NFEC NF Energy Saving Corp.

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

As used herein the terms “we”, “us”, “our,” “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 include our subsidiaries, Liaoning Nengfa Weiye Energy Technology Company Ltd., a corporation organized and existing under the laws of the Peoples’ Republic of China (“PRC”), and Liaoning Nengfa Weiye Smart Valve Technology Co., Ltd., a limited liability corporation organized and existing under the laws of the PRC.

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 Room 3106, Tower C, 390 Qingnian Avenue, Heping District, Shenyang, P. R. China 110015. Our telephone number is (8624) 2560-9775.

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 and fittings; energy saving technical reconstruction; and energy saving technology consulting services, providing comprehensive solutions for energy-saving emission reduction.

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

On September 15, 2010, the Company completed a 2.5 for 1 reverse share split of its common stock, the total number of outstanding shares of common stock changed from 13,315,486 pre-split to 5,326,501 post-split.

On October 4, 2010 our common stock commenced trading on the Nasdaq Global Market. On March 7, 2012, upon approval by Nasdaq, our common stock transferred from the Nasdaq Global Market to the Nasdaq Capital Market , Our common stock trades on the Nasdaq Stock Market under the ticker symbol “NFEC”.

On November 26, 2015 , a new company devoting to intelligent products was set up which is named by “ Liaoning Nengfa Weiye Smart Valve Technology Co.Ltd”. (“Nengfa Smart Valve”). “Liaoning Nengfa Weiye Energy Technology Co.Ltd” owns approximately 40% of the shares in this new company. On March 8, 2017, “Liaoning Nengfa Weiye Smart Valve Technology Co.Ltd was named by “Liaoning Nengfa Tiefa Import and Export Sales Company” in order to make further business activities.

NFEC is dedicated to energy efficiency enhancement in two fields: (1) manufacturing large diameter energy efficient intelligent flow control systems for thermal and nuclear power generation plants, major national and regional water supply projects and municipal water, gas and heat supply pipeline networks; and (2) energy saving technology consulting, optimization design services, energy saving reconstruction of pipeline networks and contractual energy management services for China’s electric power, petrochemical, coal, metallurgy, construction, and municipal infrastructure industries.

NFEC has received many awards and honors from China's regulators, professional associations and renowned international organizations, including the ISO 9001:2008 certification from Det Norske Veritas Management System, the Liaoning Provincial Government's Award of Innovative Enterprise with Best Investment Return Potentials, the Special Industrial Contribution Award of the ESCO Committee of China Energy Conservation Association, and the “Contract-abiding and credit enterprise” Award by the Liaoning State Local administrative bureau for industry and commerce. NFEC was awarded of “Hi-tech enterprise” by Liaoning Technology bureau in 2013.

NFEC enjoys a reputation as a leader and dedicated energy saving company in China for over 15 years. Its professional capacity as a provider of energy services is officially certified by China’s National Development and Reform Commission (NDRC). It has been a corporate member on the Board of the ESCO Committee of China Energy Conservation Association and a founding member of China Standardization and Technical Consortium for Energy Conservation and Emission.

As a certified energy service provider, NFEC is entitled to various tax breaks and energy saving awards created by Chinese governments at national, provincial and local levels. The major tax incentives by the central government include a two-year corporate income tax exemption plus a three-year reduction of corporation income tax for all energy performance based, profit sharing energy service projects. The government policy also incentivizes NFEC's clients with tax refunds on goods and properties of the energy saving projects when NFEC transfers to them at the end of the energy service contracts.

The current principal development focus of NFEC is to renew the product, such as large intelligent flow control facility and to provide our Company with more advanced technology to supply high grade energy efficient and safety reliant products for high end markets.

Our corporate goal is to maintain our established position as a leading provider of energy efficiency flow control systems, a cutting edge innovator with clean energy and energy efficiency technologies, and a total energy efficiency solution and service provider dedicated to maximum returns to our investors, partners, clients and environment.

