Item 1. Business
Overview
Rotoblock Corporation was incorporated in the State of Nevada on March 22, 2004. We were formed to engage in the development and licensing of an Oscillating Piston Engine (OPE).
As disclosed in our report on Form 8KA filed November 15, 2011, and as subsequently amended, Rotoblock and the shareholders of daifu Waste Management Holding Limited ( “Daifu”) entered into an Amended and Restated Agreement and Plan of Share Exchange dated November 11, 2010 (Share Exchange Agreement”) pursuant to which the Daifu shareholders transferred 100% of the outstanding shares of Daifu to Rotoblock in exchange for the issuance of 73,801,525 shares of Rotoblock’s common stock to the Daifu Shareholders.
We maintain our corporate administrative office in Santa Rosa, California, at 300 B Street, Phone 707-578-5220. There are also two small operational offices, one in Hong Kong and one in Beijing.
As a result of the Share Exchange Agreement, our business now includes the operations of Daifu, PHKJ, Daifu’s People’s Republic of China subsidiary. PHKJ designs, develops and sells medical waste treatment non-incinerator systems in China.
Our current corporate structure is set forth below:
Our Overall Business
We are currently involved in the development, licensing and marketing of a new type of patented oscillating piston engine “OPS” and other energy-efficient and environmental equipment in China (PRC) for distribution worldwide. The Company is also seeking to become the leading medical waste management company in the People’s Republic of China ( “PRC”) with the recent acquisition of Daifu.
Rotoblock Oscillating Piston Engine Technology (OPE)
The Company is focused on the development and manufacturing of a new type of patented oscillating piston engine “OPS” and other energy-efficient and environmental equipment in China for distribution worldwide.
The OPE patented internal combustion engine is different than conventional reciprocating engine technology in that the current oscillating piston design incorporates four pairs of pistons and subassemblies.
Each sub-assembly can be easily removed from the engine, allowing for rapid factory assembly and easy replacement or field servicing. We believe this feature should permit the engine to be totally field maintainable, to the degree that a major overhaul should be able to be completed by a qualified mechanic using only conventional hand tools in just a few hours. The simple design of the engine should also help reduce the costs of manufacturing because of the reduced parts count. In addition, the elimination of a valve train and liquid cooling system components in the oscillating piston engine design should lessen the engine's complexity, which could further reduce costs to achieve overall engine efficiency.
Departure from conventional engine design, resulting in fewer moving parts, has allowed us to produce an engine with reduced frictional losses, which if proven in testing, could lead to increased reliability, improved performance and longer engine life. As is typical with mechanical systems, simplicity is the key to a successful design. In keeping with this philosophy, the OPE engine uses standardized components, common to the industry, wherever possible.
Versatility of Use
The OPE engine has been specifically designed to maximize versatility of use. The engine's extreme horsepower to weight ratio, when finally tested and proven, could lend itself useful to a wide variety of both industrial and consumer applications. The advantage of having high power-to-weight ratio and air-cooled design fits perfectly with the specialized requirements of many recreational vehicles and portable power tools. Here, engines in the range of several hundred to several thousand horsepower are employed to power electric generators, pumps and compressors, as well as a wide variety of other industrial and agricultural types of machinery.
Environmental Impact
The OPE design is totally valve-less. As such, there are no moving intake or exhaust valves to limit combustion temperature, as with typical internal combustion engines. If we are successful in developing an operational engine on this basis, it would allow the engine to be operated with a leaner fuel/air mixture and a consequent higher combustion temperature. The result would be increased Carnot cycle efficiency when used with gasoline or similar hydrocarbon fuels. Carnot cycle efficiency is the ratio of the output work to the input heat. Leaner mixture and higher combustion temperature promotes more complete oxidation of the burning fuel, which would reduce carbon monoxide emission, while increasing efficiency and reducing fuel consumption for a given equivalent power output.
The Company is concentrating on licensing the OPE technology to available markets. Concurrently, the Company is inviting new technologies that may be used in conjunction with the OPE in order to be able to eventually offer complete propulsion and/or power generating systems to the market.
The Company’s marketing efforts are focused on selling manufacturing licenses or rights to use the technology. Sale of the technology rights would be preferred, as the administration and enforcement of licensing agreements can be very complex and costly.
