Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Rotoblock CorpFinancial_Report.xls
EX-32.1 - SEC. 906 CERTIFICATION OF PEO - Rotoblock Corprtbc10qex32-1.htm
EX-32.2 - SEC. 906 CERTIFICATION OF PFO - Rotoblock Corprtbc10qex32-2.htm
EX-31.1 - SEC. 302 CERTIFICATION OF PEO - Rotoblock Corprtbc10qex31-1.htm
EX-31.2 - SEC. 302 CERTIFICATION OF PFO - Rotoblock Corprtbc10qex31-2.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 September 30, 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  

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

    20-08987999

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 November 9, 2012, there were 82,019,206 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 September 30, 2012 and December 31, 2011 1
     
  Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 2012 and 2011. 2
     
  Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 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 33
     
       Item 3. Quantative and Qualitative Disclosures about Market Risk 41
     
Item 4. Controls and Procedures 41
   
PART II. Other Information  
     
Item 1. Legal Proceedings 40
     
Item 1A. Risk Factors 40
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
     
Item 3. Defaults Upon Senior Securities 40
     
Item 4. Mine Safety Disclosures 40
     
Item 5. Other Information 41
     
Item 6. Exhibits 41
     
SIGNATURES   42

 

 

 

 

 

2
 

 

 

ROTOBLOCK CORPORATION      
       
CONDENSED CONSOLIDATED BALANCE SHEETS      
(In thousands,  except per share data)      
( Unaudited)      
       
ASSETS Note

 September 30 2012

December 31

2011

Current assets   $ $
Cash and cash equivalents   106,386  144,202 
Restricted cash   63,732  -
Accounts receivable   958,475  538,513 
Prepayments, deposits and other receivables 5 339,039  641,454 
Inventory 6 773,509  600,963 
Total current assets   2,241,141  1,925,132 
       
Non-current assets      
Property, plant and equipment 7 105,265  123,493 
Goodwill 1 3,480,852  3,480,852 
Investments in associates 8 293,590  293,590 
Available-for-sale investments 9 755,264  990,533 
Total non-current assets   4,634,971  4,888,468 
       
TOTAL ASSETS   6,876,112  6,813,600 
       
LIABILITIES      
Current liabilities      
Accounts payable and accrued liabilities 11 1,587,223  1,273,610 
Deferred revenue   626,550  651,117 
Due to related parties 12 1,012,074  410,000 
Convertible promissory notes 14 2,355,492  2,226,192 
Total current liabilities   5,581,339  4,560,919 
       
TOTAL LIABILITIES   5,581,339  4,560,919 
       
SHAREHOLDERS’ EQUITY      
Common stock 15 81,553  79,509 
Additional paid in capital   6,122,959  5,886,251 
Warrants 15 1,441,514  1,401,514 
Available-for-sale investments valuation reserve   (259,400) (24,131)
Accumulated other comprehensive income   79,293  72,667 
Deficit   (6,170,189) (5,162,176)
TOTAL SHAREHOLDERS’ EQUITY   1,295,730  2,253,634 
       
Non-controlling interests 16 (957) (953)
       
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   6,876,112  6,813,600 

 

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

- See Accompanying Notes - 

3
 

 


ROTOBLOCK CORPORATION
 
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
           
  Note

Three month period ended September 30 2012

Three month period ended September 30 2011

Nine month period ended September 30 2012

Nine month period ended September 30 2011

Revenue   $ $ $ $
Sales   727,858  5,640  1,342,954  844,054 
Cost of sales   (568,164) (10,447) (975,583) (654,854)
Gross profit   159,694  (4,807) 367,371  189,200 
           
Operating expenses          
Selling and distribution expenses   (94,754) (117,328) (288,100) (342,235)
Administrative and other operating costs   (270,291) (227,202) (1,019,382) (896,147)
Depreciation and amortization   (6,143) (3,048) (18,377) (9,018)
Loss from operations   (211,494) (352,385) (958,488) (1,058,200)
           
Other income 4 15,524  9,235  67,110  1,773,221 
Financial income and (expense)   (40,433) (1,194) (117,141) (2,367)
Interest income   120  343  502  1,024 
Income (loss)   (236,283) (344,001) (1,008,017) 713,678 
           
