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EXCEL - IDEA: XBRL DOCUMENT - Rotoblock CorpFinancial_Report.xls
EX-31.1 - SEC.302 CERTIFICATION OF CEO - Rotoblock Corpexhibit31-1.htm
EX-31.2 - SEC. 302 CERTIFICATION OF CFO - Rotoblock Corpexhibit31-2.htm
EX-32.2 - SEC.906 CERTIFICATION OF CFO - Rotoblock Corpexhibit32-2.htm
EX-32.1 - SEC.906 CERTIFICATION OF CEO - Rotoblock Corpexhibit32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

 

  X   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

 

For the quarterly period ended March 31, 2012

 

___  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 000-51428   

 

ROTOBLOCK CORPORATION
(Exact name of registrant as specified in its charter)
   
Nevada 20-08987999 

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

   

300 B Street

Santa Rosa, California

95401
(Address of principal executive offices) (Zip Code))
 
Registrant’s telephone number, including area code: (707) 578-5220

 

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.  Yes X   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filer required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes  X  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filer  Accelerated filer  Non-accelerated filer  Smaller reporting company  X

 

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

Yes     No  X

 

As of May 11, 2012, there were 10,545,408 shares outstanding of the registrant’s common stock.

 

1
 

 

 

ROTOBLOCK CORPORATION & SUBSIDIARIES

FORM 10-Q

INDEX

   

Page

No.

     
PART I. Financial Information  
     
Item 1.  Financial Statements (Unaudited) :  
     
  Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 . 1
     
  Condensed Consolidated Statements of Operations for the Three months ended March 31, 2012 and 2011. 2
     
  Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2012 and 2011. 3
     
  Notes to Condensed Consolidated Financial Statements 4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
     
Item 4T. Controls and Procedures 27
   
PART II. Other Information  
     
Item 1. Legal Proceedings 28
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
     
Item 3. Defaults Upon Senior Securities 29
     
Item 4. Removed and Reserved 30
     
Item 5. Other Information 30
     
Item 6. Exhibits 30
     
SIGNATURES   31

 

 

 

2
 

 

  

ROTOBLOCK CORPORATION      
       
CONDENSED CONSOLIDATED BALANCE SHEET      
     
(Expressed in U.S. Dollars)      
(Unaudited)      
     
ASSETS Note

March 31, 2012

December 31, 2011

Current assets      
Cash and cash equivalents   $161,230 $144,202
Restricted cash   116,296 -
Accounts receivable   526,094 538,513
Prepayments, deposits and other receivables 5 765,160 641,454
Inventory 6 848,601 600,963
Total current assets   2,417,381 1,925,132
       
Non-current assets      
Property, plant and equipment 7 117,531 123,493
Goodwill 1 3,480,852 3,480,852
Investments in associates 8 293,590 293,590
Available-for-sale investments 9 736,573 990,533
Total non-current assets   4,628,546 4,888,468
       
TOTAL ASSETS   $7,045,927 $6,813,600

 

     
LIABILITIES      
Current liabilities      
Accounts payable and accrued liabilities 11 1,333,521 1,273,610
Deferred revenue   1,140,795 651,117
Due to related parties 12 654,736 410,000
Convertible promissory notes 14 2,293,824 2,226,192
Total current liabilities   5,422,876 4,560,919
       
TOTAL LIABILITIES   5,422,876 4,560,919
       
SHAREHOLDERS’ EQUITY      
Common stock 15 80,330 79,509
Additional paid in capital   5,970,347 5,886,251
Warrants 15 1,441,514 1,401,514
Available-for-sale investments valuation reserve   (278,091) (24,131)
Accumulated other comprehensive income   79,182 72,667
Deficit   (5,669,275) (5,162,176)
TOTAL SHAREHOLDERS’ EQUITY   1,624,007 2,253,634
       
Non-controlling interests 16 (956) (953)
       
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $7,045,927 $6,813,600

 

           Nature and Continuance of Operations (Note 1); Commitments and Contingencies (Note 17);

           Subsequent Events (Note 20) 

See accompanying notes to unaudited condensed consolidated financial statements

 

3
 


ROTOBLOCK CORPORATION
 
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPRENSIVE INCOME
 
(Expressed in U.S. Dollars, except per share amounts)
(Unaudited)
  Note    

Three month period ended March 31, 2012

Three month period ended March 31, 2011

Operating expenses          
Selling and distribution expenses       $(91,026) $(100,244)
Administrative and other operating costs       (404,500) (372,945)
Depreciation and amortization       (6,119) (3,006)
Loss from operations       (501,645) (476,195)
           
Other income 4     32,044 1,737,752
Financial income and (expense)       (37,673) (101)
Interest income       172 331
Income (loss)       $(507,102) $1,261,787
           
Non-controlling interests 16     3 -
           
Income (Loss) for the period       (507,099) 1,261,787
           
Comprehensive income (loss)          
Net income (loss) for the period       (507,099) 1,261,787
Foreign currency translation adjustment       6,515 9,365
Unrealized gain (loss) on available for sale investments       (253,960) -
           
Comprehensive income (loss) for the period       $(754,544) $1,271,152
           
Income (Loss) per share – basic and diluted     $(0.01) $0.02
           
Weighted average shares outstanding – basic and diluted   79,975,634 71,343,682

 

See accompanying notes to unaudited condensed consolidated financial statements

4
 

 

ROTOBLOCK CORPORATION      
       
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS    
   
(Expressed in U.S. Dollars)      
 (Unaudited)      
  Note

March 31, 2012

March 31, 2011

Cash Flows From (Used in) Operating Activities   $ $
     Income (Loss) for the period   $(507,099) $1,261,787
     Items not involving cash:      
     Depreciation and amortization   6,119 3,006
     Non-cash interest   37,268 -
     Non-controlling interest 16 (3) -
     Shares issued for compensation 13, 15 15,500 -
     Shares issued for consulting fees 15 45,520 -
     Stock-based compensation   - 70,858
     Warrants issued for compensation 13,15 40,000 -
       
Adjustments to Reconcile Net Loss to Net Cash From (Used in) Operating Activities      
Decrease/(Increase) in accounts receivable   15,880 288,132
Decrease/(Increase) in inventory   (244,435) (176,796)
Decrease/(Increase) in other receivables and prepayments   (96,353) (75,970)
Increase/(Decrease) in other payables and accrued liabilities   317,449 (50,898)
Increase/(Decrease) in deferred revenue   486,768 (1,505,176)
       
Net cash from (used in) operating activities   116,614 (185,057)
       
Cash Flows Used in Investing Activities      
Investment in associates 8 - (293,590)
Net cash used in investing activities   - (293,590)
       
Cash Flows From (Used in) Financing Activities      
Common shares issued for cash 15 - 85,000
(Decrease)/Increase in restricted cash   (116,589) 78,375
Convertible promissory note 14 17,000 -
Net cash from (used in) financing activities   (99,589) 163,375
       
Effect of foreign currency translation on cash and cash equivalents   3 (190)
       
Net decrease in cash and cash equivalents   17,028 (315,462)
       
Cash and cash equivalents – beginning of period   144,202 566,085
       
Cash and cash equivalents – end of period   161,230 250,623

 

See accompanying notes to unaudited condensed consolidated financial statements

5
 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

NOTE 1 - ORGANIZATION AND OPERATIONS

Rotoblock Corporation (“Rotoblock” or the “Company”) was incorporated under the laws of the State of Nevada on March 22, 2004.

On March 30, 2004, the Company entered into a Share Exchange Agreement (the “Agreement”) with Rotoblock Inc., a Canadian corporation incorporated on September 2, 2003, wherein the Company agreed to issue to the stockholders of Rotoblock Inc. 300,000 common shares in exchange for the 144,000 shares that constituted all the issued and outstanding shares of Rotoblock Inc. Effective March 30, 2004, Rotoblock Inc. completed the reverse acquisition under the Agreement with the Company.

Immediately after the acquisition, the management of Rotoblock Inc. took control of the board and office positions of the Company, constituting a change of control. Because the former owners of Rotoblock Inc. gained control of the Company, the transaction would normally have been considered a purchase by Rotoblock Inc. However, since the Company was not a business, the transaction was not considered to be a business combination, and the transaction was accounted for as a recapitalization of Rotoblock Inc. and the issuance of stock by Rotoblock Inc. for the assets and liabilities of the Company. The value of the net assets of the Company acquired by Rotoblock Inc. was the same as their historical book value, being a deficiency of $138.