The Company considers it important that a new engine concept be introduced in a low-key manner and in applications that are not mission-critical in order to build a reputation of reliability over time. We are pursuing a marketing strategy that primarily targets manufacturers of general purpose engines and secondarily, manufacturers of engines used in recreational vehicles, such as outboard motors and other weight critical uses. To date, we have determined that several large companies, such as Honda, Briggs & Stratton, Tecumseh, Kawasaki, Kohler and Stihl, dominate the industry. We are focusing our marketing efforts on these six largest manufactures of general purpose engines. The manufacturers produce engines for a large variety of applications, including portable chain saws, weeding machines, portable turbo generators, portable crushers, portable arc welders and generators, snow blowers, lawn mowers and air and gas compressors, among others. Because of the anticipated high power to weight ratio and the intensive battle for market share, we are hopeful that we will be successful in convincing one or more of these and other not so well known small engine manufacturers to include our OPE technology in their product offerings.
Articles in appropriate trade journals, prominent newspapers and direct marketing campaigns will be used to promote the OPE technology. We will also send out special invitations, solicit inquiries and encourage visits our laboratory and testing facilities for the purpose of demonstrating the engine and its technology to potential customers to demonstrate the engine and its unique technology, educate the potential buyer/licensee and establish essential relationships.
We also plan to expand our marketing efforts to the marine outboard motor industry, as well as other small engine applications used in the recreational and other markets, such as snowmobiles, small water craft such as Seadoos and all-terrain vehicles. We are confident that a high power to weight ratio engine, similar to our proposed product design will fit into a large area of applications. We are also seeking strategic business partners to manufacture and market the OPE.
Daifu
General
Daifu is a holding company that only operates through our direct Chinese subsidiary. Through our Chinese subsidiary, we design, develop, manufacture and sell medical waste treatment (“MWT”) non-incinerator systems in China. We market, sell and service our 5 series of “海卓科 (HAI ZHUO KE)” branded medical waste treatment systems in China. There are over 10 sets of systems in operation in China currently. Our client bases are hospitals and non-hospital medical institutions in China, including No. 302 Hospital in Beijing, a leading hospital in China. We also donated a mobile MWT system to Sichuan province, the most populous province in China, after the May 2008 earthquake.
Daifu’s goal is to become the leading medical waste management company in China, by leveraging our existing leadership position as a medical waste technology provider to expand the company from a solution provider to service-solution provider.
Daifu has started to expand to servicing by investing and acquiring centralized medical waste treatment centers in China. We are prepared to make additional investments in medical waste treatment centers after becoming a public company with access to more funding sources.
Daifu Products
Daifu markets sells and services its 5 series of “海卓科 (HAI ZHUO KE)” branded medical waste treatment (MWT) non-incinerator system in China. The MWT system we manufacture and sell is based on the licensed technology from Hydroclave Systems Corp. (“Hydroclave Canada”), a Canadian company that specializes in MWT and Special Waste
Treatment (“SWT”). The systems works under high-pressure and high-temperature environment and use steam to sterilize and disinfect the medical waste materials. The medical waste is also shredded into small proportions during the treatment. After the treatment, the medical waste is non-recognizable and harmless and ready for landfill. The daifu technology has the advantages of high-efficiency, environment-friendly and low operation and maintenance cost. Also, the daifu system is in full compliance with the specification and emission requirements issued by World Health Organization (WHO) and “The Technical Specifications Regarding the High-Temperature Steam Centralized Treatment of Medical Waste”, issued by China Ministry of Environment Protection (MEP).
Daifu Product Series
The MWT non-incinerator system has the following series, capacity and applications:
We have registered the trademark of “海卓科 (HAI ZHUO KE)” with the Trademark Office of the State Administration for Industry and Commerce of China. Daifu uses the trademark for the sales and marketing of our products. Our trademark expires in May 2013 and may be renewed thereafter.
Working Principle of Our Daifu Products
The “海卓科 HAI ZHUO KE)”-branded MWT non-incinerator system applies high-temperature and high-pressure steam to treat all kinds of medical waste materials. To achieve the goal of thorough and even sterilization of infectious waste material, we applied 2 principles when designing our systems:
· The waste is treated in a continual mixing and fragmenting hot vessel, to ensure that all waste particles from small needles to bulk liquid infectious wastes are subjected thoroughly and evenly to a heat temperature that kills micro organisms;
· Instead of exposing the medical waste to be treated to direct steam, indirect steam is used. The indirect steam ensures uniform heat and allows the waste to generate its own steam from its moisture. The indirect process also greatly reduces emission of hazardous materials into the air.