Non-controlling interests 16 -
           
Income (loss) for the period   (236,283) (344,000) (1,008,013) 713,682 
           
Comprehensive income (loss)          
Net income (loss) for the period   (236,283) (344,000) (1,008,013) 713,682 
Foreign currency translation adjustment   (760)

 

9,238

6,626  28,335  
Unrealized gain (loss) on available for sale investments   46,775  - (235,269) -
           
Comprehensive income (loss) for the period   (190,268) (334,762) (1,236,656) 742,017 
           
Income (loss) per share – basic and diluted (0.00) (0.00) (0.01) 0.01 
           
Weighted average shares outstanding – basic and diluted 81,387,432  73,801,525  80,679,937  72,991,247 
             

  - See Accompanying Notes -

 

4
 

 

ROTOBLOCK CORPORATION          
           
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
( In thousands, except per share data)        
(Unaudited)          
           
  Note

Three month period ended September 30, 2012

Three month period ended September 30, 2011

Nine month period ended September 30 2012

Nine month period ended September 30 2011

Cash Flows From (Used in) Operating Activities $ $ $ $
Income (loss) for the period   (236,283) (344,000) (1,008,013) 713,682 
Items not involving cash:          
 Depreciation and amortization   6,143  3,048  18,377  9,018 
 Non-cash interest   38,668  - 114,183  -
 Non-controlling interest 16 - (1) (4) (4)
 Shares issued for compensation 13,15 41,251  - 85,002  -
 Shares issued for consulting fees 15 47,395  - 150,518  -
 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   (92,327) 10,825  (417,287) 94,097 
Decrease/(increase) in inventory   105,885  (168,769) (169,971) (346,206)
Decrease/(increase) in other receivables and prepayments   246,116  182,027  308,733  614,772 
Increase/(decrease) in other payables and accrued liabilities   133,078  68,897  334,061  212,776 
Increase/(decrease) in deferred revenue   (528,488) 136,134  (26,501) (1,703,692)
Net cash from (used in) operating activities (238,562) (111,839) (570,902) (334,699)
           
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 - - - 100,000 
Advance from related parties   237,050  410,000  579,691  410,000 
Preferred stock redemption 13 - (4,310,000) - (4,310,000)
(Decrease)/increase in restricted cash   - 3,992,998  (64,022) 4,071,373 
Convertible promissory note 14 - - 17,000  -
Net cash from (used in) financing activities 237,050  92,998  532,669  271,373 
           
Effect of foreign currency translation on cash and cash equivalents 153  232  417  2,263 
           
Net decrease in cash and cash equivalents (1,359) (18,609) (37,816) (354,653)
Cash and cash equivalents – beginning of period 107,745  230,041  144,202  566,085 
Cash and cash equivalents – end of period 106,386  211,432  106,386  211,432 
                 

- See Accompanying Notes -

5
 
     
           
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
( In thousands, except per share data)        
(Unaudited)

                 
  Number of Common Shares

Common

Stock

Preferred

Stock

Additional

Paid-In

Capital

Warrants Available-for-sale investment valuation reserve Accumulated other comprehensive income Accumulated deficit Total
    $ $ $ $ $ $ $ $
Balance – December 31, 2010 66,665,853 960,731  318,875  7,781,014  - - 40,461 (5,926,561) 3,174,520 
                   
Issuance of shares for cash 6,939,076 100,000  - - - - - - 100,000 
Issuance of shares for settlement of debt 196,596 2,833  - 68,025  - - - - 70,858 
Redemption of preferred stock - - (318,875) (3,991,125) - - - - (4,310,000)
Share exchange between Rotoblock and daifuWaste 5,706,977 (984,055) - 2,028,337  1,401,514 - - - 2,445,796 
Net loss for the year - - - - - - - 764,385  764,385 
Unrealized gain (loss) on available for sale investment - - - - - (24,131) - - (24,131)
Foreign currency translation adjustment - - - - - - 32,206 - 32,206 
                   
