,973,835
            
            
            $
            2,119,063
            
            
            $
            4,081,290
            
            
            $
            555,793
            
            
            $
            217,689





We offer
the customers a free 12-months product warranty on a case-by-case basis,
depending upon the type of customers, nature and size of the infrastructure
projects. Under such arrangements, a portion of the project contract balance
(usually 5-10% of contract value) is withheld by a customer for 12 months, until
the product warranty has expired. On March 31 2010, the retention receivables
were $301,637.




13




In
addition, it is the Company's practice to build up a larger inventory to be able
to fulfill its contracts during the installation of the large infrastructure
projects. The increase in inventories of $581,915 reflects a reasonable
inventory level which corresponds to a number of contracts for products which
have not been delivered or recognized as revenue by March 31, 2010. The reason
for the large increase in the prepayments and other receivables of $1,936,703 as
compared to year end December 31, 2009, is due to increases in prepayments to
vendors for raw materials,, prepayment to projects and the future contingent
payments on the purchase of new plant and equipment and third party contractors.
During this period, a significant percentage of revenue was generated by
completing the follow-up contracts from 2009. Therefore there was a decrease in
customer deposits of $30,809 and value added tax receivable of $348,160. The
Company started to pay an 50% reduced rate of tax in the P.R.C in 2009. Compared
to December 31, 2009, the income tax payable decreased $142,136 for the three
month period ended March 31, 2010. The increase of $76,653 in other payables and
accrued liabilities is due to the increase in accruals and other
payables.




For the
three months ended March 31, 2009, net cash used in operating activities was
$351,166. This was primarily attributable to our net income of $441,913,
adjusted by non-cash items of depreciation $74,428, and a $867,507 decrease in
working capital. Negative cash flows from operations in the first three months
of 2009 were due primarily to the increase in accounts receivable by $1,230,662,
inventories by $646,847, prepayments and other receivables by $265,284, and the
decrease in other payables and accrued liabilities by $15,104, partially offset
by the increase in accounts payable by $1,240,372, customer deposits by $3,050,
and value added tax payables by $46,968 in this period.





The large
increase in accounts receivable of $1,230,662 and inventories of $646,847, an
increase of 13.8% and 42.6% over the accounts receivables and inventories
balances at December 31, 2008, are 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 reason for the increase in the prepayments and
other receivables of $265,284, a 40.6% increase over the prepayments and other
receivables balance at December 31, 2008, is due to increases in prepayment to
vendors for raw materials, prepayment to equipment vendors and prepaid operating
expense. The company expects the cost of the raw material will increase in the
coming year. In order to hedge the increase in raw material costs, we have
signed more purchase contracts in advance with the suppliers and hence
increasing the prepayments. The increase in accounts payable of $1,240,372
corresponds to the increased purchase of materials required for the production
for several large contracts. The increase in customer deposits of $3,050 is due
to the increase in sales. An increase of $46,968 in value added tax payables is
due to increased value added tax payable this period. The decrease of $15,103 in
other payables and accrued liabilities are due to the decrease in rent payable,
accrued expenses and payable to equipment vendors, and an increase in income tax
payable.





Investing
activities




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





For the
three months ended March 31, 2010, net cash used in investing activities was
$3,265,497, and was primarily attributable to the purchase of plant and
equipment for $13,054 and the payments for construction in progress of
$3,253,693. There were proceeds of $1,250 from the disposal of plant and
equipment.





As of
March 31, 2010, the Company has incurred and capitalized $11,281,600 as
construction in progress.





The
Company currently rents its manufacturing facility from a third party. The current facility has a
designed capacity of approximately 6,000 tons per year. During the three months
ended March 31, 2010, the Company utilized approximately 70% of its capacity.
The new energy equipment manufacturing facility currently under construction
will have two high standard numerical control machines installed, plus the
current equipment, which will be moved to the new facility. If fully operated,
the new facility will have a designed capacity to manufacture approximately
20,000 tons of flow control equipment on a yearly basis, and will also be able
to manufacture 300 sets of key components of wind power equipment annually. Upon
completion, the estimated manufacturing capacity of the new facility will be
more than three times the capacity of the Company’s current
facility.