Components of the Daifu System
The Daifu MWT system is usually made up of the following components:
Sterilizer
The system is the main component. The sterilizer sterilizes the waste with high temperature and pressure and simultaneously fragments and dries the waste to reduce significantly the weight and volume of the waste.. The sterilize has 2 different styles: 1) front loading systems and 2) top loading systems.
Boiler
The boiler generates the high temperature steam used in the sterilizer. The boiler can be operated using various fuel types based on availability and customer preferences. The most common fuels are oil, natural gas, propane, coal or diesel. Steam from the boiler can also be used to heat water for the Container Cleaning System.
Conveyor
The conveyer moves the treated waste from the sterilizer to the shredder and to a compactor or a collection container or truck. The conveyors are custom designed and built to suit the specific installations.
VOC Waste Gas Filter System
The filter system is an important component that condenses and filters the pressurized gases generated during treatment of the medical waste in the sterilizer. Volatile organic compounds (“VOCs”) are produced during the high temperature treatment and must be filtered before being released to the atmosphere. This specially engineered system ensures that these gases are cooled below 40°C and filtered to release environmentally non-harmful emissions to the atmosphere.
Shredder
The shredder (or grinder) is used to further reduce the size of the waste fragments after the treatment cycle. The waste is already fragmented and considerably reduced in size within the sterilizer’s treatment cycle. However, some local regulations or landfill operators require additional shredding to ensure the fragments are “unrecognizable” to prevent reclamation of any waste residues.
Container Cleaning System
The cleaning system is automated and is used to clean the soiled waste bins that are used to transport the waste to the facility from the hospitals or other sources. A chain conveyor method conveys the soiled waste bins through a series of high pressure hot water sprays and then through another series of sprays that chemically sanitize the containers. The excess water is blown off to dry the waste bins before they are shipped back to customers for reuse.
Control Panel
The control panel fully automates the system by using state-of-the-art logic controllers and a large touch screen. The panel is designed for ease of use and requires minimal operator training. Smaller remote panels can be used for ease of access by connection to the main control panel. The system logs all treatment cycle data and is accessible via the internet, making data retrieval convenient and allowing technicians to troubleshoot remotely.
Technical Advantages of Our System
Compared to other MWT techniques, such as incinerator, microwaving and heat-pressure, the Daifu system has the following advantages:
· Zero-emission of Dioxin, the most toxic elements often found in medical wastes treatment;
· The sterilization result passes the industrial standard of LOG4 (for which the survival probability rate after-treatment is 1:10,000), reaching LOG6 (for which the survival probability rate is 1:1,000,000) to LOG8 (for which the survival probability rate is 1:100,000,000);
· The steam generated can be recycled and reused, thus saving energy and cost;
· Low operating and maintenance cost and low emission;
· Complete automated operation, ensuring safety;
· No emission of any toxic, hazardous and infectious substances into the air;
· Greatly reduce the volume and weight of disposable post-treatment waste.
Manufacturing
Currently Daifu has OEM agreements for the manufacture of its system through our third-party partners, including Tianjin Huatai Pressure Container Corporation Ltd. (“Tianjin Huatai”) and Zhejiang Muopeng Machinery Corporation, Ltd (“Zhejiang Muopeng”). Tianjin Huatai is mainly responsible for the manufacturing of the sterilizer. Zhejiang Muopeng is mainly responsible for the manufacturing of the periphery components, such as the conveyor and loading platform. We purchase the control panel and other parts from third-party suppliers based on quality, price and other terms.
When we receive a firm order with a deposit from our clients, we place the order with our manufacturing partners. The usual manufacturing time is between 30 and 60 days. We have been satisfied with our partners from working with them for over 5 years. We also have a plan to acquire a specialized pressurized vessel company in China so that we can start to manufacture our systems internally. The discussion with the target is underway and we hope to complete the acquisition soon.
Environmental Protection
Our manufacturing operations are subject to the environmental laws and regulations of the People’s Republic of China on air emission, solid waste emission, sewage and waste water, discharge of waste and pollutants, and noise pollution. These laws and regulations include the Law on Environmental Protection, the Law on the Prevention and Control of Water Pollution, the Law on the Prevention and Control of Atmospheric Pollution, the Law on the Prevention and Control of Pollution from Environmental Noise and the Law on the Prevention and Control of Environmental Pollution of Solid Waste. We are also subject to periodic monitoring by relevant local government environmental protection authorities.