On November 18, 2011, the Company completed its acquisition of daifuWaste Management Holdings Ltd, (“daifu”), a Cayman Islands company, via Share Exchange Agreement (“Share Exchange Agreement”). Pursuant to the Share Exchange Agreement, the shareholders of daifutransferred all of the daifu ordinary shares outstanding to the Company in exchange for issuance of 73,801,525 common shares of the Company, par value $0.001 per share, to the daifu shareholders. As at the date of the Share Exchange Agreement, daifu had 106,356,423 ordinary shares outstanding. 

As at November 18, 2011, the Company had an aggregate of 9,281,160 share purchase warrants and a convertible promissory note outstanding. Both instruments remained intact after the Share Exchange Agreement. As a result, daifu shareholders acquired approximately 81.28% of the Company’s issued and outstanding common stock and common stock equivalents. 

Because the former owners of daifu obtained control of Rotoblock, the transaction was considered a purchase of Rotoblock’s operations by daifu, accordingly: 

(a)daifu is deemed to be the acquirer for accounting purposes and, as such, its assets and liabilities are included in the consolidated financial statements of the combined entity at their historical carrying values.

 

(b)The consolidated financial statements of the combined entity are issued under the name of the legal parent, being Rotoblock, but are a continuation of the historical consolidated financial statements of daifu.

 

(c)The transaction shares were recorded at the fair value of the net assets of Rotoblock.

 

(d)The accumulated deficit of Rotoblock as at November 17, 2011 has been eliminated.

 

(e)The capital structure of the Company is that of Rotoblock, but the dollar amount of the issued share capital in the consolidated balance sheet immediately prior to the acquisition is that of daifu plus the value of shares issued by Rotoblock to acquire daifu.

 

 

6
 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED
 

 

At the date of acquisition, the determination and allocation of the purchase price is summarized below: 

Purchase Price      
         
Shares of daifu (i)   24,497,207    
Fair value per share of daifu (ii) $ 0.0998    
Total Purchase Price     $ 2,445,796
         
Allocation of Purchase Price        
Cash     $ 76,182
Accounts receivable       217
Prepaid expenses       40,209
Accounts payable and accrued liabilities       (56,023)
Convertible promissory note       (2,211,726)
Available-for-sale investments       1,014,664
Property, plant and equipment       101,421
Goodwill       3,480,852
      $ 2,445,796

 

(i)   As the transaction is determined to be a purchase of Rotoblock’s operations by daifu, the consideration transferred by daifu for its interest in Rotoblock is based on the number of ordinary shares to be issued by daifu to give the original shareholders of Rotoblock an 18.72% (81.28% interest held by original daifu shareholders) interest in consolidated Rotoblock after the Acquisition.

(ii)   Determined based on appraised fair value of daifu’s net assets of $10,618,613 and 106,356,423 ordinary shares outstanding on the date of Acquisition.

 

daifu (formerly named China Healthcare Holdings Limited), was incorporated in the Cayman Islands on August 1, 2000.

On June 30, 2008, daifu underwent a reverse merger with its subsidiaries involving an exchange of shares (“Share Exchange”) between daifu and daifuWaste Management Holding Limited (Samoa) (“daifuWaste Samoa”), daifuWaste Solutions Inc. (“daifuWaste Solutions”), daifuWaste Investment Limited (“daifuWaste Limited”), Hydroclave China Inc. (“Hydroclave”) and daifuWaste Investment (Hong Kong) Limited (“daifuWaste HK”). For financial reporting purposes, this transaction was classified as a recapitalization of daifuWaste Samoa, daifuWaste Solutions, daifuWaste Investment, Hydroclave and daifuWaste HK. On January 13, 2009, daifuWaste HK acquired Puhua Kangjian Environment Technology (Shenzhen) Limited (“PHKJ”). 

On January 25, 2011, daifuWaste HK invested Renminbi (“RMB”) 1,960,000, 35% of the registered capital to incorporate a joint venture – Hainanzhou daifu-Luhuan Medical Waste Disposal Co., Ltd. – in the People’s Republic of China (“PRC”) (Note 8).  

daifu and its subsidiaries are principally engaged in holding medical waste technology, medical waste equipment trading and holding investments in medical waste treatment centres.

 

The Company’s unaudited condensed consolidated financial statements as at March 31, 2012 and for the three month period then ended have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has a net loss of $507,099 for the three month period ended March 31, 2012 (March 31, 2011 - net income of $1,261,787) and has a working capital deficiency of $3,005,495 at March 31, 2012 and at December 31, 2011 it was $2,635,787).

 

7
 

 

 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

 

Management cannot provide assurance that the Company will become operating cash flow positive, or raise additional debt and/or equity capital. However, based on its prior demonstrated ability to raise capital, management believes that the Company’s capital resources should be adequate to continue operating and maintaining its business strategy during the fiscal year ending December 31, 2012. If the Company is unable to raise additional capital in the near future, due to the Company’s liquidity problems, management expects that the Company will need to curtail operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other remedial measures. These condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Note 2. Basis of Presentation 

The condensed consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP and are expressed in U.S. dollars.

 

The comparative information for March 31, 2011 represents the financial performance of daifuWaste Management Holdings Limited only (Note 1).

 

Note 3. Recently Adopted Accounting Policies

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-12, “Comprehensive Income”. This ASU effectively defers the changes in ASU No. 2011-05, “Presentation of Comprehensive Income” that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. ASU No. 2011-12 should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this policy effective January 1, 2012. The adoption has not had an impact on the Company’s interim consolidated financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. This ASU presents an entity with the option to present the total of comprehensive income, the components of net income, and the component of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity/deficit. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU No. 2011-05 should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this policy effective January 1, 2012. The adoption has not had an impact on the Company’s interim consolidated financial statements.

 

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement” to amend the accounting and disclosure requirements on fair value measurements. This ASU limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, this update expands the disclosure on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. ASU No. 2011-04 is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. The Company adopted this policy effective January 1, 2012. The adoption has not had an impact on the Company’s interim consolidated financial statements.

 

8
 

 

 

 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

 

Note 4. Other Income

 

Other income as at March 31, 2012 and 2011 consists of the following:

 

 

March 31

2012

March 31

2011

 
Sundry income $13,994 $1,727,970
Management fee income 18,050 9,782
     
  $32,044 $1,737,752

 

During the three month period ended March 31, 2011, daifu recorded sundry income of $1,727,070 upon recognition of advance payments received from customers in previous years.

 

Note 5. Prepayments, Deposits and Other Receivables

 

Prepayments, deposits and other receivables as at March 31, 2012 and December 31, 2011 consist of the following:

 

 

March 31

2012

December 31

2011

 
Temporary prepayments 38,640 38,610
Deposits to suppliers 411,289 349,101
Contract guarantee deposits 218,188 208,319
Premises and sundry deposits 65,620 25,206
Advances to employees 31,201 20,000
Harmonized sales tax receivable 222 218
     
  $765,160 $641,454

 

Note 6. Inventory

 

Inventories as of March 31, 2012 and December 31, 2011 consist of the following:

 

 

March 31

2012

December 31

2011

  $ $
Raw materials 848,601 600,963

 

 

9
 

 

 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 
 

 

Note 7. Property, Plant and Equipment

 

   

Accumulated

depreciation

 
  Cost

March 31

2012

December 31

2011

  $ $ $ $
         
Equipment 52,940 20,160 32,780 34,500
Vehicles 137,291 53,810 83,481 87,880
Effect of foreign exchange on fixed asset balances 2,751 1,481 1,270 1,113
         
  192,982 75,451 117,531 123,493

 

During the three month period ended March 31, 2012, total additions to property and equipment were $nil (December 31, 2011 - $nil).  During the three month period ended March 31, 2012, total dispositions of property and equipment were $nil (December 31, 2011 - $nil).

 

Note 8. Investments in Associates

 

 

  Fair Value
 

March 31

2012

December 31

2011

  $ $
Investment in Hainanzhou daifu-Luhuan Medical Waste Disposal Co., Ltd. 293,590 293,590

 

On January 25, 2011, daifuWaste (HK) invested RMB 1,960,000 ($293,590), 35% of the registered capital, associated with Hainanzhou Luhuan Medical Waste Disposal Co., Ltd invested RMB 3,640,000, 65% of the registered capital, to incorporate a joint venture (“the Joint Venture”) – Hainanzhou daifu–Luhuan Medical Waste Disposal Co, Ltd in PRC. The net assets of Hainanzhou daifu–Luhuan Medical Waste Disposal, Ltd are RMB 5,600,000. The Joint Venture is expected to start business in the 2nd quarter of 2012.