Our products and services include the manufacturing and sales of energy-saving flow control equipment, energy saving technology consulting, optimization design services, energy saving reconstruction of pipeline networks and contractual energy management services for China’s electric power, water power, petrochemical, coal, metallurgy, construction, and municipal infrastructure development industries.

Examples of contracts entered into by the Company or its subsidiaries are:

FORWARD LOOKING STATEMENTS

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

CRITICAL ACCOUNTING POLICIES

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

Revenue Recognition

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

Revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:

(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 over 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 make 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 VAT rate is 17%.

(b)       Service revenue

Service revenue is derived from energy-saving technical services, project management or sub-contracting services. These services are generally billed on a time-cost plus basis, for the period of service provided, which is generally from two to nine months. Revenue is recognized when the service is rendered and accepted by the customer.

(c)       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. Account balances are charged off against the allowance after all means of collection has 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.

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

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

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

Product Warranties

Under the terms of its contracts, the Company offers a free 12 to 24 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 from 12 to 24 months, until the product warranty has expired. The Company has not experienced any material returns under this warranty provision.

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.

Property, Plant and Equipment

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

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.

Land Use Rights

All land in the PRC is owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time. Thus, the Company’s land purchase in the PRC is considered to be leasehold land and is stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreement on a straight-line basis, which is 50 years and will expire in 2059.

Income Taxes

Income taxes are determined in accordance with the provisions of ASC Topic 740, “Income Taxes ” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

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 Nengfa Smart Valve maintain their books and records in the local currency of the PRC, the 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, “ Translation of Financial Statement” , using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

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

RESULTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

Total Revenues

Total revenues were $1,102,693 and $1,814,111 for the three and nine months ended September 30, 2018, respectively, as compared to $1,141,920 and $3,855,365 for the corresponding period in 2017. Total revenues decreased by $39,227 and $2,041,254 for the three and nine months ended September 30, 2018, respectively, as compared to total revenues for the three and nine months ended September 30, 2017. The decrease in total revenues was primarily due to the impact of exchange rate fluctuations, the RMB was continuously depreciated against the US dollar since the beginning of this year.

Product Revenues

Product revenues are derived principally from the sale of manufactured products relating to energy- saving flow control equipment. Product revenues were $1,052,130 and $1,550,119 or 95.41% and 85.45% of total revenues for the three and nine months ended September 30, 2018, respectively, as compared to $1,103,952 and $3,678,341, or 96.67% and 95.40% of total revenues, for the corresponding period in 2017. Product revenues decreased by $51,822 and $2,128,222, or 4.69% and 57.85%, for the three and nine months ended September 30, 2018, respectively, as compared to the same period in 2017. The decrease in product revenue was primarily due to the impact of exchange rate fluctuations, the Chinese Yuan was continuously devalued against the US dollar since the beginning of this year.

Service Revenues

Service revenues are derived principally from energy-saving technical services and product collaboration processing services. The energy-saving technical services include providing energy saving auditing, conservation plans, and/or related service reports. Service revenues were $50,563 and $263,992, or 4.58% and 14.55%, of total revenues for the three and nine months ended September 30, 2018 respectively, as compared to $37,968 and $177,024, or 3.32% and 4.59%, of total revenues for the corresponding period in 2017. Service revenues increased by $12,595 and $86,968, or 33.17% and 49.12% for the three and nine months ended September 30, 2018, respectively, compared to the corresponding period in 2017. The increase in service revenue was primarily due to the increase in service orders.

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 manufacturing of products and the rendering of services. Total cost of revenues was $956,694 and $1,344,884 for the three and nine months ended September 30, 2018, respectively, as compared to $1,099,971 and $3,393,804 for the corresponding three and nine months in 2017, a decrease of $143,277 and $2,048,920, respectively, or 13.03% and 60.37%. The decrease in cost of revenues was primarily due to the decrease in total revenues.