14





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





Financing
activities





For the
three months ended March 31, 2010, net cash provided by financing activities was
$754,357 , of which $145,643 was attributable to the payments on finance lease
and $900,000 was generated by a private placement financing of convertible
promissory notes.





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





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





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




15





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.





OFF-BALANCE
SHEET ARRANGEMENTS




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





IMPACT
OF RECENTLY ISSUED NEW ACCOUNTING STANDARDS




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





Item
3. Quantitative and Qualitative Disclosures About Market Risk





Not
Applicable.





Item
4T. Controls and Procedures.




Evaluation
of Disclosure Controls and Procedures




Our chief
executive officer and chief financial officer evaluated the effectiveness of our
disclosure controls and procedures as of March 31, 2010. The term “disclosure
controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. Based on
the evaluation of our disclosure controls and procedures as of March 31, 2010,
our chief executive officer and chief financial officer concluded that, as of
such date, our disclosure controls and procedures were effective.




16




Changes in
Internal Controls





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





PART
II. OTHER INFORMATION





Item
1.      Legal Proceedings.





On May
21, 2007, a civil complaint Robert Dawley v. NF Energy Saving Corp. of America,
et al. was filed in the United States District Court, Middle District of
Florida, Orlando, Civil No. 6:07-cv-872-Orl-18DAB. The complaint accused the
defendant of breaching a contract for payment of money that was signed by Sam
Winer, former Chief Executive Officer of the Company, before the commencement of
the Company’s reverse merger. After being initially dismissed by the court, the
action was authorized to proceed on November 16, 2007. A trial was held in the
United States District Court, Middle District of Florida, Orlando on October 16,
2008. The District Court issued a judgment on December 11, 2008, awarding the
plaintiff the sum of $400,000 against the Company, plus prejudgment interest in
the amount of $132,821.92, with continuing interest of $131.51 per day on the
$400,000 obligation until it is paid. The Court further adjudged that the
plaintiff shall surrender certain shares of common stock he holds in the Company
upon payment of the $400,000. In the event the plaintiff fails to surrender the
specified shares of stock after payment, the Company may cancel the stock. Any
payments or collection under the judgment shall be credited first to
interest.





On
January 6, 2009, the Company filed a notice of appeal 09-10140-B in the United
States Court of Appeals for the 11th Circuit from the District Court’s judgment.
The Company has also accrued $200,000 for this contingent liability to the
statement of operation in 2008. In addition, the Company’s directors, Mr. Gang
Li and Ms. Li Hua Wang have personally agreed to guarantee and bear all
contingent liabilities and costs to be incurred from this litigation
claim.





On April
1, 2010, the Eleventh Circuit issued a unanimous opinion reversing the District
Court’s Judgment on the grounds that Dawley was not entitled to the relief that
he sought and that the law did not support the District Court’s Judgment against
NF Energy. The Eleventh Circuit, to the contrary entered Judgment in NF Energy’s
favor. NF Energy has filed a Bill of Costs seeking an award of its costs on
appeal, which total less than $1,000, from Dawley.





Counsel
for Dawley has filed a Petition for Re- Hearing by the Eleventh Circuit panel
that heard the appeal. At this point, the Company does not believe that the
judgment would have a material impact or significant contingencies to the
Company.





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





Not
Applicable.





Item
3.      Defaults Upon Senior Securities.





None.





Item
4.      [Reserved]






17





Item
5.      Other Information.





None.





Item
6.      Exhibits.





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





18




SIGNATURES





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




NF
      Energy Saving Corporation(Registrant)Date:
      May 17, 2010
            By:
            /s/
      Gang LiGang
      LiChairman,
      Chief Executive Officer and
President








Date:
      May 17 2010
            By:
            /s/
      Li Hua WangLi
      Hua WangChief
      Financial Officer
              (Principal
      Financial and AccountingOfficer)





19




INDEX
TO EXHIBITS




Exhibit
      No.
              
              Description10.1
              
              Form
      of Securities Purchase Agreement110.2
              
              Form
      of Convertible Promissory Note110.3
              
              Form
      of Warrant131.1
              
              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







1
            Incorporated
      by reference from the Company’s Current Report on Form 8-K, filed March 3,
      2010





20