 

Note 9. Available-for-sale Investments

 

 

      Fair Value
  Cost Unrealized Gain/(Loss)

March 31

2012

December 31

2011

  $ $ $ $
977,966 common shares of Samyang Optics Co., Ltd. 1,000,000 (263,427) 736,573 990,533

 

 

On February 11, 2010, the Company entered into an Investment Agreement with Samyang Optics Co., Ltd. (“Samyang”), a South Korean Corporation listed on the Korea Exchange, whereby Samyang loaned the Company $2,000,000 in the form of a convertible promissory note (Note 14). In turn, the Company acquired 977,966 common shares of Samyang valued at $1,000,000. The investment is classified as Available for Sale and is carried at fair value, with unrealized gains and losses recorded as Other Comprehensive Income in available for sale valuation reserve and other than temporary losses recorded in net income.

 

 

10
 

 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

 

Note 10. Patents

 

The Company has entered into an agreement for certain patents related to the Oscillating Piston Engine (“OPE”) pursuant to which the Company must pay a royalty of $50 per engine on the sale of up to 10,000 OPE, a royalty of $20 per engine on the sale of up to 100,000 OPE, and a royalty of $2 per engine thereafter. As at March 31, 2012, no engines have been sold. The Company has not capitalized any amount related to the patents.

 

Note 11. Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities as at March 31, 2012 and December 31, 2011 consist of the following:

 

 

March 31

2012

December 31

2011

  $ $
Value added taxes (“VAT”) payable 55,863 102,795
Trade payables 115,913 72,235
Accrued liabilities 437,384 228,051
Director remuneration 961,961 870,529
     
  1,571,121 1,273,610

 

Note 12. Due to Related Party 

 

Due to related parties at March 31, 2012 and December 31, 2011 consist of the following:

 

 

March 31

2012

December 31

2011

  $ $
American Pacific Medical Group Limited 417,136 410,000
Physician Medical Technology (Shenzhen) Co. Ltd. 237,600 -
  654,736 410,000

 

During the year ended December 31, 2011, $410,000 was borrowed from a related party for redemption of outstanding preferred stocks of daifu. The amount earns interest at 7% per annum. During the three month period ended March 31, 2012 a total of $7,136 in interest has been accrued on the liability.

 

Physician Medical Technology (Shenzhen) Co. Ltd. is a subsidiary of American Pacific Medical Group Limited. During the three month period ended March 31, 2012, the entity transferred $237,600 to the Company to be used for operating expenses. This amount is unsecured, non-interest bearing and is repayable on the request of Physician Medical Technology (Shenzhen) Co. Ltd.

 

11
 

 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 
 

 

 

Note 13. Related Party Transactions

 

During the three month period ended March 31, 2012, the Company paid/accrued $22,113 (March 31, 2011 - $nil) and issued 366,807 shares, par value $0.001 per share, valued at $19,917 (March 31, 2011 - $nil) to the Company’s Chief Executive Officer, (“CEO”) as payment of salary and bonus. Cash payment of $6,000 and shares valued at $4,417 have been included in prepayments as at March 31, 2012 as advance payment of salary for the month of April 2012 (March 31, 2011 - $nil). 

 

During the three month period ended March 31, 2012, Daifu paid/accrued $67,818 to related parties for salaries and wages.

 

During the three month period ended March 31, 2012, the Company granted 1,000,000 common share purchase warrants to the Company’s CEO as part of his compensation package. The share purchase warrants entitle the officer to purchase up to 1,000,000 shares of the Company at a price of $0.25 per share up to January 20, 2017. The fair value of the share purchase warrants was determined to be $40,000 and recorded in the Company’s statement of income (Note 15).

 

During the year ended December 31, 2011, daifu borrowed $410,000 from a related party for redemption of outstanding preferred shares of daifu (Note 12 and Note 15). During the three month period ended March 31, 2012 a total of $7,136 in interest payable has been accrued on the liability.

 

Physician Medical Technology (Shenzhen) Co. Ltd. is a subsidiary of American Pacific Medical Group Limited. During the three month period ended March 31, 2012, the entity transferred $237,600 to the Company to be used for operating expenses. This amount is unsecured, non-interest bearing and is repayable on the request of Physician Medical Technology (Shenzhen) Co. Ltd.

 

Note 14. Convertible Promissory Notes

 

a)On February 11, 2010, the Company entered into a Convertible Promissory Note Agreement (the “Convertible Promissory Note Agreement”) with Samyang for $2,000,000 cash (Note 9). The principal balance bears interest at a rate of 6% per annum. All unpaid principal, together with any unpaid and accrued interest is convertible into common shares of the Company at a price of $1.10 per share.

 

The note was due on February 11, 2012. At present the parties are determining a new mutually agreeable maturity date for the note.

 

The balance of the Promissory Note as at March 31, 2012 consists of principal and accrued interest of $2,000,000 and $256,110, respectively (December 31, 2011 - $2,000,000 and $226,192, respectively).

 

b)On May 5, 2012, the Company entered into a Convertible Promissory Note Agreement (the “Asher Agreement”) with Asher Enterprises, Inc. (“Asher”) for $17,000 in cash and $20,500 in trade accounts payable which Asher paid on behalf of the Company, for a total principal balance of $37,500. The principal balance bears interest at a rate of 8% per annum. All unpaid principal, together with any unpaid and accrued interest will be due and payable on December 7, 2012.

 

The principal balance of $37,500, together with all accrued and unpaid interest, is convertible into common shares of the Company. The conversion price is to be calculated as 58% multiplied by the market price, which is the average of the lowest three closing bid prices on the Over the Counter Bulletin Board (“OTCBB”) during the ten trading day period ending on the latest complete trading day prior to the conversion date.

 

The variable conversion price is considered to be an embedded derivative. The Company is unable to value the embedded derivative component separately and has therefore classified the entire contract as a financial liability that is held for trading. The balance of the Promissory Note as at March 31, 2012 consists of principal and accrued interest of $37,500 and $214, respectively.

 

 

12
 

 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

 

Note 15. Capital Stock

 

Authorized capital stock of the Company consists of 200,000,000 common shares with par value of $0.001 per share and 50,000,000 preferred shares with par value of $0.001 per share.

 

On January 10, 2012, the Company issued 100,000 shares, par value $0.001 per share, to a consultant of the Company as payment for consulting fees valued at $10,000.

 

On January 20, 2012, the Company issued 83,333 shares, par value $0.001 per share, to an officer of the Company as payment of salary and bonus valued at $2,500.

 

On January 20, 2012, the Company issued 130,000 shares, par value $0.001 per share, to two consultants of the Company as payment of consulting fees valued at $32,500. As at March 31, 2012, $19,480 was included in prepayments.

 

On February 9, 2012, the Company issued 225,000 shares, par value $0.001 per share, to six consultants of the Company as payment of consulting fees valued at $22,500.

 

On February 16, 2012, the Company issued 163,333 shares, par value $0.001 per share, to an officer of the Company as payment of salary and bonus valued at $10,500.

 

On March 26, 2012, the Company issued 120,141 shares, par value $0.001 per share, to an officer of the Company as payment of salary and bonus valued at $6,917. As at March 31, 2012, $4,417 was included in prepayments.

 

On November 18, 2011, the Company completed its acquisition of daifu (Note 1). Pursuant to the Share Exchange Agreement, the daifu shareholders transferred all of the daifu ordinary shares outstanding to Rotoblock in exchange for issuance of 73,801,525 common shares of Rotoblock, par value $0.001 per share, to the daifu shareholders.

 

As at January 1, 2011, daifu had 96,073,105 common shares issued and outstanding. During the year ended December 31, 2011, daifu issued 283,318 common shares in settlement of certain debt obligations of daifu, and also issued 10,000,000 common shares at $0.01 per share upon exercise of original daifu stock options. The 96,073,105 shares outstanding on January 1, 2011 and 10,283,318 shares issued by daifu during the year ended December 31, 2011 are adjusted for presentation in the consolidated financial statements to 66,665,853 and 7,135,672 respectively to reflect the ratio of shares exchanged between Rotoblock and daifu.