The overall gross profit for the Company was $145,999 and 469,227 (13.24% and 25.86% margin) for the three and nine months ended September 30, 2018, respectively, as compared to $41,949 and $461,561 (3.67% and 11.97% margin) for the corresponding three and nine months in 2017, respectively, an increase of $104,050 and $7,666, or 248.04% and 1.66%, compared to the corresponding period in 2017. The increase in gross profit margin was primarily due to the higher margined products sold during this period.

Cost of Products

Total cost of products was $937,586 and $1,148,581 for the three and nine months ended September 30, 2018, respectively, as compared to $1,082,652 and $3,207,838 for the corresponding period in 2017, a decrease of $145,066 and $2,059,257, respectively, or 13.40% and 64.19%. This decrease is primarily due to the decrease of product revenue which led to the decrease in the cost of products.

The gross profit for products was $114,544 and $401,538 (10.88% and 25.90% margin) for the three and nine months ended September 30, 2018, respectively, as compared to $21,300 and $470,503 (1.93% and 12.79% margin) for the corresponding three and nine months in 2017, an increase of $93,244 and a decrease of $68,965. Although the gross profit rate of this period was increased but total gross profit was decreased for the nine moenths ended September 30, 2018, the decrease is primarily due to the decrease in product revenues.

Cost of Service

The cost of services was $19,108 and $196,303 for the three and nine months ended September 30, 2018, respectively, as compared to $17,319 and $185,966 for the corresponding period in 2017, an increase of $1,789 and $10,337, respectively, or 10.32% and 5.56%.This increase is primarily due to the increase in the service revenue which lead to the increase in the cost of services.

The gross profit for services was $31,455 (62.20% margin) and $67,689 (25.64% margin) for the three and nine months ended September 30, 2018, respectively, as compared to $20,649 (54.38% margin) and -8,942 (-5.05% margin) for the corresponding period in 2017. This increase is primarily due to the decrease in fixed fees that should be amortized in cost of services.

Operating Expenses

Total operating expenses were $370,703 and $2,654,273 for the three and nine months ended September 30, 2018, respectively, as compared to $382,288 and $1,306,894 for the corresponding period in 2017, a decrease of $11,585 and an increase of $1,347,379, respectively. The increase of operating expenses is primarily due to the increase in the accrued doubtful accounts and the increase in the salary allocated to the administrative expense of the Company’s subsidiaries.

Sales and Marketing Expenses

The sales and marketing expenses were $6,153 and $22,542 for the three and nine months ended September 30, 2018, respectively, as compared to $4,181 and $82,257 corresponding period in 2017, an increase of $1,972 and a decrease of $59,715. This decrease is primarily due to the decrease in the consulting fees related to operating expenses in the Company’s subsidiaries.

General and Administrative Expenses

General and administrative expenses were $364,550 and $2,631,731 for the three and nine months ended September 30, 2018, respectively, as compared to $378,107 and $1,224,637 for the corresponding period in 2017, a decrease of $13,557 and an increase of $1,407,094, respectively. The increase of general and administrative expenses is primarily due to the increase in the accrued doubtful accounts and the increase in the salary belonged to the adminstriative expense of the Company’s subsidiaries.

LOSS FROM OPERATIONS

As a result of the factors mentioned above, loss from operations was $224,704 and $2,185,046 for the three and nine months ended September 30, 2018, respectively, as compared to loss from operations of $340,339 and $845,333 for the corresponding three and nine months period in 2017, a decrease of $115,635 and an increase of $1,339,713 respectively. This increase is primarily due to the decrease of gross profit related to the decrease in product revenues and the increase in operating expenses.