Balance – December 31, 2011 79,508,502 79,509  - 5,886,251  1,401,514 (24,131) 72,667 (5,162,176) 2,253,634 
                   
Issuance of shares for services 2,045,145 2,044  - 236,708  - - - - 238,752 
Warrants granted for services - - - - 40,000 - - - 40,000 
Net loss for the period - - - - - - - (1,008,013) (1,008,013)
Unrealized gain (loss) on available for sale investment - - - - - (235,269) - - (235,269)
Foreign currency translation adjustment - - - - - - 6,626 - 6,626 
                   
Balance – September 30, 2012 81,553,647 81,553  - 6,122,959  1,441,514 (259,400) 79,293 (6,170,189) 1,295,730 

 

- See Accompanying Notes -

6
 

 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (Unaudited)


Note 1. Nature and Continuance of Operations

Rotoblock Corporaiton (“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 officer 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 was instead 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 Holding Ltd, (“daifu”), a Cayman Islands company, via Share Exchange Agreement (“Share Exchange Agreement”). Pursuant to the Share Exchange Agreement, the shareholders of daifu transferred 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.

 

 

7
 

 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (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 the 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 Investment”), 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 interim consolidated financial statements as at September 30, 2012 and for the nine 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 $1,008,013 for the nine month period ended September 30, 2012 (September 30, 2011 – net income of $713,682) and has a working capital deficiency of $3,340,198 at September 30, 2012 (December 31, 2011 – $2,635,787).

 

8
 

 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (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 interim 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 interim 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 September 30, 2011 represents the financial performance of daifu (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.

9
 

 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (Unaudited) 


 

Note 4. Other Income

Other income as at September 30, 2012 and 2011 consists of the following: 

 

Three month period ended September 30 2012

Three month period ended September 30, 2011

Nine month period ended September 30 2012

Nine month period ended September 30 2011

  $ $ $ $
Sundry income 993 (832) 16,483 1,743,384
Management fee income 14,531 10,067  50,627 29,837
         
  15,524 9,235  67,110 1,773,221

 

During the nine month period ended September 30, 2011, daifu recorded sundry income of $1,743,384 upon forfeiture of advance payments received from customers in previous years.

Note 5. Prepayments, Deposits and Other Receivables 

Prepayments, deposits and other receivables as at September 30, 2012 and December 31, 2011 consist of the following: 

 

September 30 2012

December 31 2011

  $ $
Temporary prepayments - 38,610
Deposits to suppliers 82,123 349,101
Contract guarantee deposits 218,050 208,319
Premises and sundry deposits 35,634 25,206
Advances to employees/consultants 3,232 20,000
Harmonized sales tax receivable - 218
     
  339,039 641,454

 

Note 6. Inventory 

Inventories as at September 30, 2012 and December 31, 2011 consist of the following: 

 

September 30 2012

December 31 2011

  $ $
Raw materials 773,509 600,963

 

10
 

 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (Unaudited) 


 

Note 7. Property, Plant and Equipment 

   

Accumulated depreciation

 
  Cost

September 30 2012

December 31 2011

  $ $ $ $
         
Equipment 52,940 23,620 29,320 34,500
Vehicles 137,291 62,608 74,683 87,880
Effect of foreign exchange on fixed asset balances 2,710 1,448 1,262 1,113
         
  192,941 87,676 105,265 123,493

 

During the nine month period ended September 30, 2012, total additions to property, plant and equipment were $nil (December 31, 2011 – $nil).  During the nine month period ended September 30, 2012, total dispositions of property, plant and equipment were $nil (December 31, 2011 - $nil).

Note 8. Investments in Associates

   
 

September 30 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 was expected to start business in the 2nd quarter of 2012. However, due to delay of utilities supply, the Joint Venture is expected to start business once the government approval is granted.

Note 9. Available-for-sale Investments 

      Fair Value
  Cost Unrealized Gain/(Loss)

September 30 2012

December 31 2011

  $ $ $ $
977,966 common shares of Samyang Optics Co., Ltd. 1,014,664 (259,400) 755,264 990,533

 

11
 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (Unaudited) 


 

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 with the initial value of $1,000,000 and $1,014,664 at the time of the acquisition (Note 1). 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.