 

As at November 18, 2011, 5,706,977 outstanding shares of the Company were owned by the original Rotoblock shareholders before the Share Exchange Agreement with daifu.

 

During the year ended December 31, 2011, daifu redeemed its outstanding preferred stock at a price of $4,310,000.

 

As a result of the reverse acquisition of daifu, the Company changed its year end from April 30 to December 31. On April 30, 2011, the Company had 5,710,311 shares outstanding.

 

On January 7, 2011, the Company issued 3,334 common shares valued at $nil per common share in error. On July 14, 2011, the Company cancelled these shares and is in the process of obtaining the common shares to be returned to treasury for cancellation.

 

On December 15, 2011 the Company filed a Form S-8 Registration Statement with the SEC to register 10 million shares of our common stock for future issuances to consultants, employees, attorneys, officers and directors. As at March 31, 2012, approximately 455,000 shares have been issued under the plan.

 

13
 

 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

 

Share Purchase Warrants

 

On January 20, 2012, the Company granted 1,000,000 warrants to an officer of the Company as part of the officer’s compensation package. The warrants entitle the officer to purchase up to 1,000,000 shares of the Company at a price of $0.25 per share up to January 20, 2017.

 

The following share purchase warrants were outstanding at March 31, 2012:

 

  Exercise price

Number

of warrants

Remaining

contractual life (years)

  $    
Warrants 12.50 7,600 0.44
Warrants 7.50 20,000 1.00
Warrants 7.50 16,000 1.14
Warrants 12.50 3,333 1.26
Warrants 0.25 25,000 2.29
Warrants 0.25 25,000 2.31
Warrants 0.50 200,000 2.31
Warrants 2.50 57,144 2.31
Warrants 0.25 2,181,750 2.87
Warrants 1.00 50,000 2.87
Warrants 0.25 333,333 2.91
Warrants 1.00 300,000 2.96
Warrants 0.25 12,000 3.04
Warrants 0.25 1,000,000 4.81
Warrants 0.25 6,000,000 7.97
       
    10,231,160  

 

The following is a summary of warrant activities during the three month period ended March 31, 2012:

 

  Number of warrants Weighted average exercise price
   
Outstanding and exercisable at December 31, 2011 9,231,160 $0.34
Granted 1,000,000 0.25
     
Outstanding and exercisable at March 31, 2012 10,231,160 $0.33
     
Weighted average fair value of warrants granted during the year   $0.40

 

The weighted average grant date fair value of the 1,000,000 warrants granted on January 20, 2012 was determined using the Black-Scholes Option Pricing Model and the following assumptions:

 

         
Risk free interest rate       0.91%
Expected life       5.0 years
Annualized volatility       526.57%
Expected dividends       -

 

 

 

14
 

 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 
 

 

Restricted Common Shares

 

As at March 31, 2012, a total of 80,330,309 common shares are outstanding. Of these, 74,209,667 were restricted from trading as defined under Rule 144 of the United States Securities Act of 1933.

 

Note 16. Non-Controlling Interest

 

daifu has a non-controlling interest in one of its subsidiaries. The balance of the non-controlling interests as of March 31, 2012 and December 31, 2011 are as follows:

 

Subsidiary  

Non-Controlling Interest

 

March 31

2012

December 31

2011

      $ $
Hydroclave China Inc.   5% (956) (953)
         

 

 

 

Note 17. Commitments and Contingencies

 

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is possible that a liability has been incurred and the amount of the assessment can be reasonably estimated. As at March 31, 2012, there are no material litigations pending or threatened against the Company.

 

The Company’s commitments are as follows:

 

(a)On January 7, 2011, the Company issued 3,334 common shares valued at $nil per common share in error. On July 14, 2011, the Company cancelled these 3,334 common shares. As at December 31, 2011, the Company is in the process of obtaining the 3,334 common shares to be returned to treasury for cancellation (Note 15).

 

(b)On February 11, 2010, the Company entered into a Convertible Promissory Note Agreement with Samyang for $2,000,000 (Note 9 and 14). The principal balance bears interest at a rate of 6% per annum. All principal, together with all accrued and unpaid interest, is convertible into common shares of the Company at a price of $1.10 per share.

 

At present the parties are determining a new mutually agreeable maturity date for the note.

 

As at March 31, 2012, should Samyang exercise its option under the Convertible Promissory Note Agreement, the Company would be required to issue 2,051,009 common shares in settlement of its obligation to Samyang.

 

(c)On March 5, 2012, the Company entered into a Convertible Promissory Note Agreement with Asher for $37,500 (Note 14). The principal balance bears interest at a rate of 8% per annum. All principal, together with all accrued and unpaid interest, is convertible into common shares of the Company at a variable conversion price per share. The variable conversion price is to be calculated as 58% multiplied by the market price, which is the average of the lowest three closing bid prices on the Over the Counter Bulletin Board (“OTCBB”) during the ten trading day period ending on the latest complete trading day prior to the conversion date.

 

15
 

 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

 

As at March 31, 2012, should Asher exercise its option under the Asher Agreement, the Company would be required to issue 541,863 common shares in settlement of its obligation.

 

(d)The Company appointed its CEO on January 20, 2012, for a term of twelve months. The employment agreement stipulates an annual salary of $125,000, issuance of 1,000,000 shares of the Company’s common stock, share purchase warrants to purchase up to an additional 1,000,000 shares of the Company’s common stock at a price of $0.25 per share and Employee Common Stock Awards of 500,000 shares of common stock based on targeted increases in the Company’s market capital valuation. Of the 1,000,000 shares of the Company’s common stock, 249,999 have been issued as at March 31, 2012.
 

 

Note 18. Segmented Information

 

The Company, after the acquisition of daifu, operates in one reportable segment, that being the treatment of medical waste. Revenues are generated from trading of medical waste equipment. The Company’s operations are conducted primarily in two geographic segments, being Asia, specifically PRC, and the British Virgin Islands (“BVI”). Geographic segmentation of revenue and assets is based on the country of origin.

 

Three month period ended

March 31, 2012

PRC BVI Other Total
Revenues and other income $       8,994 $        5,000 $      18,050 $      32,044
Cost of sales and other expenses (160,002) (152) (378,989) (539,143)
Capital assets 20,759 - 96,772 117,531
Goodwill - - 3,480,852 3,480,852
Total assets $2,336,059 $      40,169 $4,669,699 $7,045,927

 

Year ended December 31, 2011 PRC BVI Other Total
Capital assets $     23,698 - 99,795 $    123,493
Goodwill - - 3,480,852 3,480,852
Total assets $1,775,126 $      53,746 $4,984,728 $ 6,813,600

 

Three month period ended

March 31, 2011

PRC BVI Other Total
Revenues and other income 900 1,727,070 9,782 1,737,752
Cost of sales and other expenses $(199,505) $          575 $(277,035) $ (475,965)

 

 

 

Note 19. Financial Instruments

 

The carrying value of cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities, and convertible promissory note approximates fair value due to the short term maturity of these financial instruments.

 

(a)Credit Risk

 

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and amounts receivable. The Company deposits cash and cash equivalents with high credit quality financial institutions as determined by rating agencies.

 

16
 

 

ROTOBLOCK CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

 

daifu extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on management’s assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment.

 

(a)Currency Risk

 

The Company’s reporting currency is the U.S. dollar. Foreign currency transactions are primarily undertaken in CAD, HK$ and RMB. The Company has not, to the date of these condensed consolidated financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

 

If the Canadian dollar had weakened (strengthened) against the U.S. dollar, with all other variables held constant, by 100 basis points (1%) at year end, the impact on net loss and other comprehensive loss would have been $4 higher ($4 lower).

 

If the Hong Kong dollar had weakened (strengthened) against the U.S. dollar, with all other variables held constant, by 100 basis points (1%) at year end, the impact on net loss and other comprehensive loss would have been $11,680 higher ($11,680 lower).

 

If the Renminbi had weakened (strengthened) against the U.S. dollar, with all other variables held constant, by 100 basis points (1%) at year end, the impact on net loss and other comprehensive loss would have been $4,273 higher ($4,273 lower).

 

(b)Interest Rate Risk

 

The Company has cash balances and fixed interest-bearing debt.  It is management’s opinion that the Company is not exposed to significant interest risk arising from these financial instruments. 