Other Expense

Other expense was $90,171 and $286,394 for the three and nine months ended September 30, 2018, respectively, as compared to $86,525 and $264,431 for the corresponding period in 2017, an increase of $3,646 and $21,963 respectively. This increase is primarily due to the increase in interest expense. As a result, the loss before income taxes was $314,875 and $2,471,440 for the three and nine months ended September 30, 2018 respectively, as compared to the loss before income taxes of $426,864 and $1,109,764 for the corresponding three and nine months period in 2017, a decrease of $111,989 and an increase of $1,361,676, respectively.

Income Tax Expense

For the three and nine months ended September 30, 2018, income tax expense was $16 and $114 respectively, as compared to $51 and $2,723 for the same period in 2017, a decrease of $35 and $2,609, or 68.62% and 95.81%. This decrease was primarily due to the increase of loss before income tax.

As of September 30, 2018, the operations in the United States of America incurred $4,087,926 of cumulative net operating losses which can be carried forward to offset future taxable income. The net operating loss carryforwards begin to expire in 2038, if unutilized. The Company has provided for a full valuation allowance against the deferred tax assets of $858,464 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.

The Company’s effective income tax rate for the three months and nine month ended September 30, 2018 was 25%.

Net loss

As a result of the factors mentioned above, net loss was $314,891 and $2,471,554 for the three and nine months ended September 30, 2018, respectively, as compared to net loss of $426,915 and $1,112,487 for the corresponding period in 2017, a decrease of $112,024 and an increase of $1,359,067. This increase is primarily due to the decrease in the product revenue and corresponding decrease in gross profit as well as devaluing the Chinese Yuan against US dollar.

LIQUIDITY AND CAPITAL RESOURCES

Operating activities

For the nine months ended September 30, 2018, net cash generated from operating activities was $456,033. This was attributable primarily to net loss of $2,471,554, adjusted by non-cash items of depreciation and amortization of $695,162, and gain on disposal of property, plant and equipment of $730, a decrease in accounts and retention receivable by $3,637,343, an increase in inventories by $2,506,962, an increase in amount due from a related company of $282,478, an increase in prepayment and other receivable by $459,222, an increase in the accounts payable by $218,853 and an increase in other payable and accrued liabilities by $162,723.

We have followed ASC 230-10-45-28 and choose to provide information about major classes of cash flow items by the indirect method. In the statement of cash flows, we have reported the same amount for net cash flow from operating activities indirectly by adjusting net income to reconcile it to net cash flow from operating activities. The reconciliation has separately reported all major classes of reconciling items, for example, changes during the period in accounts receivables pertaining to operating activities, in inventory, and in payables pertaining to operating activities.

As of September 30, 2018, the increase of inventories was primarily due to the delayed project so as to preventing us to deliver these inventories to our clients.

As of September 30, 2018, accounts and retention receivable was $9,210,785, 99.9% and 0.1% of the product revenue and service revenue, respectively.

The Company is highly aware the risk of default, and as a result, we actively monitor accounts receivable with aging above 1 year and those that account for about 17% of the total accounts receivable, thus there is no significant credit risk. The Company will consider an allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. The Company’s accounts and retention receivable aging was as follows:

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. The Company takes appropriate actions to exhaust all means of collection, including seeking legal resolution in a court of law, for our collection efforts. Meanwhile, the Company also adopted strict sales polices according to the signed contracts. The Company evaluated the existing customers and potential customers; as well as reducing their credit in the sales and raising the quality of contracts and controls on the doubtful accounts. This year, we have strengthened the team makeup of accounts receivable settlement, and we have organized nearly 30 professional people to track the accounts receivable and resident the customer until the accounts receivable have been recovered. We believe that these measures should improve the collection of the accounts receivable.

As of September 30, 2018, the accounts receivable of the major customer with aging above 365 days are expected to be collected between December 2018 and September 2019:

We offer a free 12 to 24 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 from 12 to 24 months, until the product warranty has expired.

Investing activities

For the nine months ended September 30, 2018, net cash provided by investing activities was $1,441.

Financing activities

For the nine months ended September 30, 2018, net cash used in financing activities was $528,935.

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.