According to these environmental laws and regulations, all business operations that may cause environmental pollution and other public hazards are required to incorporate environmental protection measures into their operations and establish a reliable system for environmental protection. The operations must adopt measures to prevent and control pollution levels and harm caused to the environment in the form of waste gas, waste water and solid waste, dust, malodorous gas, radioactive substance, noise, vibration and electromagnetic radiation generated in the course of production, construction or other activities. Companies in the PRC are also required to carry out an environment impact assessment before starting construction of production facilities and the installation of pollution treatment facilities. The assessment shows that the construction or instruction will meet the relevant environmental standards and treat pollutants before discharge. Daifu has done the required environment impact assessment before selecting our OEM third-party partners and all of our third-party partners have obtained all the required permits and environmental approvals.
Health and Safety Matters
The PRC Production Safety Law (the “Production Safety Law”) requires that our third-party partners maintain safe working conditions under the Production Safety Law and other relevant laws, administrative regulations, national standards and industrial standards. Our third-party partners are required to offer education and training programs to their employees about production safety. The design, manufacture, installation, use and maintenance of our safety equipment must conform to applicable national and industrial standards. In addition, our third -party partners are required to provide employees with safety and protective equipment that meet national and industrial standards and to supervise and educate employees to wear or use such equipment according to the prescribed rules.
Daifu complies with all applicable labor and safety laws and regulations and has implemented internal safety guidelines and operating procedures.
Daifu also complies with the new Chinese Labor Contract Law, which came into effect on January 1, 2008, and does not believe this new law will have any adverse impact on our business and operations. Since Daifu started business, no employee has been involved in any major accident at work, and we have never been subject to governmental disciplinary actions over the labor protection issues.
Sales Process
We have established a sales network nationwide which is composed of sales representatives, agents and third-party partners. Most of our projects are centralized municipal waste treatment centers. The centers usually finance the projects through special government bonds. Daifu also sells to hospitals and medical institutions nationwide. We usually obtain the potential project leads through our contacts in various cities. Then we will contact the contractor who will operate the waste treatment centers. We will work with the contractor to incorporate our technology and specifications in the feasibility study that is prepared by the local Development and Reform Commission (DRC). Then the feasibility study will be presented to the provincial (municipal) DRC for environmental impact study and be submitted to the National Development and Reform Commission (NDRC) for evaluation and approval. The NDRC has the final authority to approve the project and allocate the government bonds for the construction. Usually the NDRC only approve the projects presented to it twice per year.
After the project is approved and the funds allocated, the local contractor will start the project design process. In this process, we work together with them to include our technology and specifications into the final design. Then a bidding process for the equipment of the treatment center takes place. If daifu wins the bidding, we will start the manufacturing process and deliver the system to the contractor based on the time frame of the contract. An indicative sales cycle for our system is between 6 to 12 months, depending on the size and sophistication of the system.
Once Daifu wins the bidding and sign the sales contract with a customer, we will ask them to pay a deposit between 30% and 50% of the total contract value. When the system is delivered, 90% to 95% of the total contract value will be paid. The balance will be held to cover the warranty and will be paid at the end of the warranty period (typically 12 months) provided that no warranty repairs are required from the operation of the system and all technical specifications are met to the satisfaction of the owner and operator.
Sales and Marketing Strategy
In the future, Daifu's sales and marketing strategy will focus on the following aspects:
Strengthen our sales efforts through hiring more sales representatives
We plan to hire more full-time sales representatives and to establish more branch offices in China, especially in the regions that we have established market awareness and reputation, such as Southeastern China. This will improve our contacts with existing and potential clients as well as enable collection of market intelligence for potential clients.
Expand our nationwide agents and business partner networks
Besides establishing in-house sales force, we will also depend on our agents and business partner network for sales leads and market intelligence. As discussed above, the sales process for selling our systems is usually complicated and multiple government bodies and regulators are involved. This complexity means that we have to rely on our local contacts for the most recent and accurate market information. Establishing a reliable and long-term sales agent network nationwide is critical for our future growth.