 

(c)Liquidity Risk

 

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with its financial liabilities. The Company is reliant upon successful financing and the operations of daifu as its sources of cash. The Company has received financing from private placements in the past; however, there is no assurance that it will be able to continue obtaining financing or maintain profitable operations in the future.

 

Note 20. Subsequent Event

 

On April 10, 2012, the Company issued 120,000 shares, par value $0.001 per share, to a consultant of the Company as payment of consulting fees valued at $30,000.

 

 

17
 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

This quarterly report of Form 10-Q, or Form 10-Q, including the following management’s discussion and analysis, and other reports filed by the registrant from time to time with the securities and exchange commission (collectively the “filings”) contain forward-looking statements which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. these forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. you can generally identify forward-looking statements through words and phrases such as “seek”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “budget”, “project”, “may be”, “may continue”, “may likely result”, and similar expressions. when reading any forward-looking statement you should remain mindful that all forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and are subject to risks, uncertainties, assumptions and other factors relating to our industry and results of operations, including but not limited to the following factors:

 

Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

 

Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made in our filings. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law.

 

In this quarterly report on Form 10-Q the term refers to Rotoblock refers to Rotoblock, the term Daifu refers to daifuWaste Management Holdings , Ltd . Rotoblock acquired daifu Waste Management as a wholly owned subsidiary on November 18, 2011 on a consolidated basis, and “we,” “us” and “our” refer to Rotoblock , as the context indicates.

·our ability to establish, maintain and strengthen our brand;
·our ability to successfully integrate acquired subsidiaries, particularly Jonway, into our company and business;
·our ability to maintain effective disclosure controls and procedures;
·our limited operating history, particularly of ZAP and Jonway on a consolidated basis;
·whether the alternative energy and gas-efficient vehicle market for our electric products continues to grow and, if it does, the pace at which it may grow;
·our ability to attract and retain the personnel qualified to implement our growth strategies;
·our ability to obtain approval from government authorities for our products;
·our ability to protect the patents on our proprietary technology;
·our ability to fund our short-term and long-term financing needs;
·our ability to compete against large competitors in a rapidly changing market for electric and conventional fuel vehicles;
·changes in our business plan and corporate strategies; and
·other risks and uncertainties discussed in greater detail in various sections of this report, particularly the section captioned “Risk Factors.”

 

 

18
 

Recent Developments

Activity during quarter ended March 31, 2012

In the first quarters of 2012 and 2011, we were not able to recognize any revenues. In accordance with our policy of revenue recognition, we require the customer acceptance of the installation as operating satisfactorily. During the first quarter of both years, we experienced delays in obtaining customer contract sign-offs due to the Chinese holidays where many businesses are closed to celebrate. Although work continued on various installations, we did not reach the completion stage to properly recognize revenue.

Quarter Ended March 31, 2012 Compared to Quarter Ended March 31, 2011 

Selling and distribution expenses decreased by $9,218 from $100,244 for the quarter ended March 31, 2011 to $91,026 for the period ended March 31, 2012.  The decrease was primarily due to less travel expenses for personnel to conserve cash.

Administrative and other operating costs increased by $31,555 from 372,945 for the quarter ended March 31, 2011 to $404,500 for the period ended March 31, 2012.  The increase was primarily due to the inclusion of Rotoblock corporate for the first quarter ended March 31, 2012. Since the merger did not occur until November 2011. The Company incurred additional expenses for the following: legal and professional fees, consulting expenses and stock based compensation.

Other income decreased $1.7 million from $1.7 million for the quarter ended March 31, 2011 to $32,044 for the quarter ended March 31, 2012.  The decrease was primarily due to forfeiture of a customer’s deposit on an installation for approximately $1.7 million in the first quarter ended March 31, 2011.

Financial expense. increased by $37,496 from $101 for the quarter ended March 31, 2011 to $37,673 for the period ended March 31, 2012.  The inclusion of Rotoblock corporate for the first quarter ended March 31, 2012 added approx $30,000 for interest on the Samyang Convertible debt plus interest on the recently incurred convertible debt due to Asher Enterprises Inc. and the loan from a related party, American Pacific Medical Group Limited.

Interest income decreased by $159 from $331 for the quarter ended March 31, 2011 to $172 for the period ended March 31, 2012.  The decrease was due to less overall average Company balances in bank savings accounts.

Net Income (loss) for the quarter ended March 31, 2012 was ($507,099) net loss compared to net income of $1.3 million for the period ended March 31, 2011.

Liquidity and Capital Resources

In assessing our liquidity, we monitor and analyze our cash on-hand, liquidation value of our investment in securities, and our operating and capital expenditure commitments.  Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. 

Our principal sources of liquidity consist of our existing cash on hand, bank loans, our investment in securities with Samyang Optics, Ltd of $736,573. As of March 31, 2012, we had a loan of $410,000 due to American Pacific Medical Group Limited, a related party of daifuWaste Group, with loan interest rate at 7% per annum, from January 1, 2012. Also during the 1st quarter of 2012, we had convertible debt for $37,500 with Asher Enterprises Inc with interest rate at 8% per annum.

We will require additional capital to expand our current operations.  In particular, we require additional capital to expand our customer base by the addition of qualified sales and professional staff to execute on our business plan and pursue our efforts in the research and development.

We intend to fund our long term liquidity needs related to operations through the incurrence of indebtedness, equity financing or a combination of both.  Although we believe that these sources will provide sufficient liquidity for us to meet our future liquidity and capital obligations, our ability to fund these needs will depend on our future performance, which will be subject in part to general economic, financial, regulatory and other factors beyond our control, including trends in our industry and technological developments.  However, we may not be able to obtain this additional financing on terms acceptable to us or at all.

 

19
 

We provided cash in operations of $116,614 and used cash in operations of $185,057 during the first quarter ended March 31, 2012 and 2011 respectively.

Cash provided from operations during the first quarter ended March 31, 2012 was the result of the net loss incurred for the periods of $507,099, offset by non-cash expenses of $144,404. In the first quarter of 2012, non-cash expenses were due to depreciation and amortization, non-cash interest, non-controlling interest, stock/warrants issued for compensation and consulting fees.

Cash used in operations for the first quarter ended March 31, 2011 was the result of the net profit of $1.3 million plus non-cash expenses of $73,864. In the first quarter of 2011, non-cash expenses were due to depreciation and amortization and stock based compensation for certain equity instruments.

For the first quarter ended March 31, 2012, the net change in operating assets and liabilities resulted in a cash increase of $479,309. The change was primarily due to the following: a increase in other receivables and prepayments of $96,353 as result of payments to suppliers and a decrease in customer’s deposits offset by an increase in other payables and accrued liabilities of $317,449 as a result of accruals of $106,000 for executive pay, loan from Pacific Medical Group Limited of $238,000 and Vat Taxes of $47,000.

In 2011, the net change in operating assets and liabilities resulted in a cash decrease of $1.5 million. The change was primarily due to the following: a decrease of $1.5 million in deferred revenue to recognize a customer deposit that was forfeited, a decrease of $288,000 in accounts receivable, offset by increase of $176,796 in the inventory, an increase of $50,898 in other payables and accrued liabilities executive and staff salaries and an increase of $75,970 due to payments for suppliers.

Investing activities used cash no cash for the first quarter ended March 31, 2012, however, cash of $293,590 was used in the first quarter ended March 31, 2011 to acquire a 35% share interest in a MWT center in Qinghai Province. The center is expected to start business in the second quarter of 2012.

Financing activities used cash of $99,589 for the first quarter ended March 31, 2012 and provided cash of $163,375 for the first quarter ended March 31, 2011. In the first quarter ended March 31, 2012, we received cash of $17,000 through the issuance of convertible debt and used $116,589 of cash to deposit in a restricted cash account to ensure certain project performances. In the first quarter of 2011, we received total cash of $163,375 from the exercise of stock options of $85,000 and the release of previously restricted cash of $78,375.

We had cash and cash equivalents of $161,230 at March 31, 2012 as compared to $144,202 at December 31, 2011. We had working capital deficits of $5.4 and $6.4 million at March 31, 2012 and December 31, 2011, respectively.

 We will need additional funding to sustain our operations at our current levels through the next twelve months.

  

 Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in conformity with U.S. generally accepted accounting principles which requires our management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The amounts estimated could differ from actual results.

 Estimates

 The preparation of financial statements in conformity with United States generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates

 

 

20
 

 

Stock Based Compensation

 

The Company accounts for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option pricing model (the “Black-Scholes model”). The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates.