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 September 30, 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 September 30, 2012 and December 31, 2011 consist of the following: 

 

September 30 2012

December 31 2011

  $ $
Value added taxes (“VAT”) payable 174,222 102,795
Trade payables 72,403 72,235
Accrued liabilities 323,840 228,051
Director remuneration 1,016,758 870,529
     
  1,587,223 1,273,610

 

Note 12. Due to Related Parties 

Due to related parties as at September 30, 2012 and December 31, 2011 consist of the following: 

 

September 30 2012

December 31 2011

  $ $
American Pacific Medical Group Limited 458,024 410,000
daifuMD Internet Information Service Ltd., Co. (SZ) 79,150 -
Physician Medical Technology (Shenzhen) Co. Ltd. 474,900 -
  1,012,074 410,000

 

During the year ended December 31, 2011, $410,000 was borrowed from a related party for redemption of outstanding preferred stock of daifu. The amount earns interest at 7% per annum. A further $25,641 was borrowed during the nine month period ended September 30, 2012, with an annual interest rate of 7%. During the nine month period ended September 30, 2012 a total of $22,383 of interest has been accrued on the liability.

 

12
 

 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (Unaudited) 


 

During the nine month period ended September 30, 2012, $ 554,050 cash was temporarily advanced from two related parties to daifu for operating use. This amount is unsecured, non-interest bearing and is repayable on request.

Note 13. Related Party Transactions

During the nine month period ended September 30, 2012, the Company paid/accrued $34,530 (September 30, 2011 - $nil) and issued 1,067,145 shares, par value $0.001 per share, valued at $85,002 (September 30, 2011 - $nil) to the Company’s Chief Executive Officer, (“CEO”) as payment of salary and bonus. 

During the nine month period ended September 30, 2012, daifu paid/accrued $147,816 to directors for salaries and wages. (September 30, 2011 - $323,528). 

During the nine month period ended September 30, 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 is 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). A further $25,641 was borrowed during the nine month period ended September 30, 2012 for use in operations. During the nine month period ended September 30, 2012, a total of $22,383 of interest payable has been accrued on the liability. 

During the nine month period ended September 30, 2012, $554,050 cash was temporarily advanced from two related partes to daifu for operating use. This amount is unsecured, non-interest bearing and is repayable on request.

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 Convertible Promissory Note as at September 30, 2012 consists of principal and accrued interest of $2,000,000 and $316,274, respectively (December 31, 2011 - $2,000,000 and $226,192, respectively). 

b)On March 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 other payables and accrued liabilities 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 balance of the Promissory Note as at September 30, 2012 consists of principal and accrued interest of $37,500 and $1,718, respectively.

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 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 September 30, 2012, $732 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. 

13
 

 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (Unaudited) 


 

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. 

On April 10, 2012, the Company issued 120,000 shares, par value $0.001 per share, to a consultant of the Company as payment for consulting fees valued at $30,000. As at September 30, 2012, $2,500 was included in prepayments. 

On May 1, 2012, the Company issued 117,001 shares, par value $0.001 per share, to an officer of the Company as payment of salary and bonus valued at $10,917. 

On May 17, 2012, the Company issued 28,000 shares, par value $0.001 per share, to a consultant of the Company as payment for consulting fees valued at $7,000. 

On May 30, 2012, the Company issued 125,001 shares, par value $0.001 per share, to an officer of the Company as payment of salary and bonus valued at $12,917. 

On June 1, 2012, the Company issued 300,000 shares, par value $0.001 per share, to two consultants of the Company as payment of consulting fees valued at $39,000. 

On June 21, 2012, the Company issued 75,000 shares, par value $0.001 per share, to two consultants of the Company as payment of consulting fees valued at $12,750. 

On June 27, 2012, the Company issued 125,001 shares, par value $0.001 per share, to an officer of the Company as payment of salary and bonus valued at $12,917. 

On August 1, 2012, the Company issued 208,334 shares, par value $0.001 per share, to an officer of the Company as payment of salary and bonus valued at $15,417. 

On September 7, 2012, the Company issued 125,001 shares, par value $0.001 per share, to an officer of the Company as payment of salary and bonus valued at $12,917. 