Improve the name-recognition of our company and products
Since Daifu started operations in 2001, we have witnessed the growth and development of the MWT industry in China as well as the gradual increase in the awareness of the need to protect the environment in China. The general population in China is becoming more aware about environmental protection issues. We believe that this development is a good trend for Daifu. Through participating in related conferences and exhibitions, as well as making selective social welfare donations, such as to the earthquake-struck regions of Sichuan Province, we will try to increase the market awareness of our technology and system and improve our competitive position as a result.
Next Step: Entry into Waste Management Services
Daifu wants to become the leading medical waste management company in PRC, by leveraging our present leadership position as a medical waste technology provider and expanding our business from a solution provider to a service+solution provider. Daifu estimates that the medical waste market is a RMB 5 billion market, in both equipment and services.
Daifu started in 2002 and has a strong brand as a technology provider to the medical waste market and government in China for over the past nine years. Government agencies have approved our products and granted licenses. Provinces and cities are using our technology and systems. This government acceptance gives Daifu a competitive advantage to enter the medical waste service business in a market that is still fragmented. Daifu has a good chance to become a leader in the service business.
As China’s economy continues its growth and the living standard keeps rising, the demand for high-quality and affordable healthcare will continue to increase. To meet the ever-present popular demand as well as to harness social harmony, the Chinese government has encouraged the entry of private capital into all sectors relating to healthcare, including hospital, medical institutions and other industries. According to the MOH statistics, the number of hospitals in China in 2010 exceeded 20,900 with over 4.78 million hospital beds. The overall utilization rate of hospital beds stood at the high level of 90% nationwide in 2011. The total number of in-patients and out-patients in China in 2010 was 5.838 billion and 141.4 million. These numbers represent over 10% increase annually from 2008.
The growth in use of hospitals and medical institutions has increased production of medical waste. By industry standard, one hospital bed will produce 0.5-1.0 Kg of waste per day when occupied and 20 to 30 out-patients will produce 1.0 Kg of waste. Daifu estimates the amount of medical waste produced in China now totals approximately 3,000 tons per day and over 1 million tons annually. How to cope with the this medical waste has become a huge challenge to China’s environment and public safety. The Chinese government has continued to implement policies to improve environmental protections and public hygiene for the last ten years. Such incidents as the SARS epidemic catalyzed improvement in rapid response to public health emergencies. In 2008, China encountered difficulties in medical waste treatment in the earthquake area of Sichuan. As one of the waste industry leaders, Daifu developed and made its first mobile medical waste treatment unit and donated to the Chinese government to aid in Sichuan emergency . This mobile unit demonstrates the importance of readiness to deal with medical waste in emergency situations. The government is considering the purchase of more mobile units for cities all over China and to allow Daifu to provide long term mobile unit services under joint venture agreement or BOT (Build, Operate and Transfer) structure.
Currently, China’s medical waste management industry is in its infancy and fragmented. Only first-tier cities, such as Beijing, Shanghai and Guangzhou, enforce government regulations on medical waste treatment. Most Chinese cities, except large first tier cities such as Beijing, Shanghai and Guangzhou, lack centralized MWT centers that the Ministry of Environment Protection (“MEP”) requires. The proportion of medical waste that is centrally treated is small. In most small cities and the countryside, the government-issued rules and regulations on the proper and safe treatment of medical wastes are often neglected. Sales of used medical wastes, such as needles and blood bags, for profit are still widespread in these cities and countryside. However, Daifu expects the second and third tier cities to follow first tier cities to comply with the medical waste treatment policy issued by the central and local governments. This development will create new market opportunities for Daifu in both system sales and the MWT center business.
Daifu is constantly evaluating the needs of the market by direct discussion with city environmental agencies and medical waste management operators. Daifu also participates in conferences and research forums and maintains good communication with MEP to learn about waste policy updates. Our active presence in the field is valuable to the company in assessing potential investments and acquisitions.
Daifu plans to leverage our superior technology and market positioning to expand into the business of operation and management of municipal MWT centers. The current conventional technology is the incinerator, which creates significant air pollution issues. Daifu believes that our technology is superior and more environment-friendly than the competing technologies. Our strategy is to enter into the business of managing the MWT centers in various cities. Expert in non-incinerating technology, Daifu plans to invest in centers with conventional incinerators and converting the incinerators to Daifu's non-incinerating technology for added efficiency and environmental friendliness. This plan is consistent with the direction of development encouraged by current governmental policy.