 

The Company accounts for stock-based compensation awards and warrants granted to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). Under ASC 505-50, the Company determines the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.

 

Allowance for Doubtful Accounts

 

The Company provides an allowance for doubtful accounts when management estimates collectability to be uncertain. Accounts receivable are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer, overall customer credit-worthiness and historical experience. The Company determined that no allowance was needed at March 31, 2012 and 2011.

 

Inventories

 

Inventories consist primarily of raw materials and are valued at the lower of cost or market value with cost determined on a specific identification basis. In assessing the ultimate realization of inventories, management makes judgments as to future demand requirements compared to current or committed inventory levels. The Company’s reserve requirements generally increase/decrease due to management’s projected demand requirements, market conditions and product life cycle changes. During the quarter ended March 31, 2012, the Company did not make any allowance for slow-moving or defective inventories.

  

Off-Balance Sheet Arrangements

 

None.

 

 

21
 

 

 

Item 4.  Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports filed, furnished or submitted under the Exchange Act. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

 

Changes in internal control over financial reporting

 

No significant changes were made in our internal control over financial reporting during the Company’s first quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

We are not a party to any pending legal proceedings.

 

 Item 1A. Risk Factors

 

Report investors should carefully consider and evaluate each of the following considerations and all other information set forth in this Report before deciding to invest in our common stock. To the best of our knowledge and belief, all risk factors that are material to investors in making an informed judgment have been set out below. If any of the following considerations and uncertainties develops into actual events, our business, financial conditions, results of operations and prospects could be materially and adversely affected. In such cases, the trading price of our Shares could decline and you may lose all or part of your investment in our Shares.

 

This Report also contains forward-looking statements having direct and/or indirect implications on our future performance. Our actual results may differ materially from those anticipated by these forward looking statements due to certain factors including the risks and uncertainties faced by us, as described below and elsewhere in this Report. 

 

RISKS RELATED TO OUR BUSINESS

 

Daifu is a relatively new company and may experience volatility in our business 

 

Daifu only started to operate in 2001 and has not achieved significant revenue through first quarter ended March 31, 2012. During this period, it has experienced significant challenges in expanding its business and selling its systems. The reason for the challenges is that the MWT industry was nonexistent in China until the 2001 SARS outbreak. Hospitals and medical institutions reused the medical supplies like needles. Selling used medical supplies for profit was common. Daifu had to

22
 

educate medical institutions and the Chinese government about the critical need treat medical waste properly. While Daifu has seen significant improvement in the general public’s knowledge and awareness of the MWT industry, we cannot assure that the MWT industry will grow as Diafu has projected. Not meeting projections will impact Daifu's business negatively.

Our planned expansion into the Medical Waste Treatment Management Center business is a new business for us and we may experience difficulties implementing the plan

Daifu plans to expand into the MWT center operation and management business by leveraging our industry leadership in the equipment sector. If successfully implemented, the strategy will greatly enhance our industrial and competitive position and generate recurring revenue for us. However, the MWT industry, especially the operation and management of treatment centers, is competitive and undeveloped. Because every city has one or two centers, the operators have close connections with the regulatory agency in the city. One consequence is a lack of transparency or predictability in the MWT center operation and management business. Our plan to acquire these centers may not succeed because of the lack of transparency or predictability. The failure would result in slower growth of Daifu's business than projected.

Our Oscillating Piston Engine is in the small engine industry which is highly competitive and our technology may not be well received or successful.

The small engine industry is highly competitive with respect to technology, performance, quality and availability of service/parts. There are numerous well-established competitors, including national, regional and local small engine manufacturers and distributors who have substantially greater financial, marketing, personnel and other resources than our company.  There can be no assurance that we will be able to respond to various competitive factors affecting our industry and technology. The need for small engine equipment is also generally affected by changes in consumer preferences, national, regional and local economic and environmental regulations and demographic trends.  Prior to our acquisition of the engine and technology, it experienced a critical mechanical failure and was disassembled to investigate the cause of the problem. Failure analyses showed metal fatigue to be the cause of the critical component having failed. It was subsequently determined that choice of materials specified in the original design was ultimately the cause of the failure. A replacement component was re-specified and fabricated from a more suitable material. There can be no assurance that we will be able to successfully develop our proposed technology sufficient to create our planned model or, that if developed, it will suitably pass future testing and not fail again. If we are unable to successfully compete in the development and marketing of our finished product, we may be unable to generate any revenues and you could suffer a total loss of any investment you make in our securities.

We may be unable to protect the proprietary rights to the Oscillating Piston Engine technologies, patents and intellectual property, which may hamper our ability to license and/or sell the manufacturing rights to the technology, thereby impacting our ability to earn revenues and become profitable. 

Our success and ability to compete depend in part on the protection of the patents to the technology. We rely on patent and copyright laws to protect the intellectual property that was developed and have an option to acquire several patents on the technology. However, such laws may provide insufficient protection. Moreover, other companies may develop products that are similar or superior to our prototype engine,  or may copy or otherwise obtain and use proprietary information we develop or use without our authorization. If a third party were to violate one or more of the patents or the new technology we develop, we may not have the resources to bring suit or protect the intellectual property underlying the patents. In the event of such a violation or if a third party appropriated any of our unpatented technology, such party may develop and market technology and/or products which we intend to develop and/or market. We would lose any revenues, which we would otherwise have received from the sale or licensing of that technology or those products. This could prevent our ever making a profit on any licensing and/or sale of any technology or products we develop.

 

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We do not currently own the intellectual property underlying the engine's technology, but rather, have an option agreement to use the technology. Our business plans are to develop the technology and build a prototype engine that can be sub-licensed to third party manufacturers for amounts sufficient to generate the funds to purchase the patent rights subject of the option agreement; however, if we are unable to do so prior to the expiration date of the option, we would need to raise additional capital through loans or equity sales. We cannot guarantee that we will ever develop a successful prototype or that, if successfully developed, we will be able to sublicense the rights to any manufacturer for production and sale. As a result, we may never have the funds to purchase the patents, which would result in a total failure of our business and a complete loss of any investment you make in our securities.

 Policing unauthorized use of the patents, proprietary and other intellectual property rights could entail significant expense and could be difficult or impossible. In addition, third parties may bring claims of copyright or trademark infringement against us or claim that certain of our processes or features violate a patent, that we have misappropriated their technology, or formats or otherwise infringed upon their proprietary rights. Any claims of infringement, with or without merit, could be time consuming to defend, result in costly litigation, divert management attention and/or require us to enter into costly royalty and/or licensing arrangements to prevent further infringement on the technology we develop or use, any of which could increase our operating expenses and thus prevent us from becoming profitable.

Our competitive position also depends upon unpatented trade secrets. Trade secrets are difficult to protect. Our competitors may independently develop proprietary information and techniques that are substantially equivalent to the technology we use, or otherwise gain access to trade secrets we develop surrounding the engine development, such as through unauthorized or inadvertent disclosure of our trade secrets. If this occurs, our competitors may use our processes or techniques to develop competing products and bring them to market ahead of us. This could prevent us from becoming profitable.  As a result of any of the aforementioned circumstances, you could suffer a total loss of any investment you make in our securities. 

We may not be able to successfully develop an Oscillating Piston Engine to a marketable product. 

We cannot guarantee that we will be able to successfully complete an engine that meets the specifications we have set forth and are attempting to develop. Our final product may not function as we believe it will; its projected potential applications may be limited; and it may never be a viable product. If we are unable to successfully develop the engine technology as planned and it is not functional or commercially attractive to third parties, we may never be able to license the technology or sell the rights to manufacture our products. In such event, we would not be able to generate any revenues and any investment you made in our securities would be a total loss. 

 Daifu does not own any manufacturing facilities so our product quality and delivery time may experience negative variances

  Currently, Daifu manufactures our MWT systems through third-party OEM partners. The relationship is mutually beneficial, and we are satisfied with the quality of the manufactured systems and the price and terms. Still, because China has special requirements for pressurized containers, Daifu wants to start manufacturing directly. We are thus considering the acquisition of a special boiler company in China so that we can start to make the systems. However, no understandings, commitments or agreements are in place for the acquisition at this time, and we cannot assure that the acquisition can be completed timely on favorable terms and price. Not having our own manufacturing facilities may our hinder our future growth.