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 the 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 the 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 its common stock for future issuances to consultants, employees, attorneys, officers and directors. As at September 30, 2012, 878,000 shares have been issued under the plan. 

Share Purchase Warrants 

On January 20, 2012, the Company granted 1,000,000 warrants to the Company’s Chief Executive Officer as part of the his compensation package. The warrants entitle the Chief Executive 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.

14
 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (Unaudited) 


 

The following share purchase warrants were outstanding as at September 30, 2012: 

  Exercise price

Number of warrants

Remaining contractual life (years)

  $    
Warrants 7.50 20,000 0.50
Warrants 7.50 16,000 0.64
Warrants 12.50 3,333 0.76
Warrants 0.25 25,000 1.79
Warrants 0.25 25,000 1.81
Warrants 0.50 200,000 1.81
Warrants 2.50 57,144 1.81
Warrants 0.25 2,181,750 2.37
Warrants 1.00 50,000 2.37
Warrants 0.25 333,333 2.41
Warrants 1.00 300,000 2.46
Warrants 0.25 12,000 2.53
Warrants 0.25 1,000,000 4.31
Warrants 0.25 6,000,000 7.47
       
    10,223,560  

 

The following is a summary of warrant activities during the nine month period ended September 30, 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
Expired (7,600) 12.50
     
Outstanding and exercisable at September 30, 2012 10,223,560  0.32
     
Weighted average fair value of warrants granted during the year   0.04

 

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       -

 

Restricted Common Shares 

As at September 30, 2012, a total of 81,553,647 common shares are outstanding. Of these, 76,881,351 were restricted from trading as defined under Rule 144 of the United States Securities Act of 1933.

 

15
 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (Unaudited) 


 

Note 16. Non-Controlling Interest 

daifu has a non-controlling interest in one of its subsidiaries. The balance of the non-controlling interests as at September 30, 2012 and December 31, 2011 are as follows: 

Subsidiary   Non-Controlling Interest

September 30 2012

December 31 2011

      $ $
Hydroclave China Inc.   5% (957) (953)
         
    5% (957) (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 September 30, 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 September 30, 2012, the Company is still 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 September 30, 2012, should Samyang exercise its option under the Convertible Promissory Note Agreement, the Company would be required to issue 2,105,704 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.

 

As at September 30, 2012, should Asher exercise its option under the Asher Agreement, the Company would be required to issue 845,211 common shares in settlement of its obligation. 

(d) The Company appointed a new Chief Executive Office (“CEO”) on January 20, 2012, with an employment agreement term effective for 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, 749,997 have been issued as at September 30, 2012.

 

16
 

 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (Unaudited) 


  

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.

 

Nine month period ended

September 30, 2012

PRC BVI Other Total
  $ $ $ $
Revenues and other income 1,354,437  5,000  50,627  1,410,064 
Cost of sales and other expenses (1,478,233) (184) (939,660) (2,418,077)
Capital assets 14,571  - 90,694  105,265 
Goodwill - - 3,480,852  3,480,852 
Total assets 2,236,327  1,237  4,638,548  6,876,112 

 

Three month period ended

September 30, 2012

PRC BVI Other Total
  $ $ $ $
Revenues and other income 728,851  - 14,531  743,382 
Cost of sales and other expenses (729,284) (18) (250,363) (979,665)

 

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

 

Nine month period ended

September 30, 2011

PRC BVI Other Total
  $ $ $ $
Revenues and other income 860,368  1,727,070 29,837  2,617,275 
Cost of sales and other expenses (1,243,681) 524 (660,436) (1,903,593)

 

Three month period ended

September 30, 2011

PRC BVI Other Total
  $ $ $ $
Revenues and other income 5,749  (941) 10,067  14,875 
Cost of sales and other expenses (207,380) - (151,495) (358,875)

 

 

17
 

ROTOBLOCK CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2012 (Unaudited) 


 

Note 19. Financial Instruments 

The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, and convertible promissory notes 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 accounts receivable. The Company deposits cash and cash equivalents with high credit quality financial institutions as determined by rating agencies. 

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. 