The medical waste treatment industry is heavily regulated by Chinese government and changes in government regulation may negatively impact Daifu's business

The Chinese government has issued rules, regulations and standards for the disposal and treatment of medical waste as well as other hazardous waste. It also regulates who can operate and manage the municipal treatment centers. The standards and regulations regarding the treatment centers also change frequently. This regulatory environment creates uncertainty for us, and future changes may adversely affect our business.

 

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Failure to achieve our acquisition strategy would impact our ability to grow

Part of Daifu's strategy is to grow through acquisitions of other product lines, technologies or facilities that will complement or expand our existing business. We may fail to achieve this part of our business strategy. A limited number of potential targets are available in the MWT industry, including both system manufacturers and MWT centers. Daifu may not identify suitable acquisition candidates or negotiate attractive terms. In addition, Daifu may have difficulty obtaining financing necessary to complete acquisitions.

Acquisitions may dilute equity ownership and value and may result in more negatives than benefits

Future acquisitions may involve the issuance of our equity securities that would dilute ownership interests of current shareholders. In addition, future acquisitions may adversely affect Daifu earnings or earnings per share. We also may incur additional debt or suffer adverse tax and accounting consequences from future acquisitions, and then the benefits from an acquisition may be less than the negatives. 

Failure to integrate acquired companies successfully could disrupt Daifu, and integration issues could distract management.

Even if we succeed in completing acquisitions, we might experience difficulties integrating the acquired businesses or assets. Acquisitions might result in unanticipated liabilities, unforeseen expenses and distraction of management’s time and attention.

Daifu now has a small number of customers, and results from operations and shareholder value could be adversely affected if we fail to acquire new customers.

Daifu has a limited history of operation. In 2009, we acquired one new customer. In 2010, we acquired six new customers and in the six months ended June 30, 2011, we acquired two new customers. As discussed before, the sale cycle for our MWT systems is time-consuming and unpredictable. Failure to achieve significant sales growth, would adversely affect future revenues and stockholder value.

Our products could be subject to product liability claims by customers and/or consumers, which would adversely affect our profit margins, results of operations and stockholder value.

 Daifu's MWT system is used in hospital, medical institutions and municipal medical waste treatment centers. If our products are not properly designed or built and/or personal injuries or environmental accidents are sustained from our equipment, we could be subject to claims for damages based on theories of product liability and other legal theories. The costs and resources to defend claims could be substantial. We could be responsible for paying some or all of the damages if the claims succeed in court or through settlement. Also, our reputation could be adversely affected, whether or not the claims are successful. Any of these results would adversely affect our profit margins, results from operations and stockholder value.

Expansion of our business may put added pressure on our management and operational infrastructure impeding our ability to meet any increased demand for our system and possibly hurting our operating results.

Our business plan is to grow significantly to meet the anticipated growth in demand for our MWT systems and enter into the MWT center management business. Growth in our business may significantly strain our personnel, management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges, including: 

               our ability to successfully and rapidly expand sales of our system nationwide to meet the expected increased  demand;
               unexpected changes in the regulatory environment of our industry;
               the costs associated with growth that are difficult to quantify, but could be significant; and
               technological change.

 

 

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To accommodate the expected growth and compete effectively, daifu will need to obtain additional funding to improve information systems, procedures and controls and expand, train, motivate and manage our employees. Our operating results could be adversely affected if the needed funding is not obtained.

We depend heavily on key personnel

Our future business and results of operations depend on the our key technical and senior management personnel, including Dr. Michael Hon Choi Choy, our director, Mr. Andrew P. Schneider, our Chief Executive Officer, and Ms. Yin Jie, our Chief Operating Officer. They also depend on our ability to attract and retain additional qualified management, technical, marketing and sales and support personnel for our business. If we lose a key employee or if a key employee fails to perform as expected, or if we are unable to attract and retain skilled employees as needed, our business could be adversely affected. Turnover in our senior management would result in the loss of institutional knowledge held by our existing senior management team and could adversely affect our company.

Our holding company structure may limit the payment of dividends to our stockholders

We have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.

Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits according to Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will be unable to pay any dividends.

The majority of our business is solely in the PRC

All our Daifu products have been sold to the PRC market. As such, our business and prospects are susceptible to changes in the PRC MWT market that could adversely affect demand for our systems. Our business could be adversely affected if our PRC business drops, and if we are unable to make up the decline with sales outside the PRC.

Our competitiveness is dependent on our continuing R&D

  We emphasize R&D, in particular to develop advanced systems that lower emissions and increase efficiency of our MWT systems. Our continuing emphasis on R&D to improve product quality and develop new products to meet changing market demands is important to our future growth and prospects. We cannot assure that our R&D efforts in the development of new products will yield commercially viable products. or the sale of such products.

Achieving or maintaining our profitability and adequate working capital

We cannot assure that our achieve profitability. Our plan to expand our product line and sales force and to enter into the operation and management of MWT centers in the PRC will increase our operating costs. This increase in operating costs without a corresponding revenue increase will have a negative impact on our operating results.

 We cannot assure that we will be able to secure funding on acceptable terms when required. The inability to maintain sufficient working capital to meet our business requirements, implement plans or react to changes in our business and industry will negatively affect our business and financial condition.

 

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Relationship between Hydroclave Canada and Hydroclave China, our subsidiary

Daifu sells non-incinerator medical waste treatment products using technology developed by Hydroclave Systems Corporation, a Canadian company (“Hydroclave Canada”). Hydroclave Canada has granted in a technology transfer agreement the rights to manufacture non-incinerator medical waste treatment systems using Hydroclave Canada technology to Hydroclave China for sale only to daifu Waste Solutions and to Hydroclave Canada. The consideration for the technology transfer agreement is a 5% share ownership in Hydroclave China and 5% royalty fee payable by Hydroclave China for every product that Hydroclave China supplies to daifu Waste Solutions.

Hydroclave Canada and Hydroclave China had a dispute over the technology transfer agreement in the past, but no dispute has happened in the last three years. Nonetheless, a risk remains that a dispute with Hydroclave Canada may arise again over the technology transfer agreement.

Protection of our intellectual property

Currently Daifu has three patents on its technology registered in the PRC:

 1. Steam-Base Medical Waste Treatment Vessel Patent by Hydroclave China Inc.
 2. Anti-Wrapping Device Patent for Steam-Base Medical Waste Treatment Vessel by Puhua Kangjian     Environmental Technology
 3. Waste Bin Washing & Cleaning System Patent by Puhua Kangjian Environmental Technology

 

We also applied Mobile Steam-Base Medical Waste Treatment System by Puhua Kangjian Environmental Technology, which combines our system with tow truck.

RISKS RELATING TO OUR INDUSTRY

Competition

 We face competition from local and overseas companies. producers. Some competitors have longer operating histories, larger customer bases, stronger relationships with their customers, greater brand or name recognition and greater financial, technical, marketing and public relations resources than we have. Our business will be adversely affected if we are unable to compete effectively.

 We compete on the basis of price, quality and brand recognition. If we are not competitive on pricing, our business and results of operations may be adversely affected. Any deficiencies in the quality of our MWT systems or the level of our service to our customers or any price war will also affect our business and results of operations. 

Dependency on the hospital and medical institution industry

 The principal customers for our MWT systems are hospital, medical institutions and waste disposal facilities in the PRC. Any adverse change in the outlook or growth of the hospital and medical institution industry in the PRC may adversely affect the demand for our MWT systems. Our business will also be adversely affected if we are unable to expand our customer base. 

Environmental protection laws and regulations

Daifu is required to comply with the environmental protection laws and regulations promulgated by the state and local governments of the PRC and the standards applicable to the discharge of waste water, solid waste, effluents and gases. These regulations impose penalties for noncompliance. The nature of our business is that waste water and wastes are regularly discharged from our production processes.

Our OEM partners have installed waste treatment facilities in their production facilities to treat the discharges. However, there can be no assurance that we will at all times be in full compliance with the laws and regulations. Any failure by us to discharge the waste generated in the production process in could subject us to warnings, fines or other penalties. If our business operations result in environmental pollution, we will also be obliged to cure the harm caused to the environment and pay compensation to the entity or individual that suffers direct losses from the pollution. These events may negatively affect our business.

In addition, the promulgation of any new environmental laws or regulations that require us to acquire equipment or incur additional capital expenditure will increase our costs and affect the profitability of our business. 