(b)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 interim 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 $7 higher ($7 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 $13,155 higher ($13,155 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 $3,803 higher ($3,803 lower). 

(c)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.  

(d)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. 

18
 

 

 

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

This quarterly report of Form 10Q for the third quarter, 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.

 

Recent Developments

We have approximately ten project installations that are in various stages  from completed with operational testing underway to those currently under construction.  These installations for medical waste treatment are located in the following provinces of China : Sichuan ,Guangdon and Guangxi. 

Results of Operations

 

The following table sets forth, as a percentage of net sales, certain items included in Rotoblock’s Statements of Operations (see Financial Statements and Notes) for the periods indicated:

 

   

Three Months

ended September 30

   

Nine Months

ended September 30

 
    2012     2011 (1)     2012     2011  
Statements of Operations Data:                        
Net sales     100.0  %     100.0  %     100  %     100  %

Cost of sales

 

 

    (78.1)       (185.2)       (72.6)       (77.6)  
Operating expenses     (51.0)       (616.3)       (98.7)       (147.8)  
Loss from operations     (29.1)       (624.8)       (71.4)       (125.4)  
Net Income (loss)     (32.5)       (609.9)       (75.1)       84.6   

 

(1)The percentages are unusually high for the 3 months ended September 30, 2011 since only minimal revenue was able to be recognized during the period.

 

  

19
 

 

Quarter Ended September 30, 2012 Compared to Quarter Ended September 30, 2011

 

Note: Only minimal revenue was able to be recognized in the 3 month period ended September 30, 2011 while the operating expenses were comparative to other Periods. 

 

Sales increased by $722,218 from 5,640 for the quarter ended September 30, 2011 to $727,858 for the quarter ended September 30, 2012. The increase was due to completion of a major installation project with high capacity equipment.

 

Cost of Goods Sold increased by $557,717 from $10,447 for the quarter ended September 30, 2011 to $568,164 for the quarter ended September 30, 2012. The increase was due to the above product costs associated with the above major installation.

 

Gross profit increased by $164,501 from a gross loss of $4,807 for the quarter ended September 30, 2011 to $159,694 for the quarter ended September 30, 2012.  The increase was primarily due to recognition of the above mentioned major installation. As a percentage of sales, the Gross Profit for the quarter was 22% for 2012. 

Selling and distribution expenses decreased by $22,574 from $117,328 for the quarter ended September 30, 2011 to $94,754 for the quarter ended September 30, 2012. The reason for the decrease was due less expenses for sales related travel. 

Administrative and other operating costs increased by $43,089 from $227,202 for the quarter ended September 30, 2011 to $270,291 for the period ended September 30, 2012. The increase was primarily due to the inclusion of Rotoblock U.S. corporate for the second quarter ended September 30, 2012. Since the merger did not occur until November 2011. The Company incurred additional expenses for the following: legal and professional fees, consulting expenses. The actual Administrative and Other operating costs for the Company’s China and Hong Kong operations were less due to fewer employees during the quarter ended September 30, 2012 as compared to 2011. 

Depreciation increased by $3,095 from $3,048 for the quarter ended September 30, 2011 to $6,143 for the quarter ended September 30, 2012. The increase was mainly due to the acquisition with Rotoblock U.S. office for its office equipment and vehicle. 

Other income increased by $6,289 from $9,235 for the quarter ended September 30, 2011 to $15,524 for the quarter ended September 30, 2012. The other income generated for the current quarter is mainly due to service income and maintenance income for medical waste equipment. 

Financial expense increased by $39,239 from $1,194 for the quarter ended September 30, 2011 to $40,433 for the quarter ended September 30, 2012. The increase was mainly due to interest on loan with a related party of American Pacific Medical Group Limited for $435,641 at 7% p.a. payable of $7,665 Interest on Samyang Optics Convertible Debt for $2 millions at 6% p.a. payable of $30,247 interest on Asher Enterprises Inc. Convertible Debt for $37,500 at 8% p.a. payable of $756. 

Interest Income decreased slightly from $343 for the quarter ended September 30, 2011 to $120 for the quarter ended September 30, 2012 due to less cash balances in the bank accounts subject to interest. 

Net Loss for the quarter ended September 30, 2012 was $236,283 compared to $344,000 for the period ended September 30, 2011. 

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011 

 

Sales increased by $498,900 from $844,054 for the nine months ended September 30, 2011 to approximately $1.3 million for the nine months ended September 30, 2012. The increase was due to three installations completed during the first nine months of 2012 as compared to two completed in 2011. 

 

Cost of Goods Sold increased by $320,792 from $654,854 for the nine months ended September 30, 2011 to $975,583 for the nine months ended September 30, 2012. The increase was due to the additional installation completed in 2012. As a percentage of sales, the products costs were 72.6% and 77.6% for 2012 and 2011, respectively. 

Gross profit increased by $178,171 from $189,200 for the nine months ended September 30, 2011 to $367,371 for the nine months ended September 30, 2012.  The increase was due to improvements in cost control, where the sales margins increased from 22% to 27% for the nine months ended September 30, 2012 and for the nine months ended September 30, 2011 respectively. 

Selling and distribution expenses. Decreased by $54,135 from $342,235 for the nine months ended September 30, 2011 to $288,100 for the nine months ended September 30, 2012. The reason for the decrease was less travel expenses and improved cost controls over technical and distribution expenditures. 

 

20
 

 

Administrative and other operating costs increased by $123,235 from $896,147 for the nine months ended September 30, 2011 to approximately $1 million for the nine months ended September 30, 2012. The increase was primarily due to the inclusion of Rotoblock U.S.corporate for the nine months ended September 30, 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. The actual expenses for the Company’s China and Hong Kong operations were less due to the reduction of staff, with less travel expenses and professional fees incurred in China. 

Depreciation increased by $9,359 from $9,018 for the nine months ended September 30, 2011 to $18,377 for the nine months ended September 30, 2012. The increase was mainly due to the acquisition with Rotoblock U.S. Corporate for its office equipment and vehicle. 

Other income decreased by approximately $1.7 million from $1.7 million for the nine months ended September 30, 2011 to $67,110 for the nine months ended September 30, 2012. Other income of $1.7 million in 2011 was primarily due to the cancellation of two sales contracts by customers where the installation deposits of approximately $1.7 million were forfeited to us. 

Financial expense increased by $114,774 from $2,367 for the nine months ended September 30, 2011 to $117,141 for the nine months ended September 30, 2012. The increase was mainly due to the following: interest on loan with a related party of American Pacific Medical Group Limited for $435,641 at 7% p.a. payable of $22,383, interest on Samyang Optics Convertible Debt for $2 millions at 6% p.a. payable of $90,082, interest on Asher Enterprises Inc. Convertible Debt for $37,500 at 8% p.a. payable of $1,718. 

Interest Income Decreased from $1,024 for the nine months ended September 30, 2011 to $502 for the nine months ended September 30, 2012. The decrease is due to be less cash deposit into the saving account and escrow account. 

Net Income (Loss ) The net loss for the nine months ended September 30, 2012 was approximately $1 million compared to a Net Income of $713,682 for the nine months ended September 30, 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. 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, our investment in securities with Samyang Optics, Ltd of $755,264. As of September 30, 2012, we had a loan of $458,024 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. We also have convertible debt for $39,218 with Asher Enterprises Inc with interest rate at 8% per annum. During the first nine months of 2012, we received loans of $474, 900 from Physican Medical Technology (Shenzhen) Co. Ltd and $79,150from daifu MD Internet Information Services Ltd.. Both lenders are related to daifuWaste Group and are unsecured and non-interest bearing and are repayable on request.

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. 

We used cash in operations of $570,902 and of $334,699 during the nine months ended September 30, 2012 and 2011 respectively.

Cash used in operations during the first nine months ended September 30, 2012 was the result of the net loss incurred for the periods of approximately $1 million, offset by non-cash expenses of $331,576. In the first nine months 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. 

 

21
 

 

Cash used in operations for the first nine months ended June 30, 2011 was the result of the net profit of $713,682, offset by non-cash expenses of $79,876. In the first nine months of 2011, non-cash expenses were due to depreciation and amortization, non-controlling interest and stock based compensation for certain equity instruments. 