 

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RISKS RELATING TO THE PRC

Uncertainties in PRC economic conditions that may arise from changes in government policies and social conditions

Since 1978, the PRC government has undertaken various reforms of its economic systems. The reforms have resulted in economic growth for the PRC in the last two decades. However, many of the reforms are unprecedented or experimental, and are expected to be refined and modified. Other political, economic and social factors may also lead to further adjustments to the reforms. This refinement and readjustment of policies, laws, regulations or their interpretation or implementation create uncertainty in economic conditions that may materially and adversely impact our operations in the PRC or our financial performance. 

PRC laws and regulations

Our business and operations in the PRC are subject to the legal system of the PRC. The PRC legal system is a codified system with written laws, regulations, circulars, administrative directives and internal guidelines. A violation of these laws, regulations and the like by our PRC subsidiaries will subject them to prescribed penalties. The PRC government is still developing its legal system to meet the needs of investors and to encourage foreign investment. Further, the PRC economy is generally undergoing development at a faster pace than its legal system. These two facts create uncertainty about the applicability laws and regulations. Some of the laws and regulations, and their interpretation, implementation and enforcement are still developing, and subject to policy changes. Also, precedents on the interpretation, implementation and enforcement of the PRC laws and regulations are limited, and higher court decisions in the PRC do not have any binding effect on lower courts. Thus, the results of legal disputes may not be as consistent or predictable as in other more developed countries. It may also be hard to obtain quick and equitable enforcement of laws in the PRC, or to obtain enforcement of a judgment of a court of another jurisdiction. 

Compliance with the United States Foreign Corrupt Practices Act

Daifu is required to comply with the United States Foreign Corrupt Practices Act. This act prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. If our competitors engage in these practices, they may receive preferential treatment from governmental customers to give our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses. These practices would put us at a disadvantage. Although we inform our employees that such practices are illegal, we cannot assure that our employees or other agents will not engage in conduct that would violate the US Foreign Corrupt Practices Act. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties under the act. 

PRC foreign exchange control of dividends and other payments from our PRC subsidiary

 The applicable law in respect of the conversion of RMB into other currencies is the Regulation for Foreign Exchange Controls of the PRC (“Regulation”), which came into effect on 1 April 1996 and was amended as of 14 January 1997.

 Under the Regulation:

The conversion of RMB into foreign currencies for the use of recurring items, including the distribution of dividends and profits to foreign investors of foreign investment enterprises is permissible and foreign investment enterprises are permitted to remit foreign currencies from their foreign currency bank accounts in the PRC upon the presentation of board resolutions authorizing the distribution of profits or dividends, subject to other requirements being satisfied; and

The conversion of RMB into foreign currencies for capital items, such as repatriation of capital, repayment of loans and securities investment, is still under control.

In addition, in December 2006, the People's Bank of China promulgated the Administrative Measures for Individual Foreign Exchange, which set forth the respective requirements for foreign exchange transactions by PRC individuals under either current account or the capital account. In January 2007, the PRC State Administration for Foreign Exchange (“SAFE”) issued the Implementation Rules of the Administrative Measures for Individual Foreign Exchange, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen's participation in employee stock ownership plans or stock option plans of an overseas publicly-listed company. On March 28, 2007, SAFE promulgated the Processing Guidance on Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas-Listed Companies. PRC citizens who are granted stock options by an overseas publicly-listed company are required, through a qualified PRC domestic agent or PRC subsidiary of such overseas publicly-listed company, to register with SAFE and complete certain other procedures.

 

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Our PRC employees and shareholders are subject to the stock option rules and guidance. Our PRC employees and shareholders have yet to complete the registration process upon the completion of the merger. Failure to comply with the stock option rule and related rules will subject us or our PRC citizen employees participating in our stock incentive plan to fines and other legal or administrative sanctions Restrictions could be imposed on our execution of option plans, including the grant of options under the plans to our employees. The restrictions could adversely affect our ability to hire and retain employees. 

Effect on our financial performance of changes of PRC laws and regulations on currency conversion

Under the present unified floating exchange rate system, the People’s Bank of China publishes a daily exchange rate for the RMB based on the previous day dealings in the inter-bank foreign exchange market. Under this unified floating exchange rate system, fluctuations in the exchange rate of the RMB against other currencies are to some extent subject to market forces. Moreover, no assurance can be given that the RMB will not be subject to devaluation or depreciation from administrative or legislative intervention by the PRC government or adverse market movements. A devaluation of the RMB may adversely affect our cash flow position in the repayment of any foreign currency debt. Conversely, an appreciation of RMB could lead to a reduction in the prices of imported products that would adversely our competitiveness against foreign MWT systems imported to the PRC. 

Expected increase in competition following the PRC’s entry into the World Trade Organization (WTO)

The PRC has gained entry into the WTO. The entry may result in the lowering or elimination of trade tariffs and import controls on imports of foreign MWT products into the PRC may be lowered or removed. A reduction of import tariffs and barriers will tend to increase competition from competitive foreign MWT products. The increased competition may result in lower prices and profitability for daifu's MWT systems.

 

RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK

Our Directors, Substantial Shareholders and their associates, who will in aggregate own approximately 87% of our enlarged share capital and Common Stock equivalents (including the shares underlying the Rotoblock Warrants)., will retain significant control over our Company after the Share Exchange, which will allow them to influence the outcome of matters submitted to stockholders for approval. As a result, these persons, if they act together, will be able to exercise significant influence over all matters requiring stockholder approval, including the election of Directors and approval of significant corporate transactions, and will have veto power in respect of any stockholder action or approval requiring a majority vote. Such concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of our Company which may not benefit all stockholders.

There may not be sufficient liquidity in the market for our securities in order for investors to sell their securities

Rotoblock has currently only a limited public market for our Common Stock, which is listed on the Over-the-Counter Bulletin Board. No assurance can be given that a trading market will develop further or be maintained in the future.

The price of Rotoblock Common Stock may be volatile, which could result in substantial losses for stockholders

The market price of Rotoblock Common Stock may be highly volatile and could be subject to wide fluctuations in response to variations in operating results. These fluctuations may be exaggerated if the trading volume of the stock is low. In addition, the market price of the Rotoblock Common Stock may also rise and fall as a result of, among others, the following factors, some of which are beyond our control:-

 (i)                 the success of our management team in implementing business and growth Strategies;

(ii)               gain or loss of an important business relationship;

(iii)             changes in analysts’ recommendations or perceptions;

(iv)             changes in general economic conditions or stock market sentiments or other events or factors;

(v)               changes in share prices or prospects of companies with similar businesses as our Group that are listed in     Singapore or elsewhere; and broad stock market fluctuations.

Future sales of our common stock could adversely affect our share price

Rotoblock's directors and substantial shareholders collectively hold approximately 70.87% percent of Rotoblock's issued and outstanding Common Stock and Common Stock equivalents (including the shares underlying the Rotoblock Warrants). Any sale of Rotoblock Common Stock by our directors and substantial shareholders could cause the price of the Common Stock to fall and may thereby also affect our ability to raise funds through issuance of equities or other forms of securities.  Our securities are highly speculative and involve a high degree of risk, including among other items the risk factors described below. You should carefully consider the following risk factors and other information in this 10-K before deciding to invest in our securities.

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Item 1B. Unresolved Staff Comments

 None.

 

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

 

None

 

 

Item 3.  Defaults upon Senior Securities

 

None

 

 

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

 

None 

 

 

Item 5.  Other Information

 

At the present time we do not have a standing committee or a committee performing similar functions. In addition, at the present time, we do not have a defined policy or procedure for shareholders to submit recommendations or nominations for directors. We do not currently have any specific or minimum criteria for the selection of nominees to the Board of Directors and the Board does not have any specific process or procedure for evaluating such nominees. The Board of Directors assesses all candidates, whether submitted by management or shareholders and make recommendations for election or appointment.

 

 

Item 6.  Exhibits

 

(b) Exhibits.

Exhibit Number
  Description
     
31.1   Certification of Principal Executive Officer pursuant to Rule 13a-14/15d-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Principal Financial Officer pursuant to Rule 13a-14/15d-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: May 15, 2012 By: /s/ Andrew P. Schneider

Name: Andrew P. Schneider

Title: Chief Executive Officer (Principal Executive Officer).

Dated: May 15, 2012 By: /s/ Chow Chu Keung

Name: Chow Chu Keung

Title: Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 

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