For the first nine months ended September 30, 2012, the net change in operating assets and liabilities resulted in a cash increase of $290,350. The change was primarily due to the following: an decrease of $26,501 in deferred revenue, an increase of $308,733 in other payables and accrued liabilities as a result of executive pay, legal and accounting fee with offset a decrease in VAT Taxes, an increase of $417,287 in accounts receivable and an increase of $169,971 in inventory, offset by an decrease of $308,733 in prepayments and other receivables. 

For the first nine months ended September 30, 2011, the net change in operating assets and liabilities resulted in a cash decrease of approximately $1.1 million The change was primarily due to the following: a decrease of $1.7 million in deferred revenue which was recognized into income, an increase of $212,776 in other payables and accrued liabilities mainly for executive pay, a decrease of $94,097 in accounts receivable and a decrease of $614,772 in payment to suppliers, offset by an increase of $346,206 in inventory. 

Investing activities used cash of $0 for the first nine months ended September 30, 2012, however, cash of $293,590 was used in the first six months ended June 30, 2011, to acquire a 35% share interest in a MWT center in Qinghai Province. The center was expected to start business in the last quarter of 2012. However, due to delay of utilities supply, it is expected to start business once the government approval is granted. 

Financing activities provided cash of $532,969 for the first nine months ended September 30, 2012 and provided cash of $271,373 for the first nine months ended September 30, 2011. In the first nine months ended September 30, 2012, we received cash of $17,000 through the issuance of convertible debt and used $64,022 of cash to deposit in a restricted cash account to ensure certain project performances. Also we received $579,991 in unsecured loans from two related parties of daifuWaste Group for operating use. 

In the first nine months of 2011, we received total cash of $271,373 due to the following: the exercise of stock options of $100,000 and the release of previously restricted cash of $4.1 million and advances from related parties of $410,000. The cash inflows were offset by the use of $4.3 million to settle the redemption of preferred stock in our 100% subsidiary daifuWaste Management Holding Ltd. 

We had cash and cash equivalents of $106,386 at September 30, 2012 as compared to $144,202 at December 31, 2011. We had working capital deficits of $3.3 million and $2.6 million at September 30, 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

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.

 

 

22
 

 

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 September 30, 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 first nine months ended September 30, 2012, the Company did not make any allowance for slow-moving or defective inventories.

 

 Off-Balance Sheet Arrangements

 

None.

 

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 third quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

23
 

 

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

We are not a party to any pending legal proceedings.

 

 Item 1A. Risk Factors

 

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 third quarter ended September 30, 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 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.

24
 

 

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. 

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.

25
 

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.

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. At present, our customer base is very small, less than fifteen in various stages of planning and installation. 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.

 

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.

26
 

We depend heavily on key personnel.

Our future business and results of operations depend on the our key technical and senior management. 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. 

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. 

 

27
 

 

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. 

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

28
 

 

 

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.

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. 

 

29
 

 

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.

Item 1B. Unresolved Staff Comments

None.

 

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

 

None.

 

30
 

 

Item 3.  Defaults upon Senior Securities

 

None.

 

 

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

 

None. 

 

 

Item 5.  Other Information

 

On November 1, 2012, the Board of Directors accepted the resignation of Michael Hon Choi Choy as a Director and Chairman. He will continue to assist the Company in a consulting role. Mr. Chien Chih Lui has been appointed the new Chairman. Mr, Lui has been a Director of the Company since November of 2007 and was the former Chief Executive Officer.

 

On November 1, 2012, Ms. Jie Yin, the current Chief Operating Officer was appointed as a new Director of the Company. On the same date, Mr. Freddy Gorman Yu Ting Chong resigned as President of the Company.

 

At the present time we do not have a standing committee or a committee performing similar functions. In addition, 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.

  

 

31
 

 

 

 

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: November 12, 2012

By: /s/ Andrew P. Schneider

Name: Andrew P. Schneider

Title: Chief Executive Officer (Principal Executive Officer)

 

Dated: November 12, 2012

By: /s/ Chow Chu Keung

Name: Chow Chu Keung

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