Daifu has started expansion to the service-solution business by investing and acquiring centralized medical service centers in a few Chinese cities .We entered a joint venture with Hainanzhou Luhuan Medical Waste Disposal Co. Ltd. in October 2009 to provide medical waste treatment to the city of Hainanzhou, in Qinghai province. Under the current arrangement, Daifu starts with a minority position which will enlarge to a majority in the future. This project is scheduled to be in operation in the second quarter of 2012.
As we implement our plan to enter into the business of managing medical waste treatment centers, Daifu intends to become an integrated player in the medical waste treatment industry in China, covering equipment sales, technology transfer and consulting, as well as management of treatment centers. We believe that, there are few companies in China with a similar business model and that we will enjoy an early entry advantage over our competitors.
Customers
We currently have approximately twenty customers located in China. The installations range from the planning phase, under construction or completed. The usage is for medical waste or specific hospitals or entire provinces in China. The installations are located as follows: thirteen in Sichuan province, Two in Beijing and one in Guangdong Province, one in Guangxi Province, one in Gansu Province. and one in Henan Province.
Back Log
As of April 12, 2013, Rotoblock had over $1.8 million in backlog orders for installations. The Company anticipates completing these installations by December 31, 2013.
Warranty Program
Our products vary by geography and product and are competitive with other suppliers of these types of products. Generally, our product warranties are 12 months after installation. The customer will hold back between 5% and 10% of the contract value will be kept as warranty cost and will be pay the balance to Daifu after the warranty period expires if no defect in the operation of the system and all technical specifications are met to the satisfaction of the owner and operator during the warranty period.
Our warranties generally cover defects in workmanship and materials and are limited to specific usage parameters.
After Sales Service
Daifu strives to serve our customers as quickly as practicable. After receiving a complaint which requires immediate attention, an engineer will be dispatched to the customer to resolve the problem generally within 24 hours. We have set up a major client response line to communicate with end users and customers. We have also established a department and data collection center that monitor our after-service department and provide it with support.
Daifu’s Indusrty
Governmental legislation and regulation increasingly require the proper handling and disposal of regulated wastes like medical waste and hazardous industrial waste. Medical waste are composed of infectious, toxic and other hazardous wastes which are directly or indirectly produced in the medical care, prevention, health care and other related activities by medical institutions. Medical wastes specifically include infectious wastes, pathological wastes, traumatic wastes, chemical wastes, and drugs.
These wastes contain a large number of bacterial viruses and have the characteristics of space pollution, acute viral infection and latent infection. If the wastes are thrown away and mixed with other living garbage, they will pollute air, water, land, animals and plants, resulting in the spread of diseases, and serious harm to human health.
Medical Wastes in China
The collection and treatment of medical wastes and solid hazardous wastes collection has become a booming industry since 2003 when SARS broke out, growing fast especially in the past three years. Medical waste production grows with an increase in hospital bed usage and outpatient visits.
According to the “Hazardous waste and medical waste disposal facility construction planning” of 2004 (the “Planning Report”), which was jointly published by the Ministry of Environmental Protection and the State Finance Department of Commerce Ministry, a total of 342 medical waste treatment centers and hazardous waste treatment centers would be established in 326 first-tier and second-tier cities (covering almost all prefecture-level cities). Among these centers, non-incinerator technology (which we use) would be employed in 287 centers which would deal with 3 to 15 tons daily medical wastes; incineration technology would be used in 28 large cities which are mostly capitals in each province. However, our technology can be used to update these incinerators when updating is preferred.
In the Planning Report, there would be another 24 centers/cities which are supposed to deal with medical wastes and hazardous wastes in each center. They are typically incinerators.
Outside of these large and medium sized cities, we believe there is a significant untapped market for our mobile devices. According to Administrative Divisions Forum (www.xzqh.org), in 2010 there were a total of 356 prefecture-level cities, 845 county-level cities and 357 counties in the mainland of China (excluding Taiwan, Hong Kong and Macau). According to the Planning Report, only 326 cities have planned to establish medical centers., There would be 1,202 counties/county-level cities which have not installed and even planned to install qualified facilities to dispose of medical wastes.
Regulation
China’s medical waste equipment industry and medical waste collection and treatment industry are regulated by various government agencies, including the Ministry of Environmental Protection (“MEP”). The MEP has branch offices across China to oversee the medical waste industry at the provincial and county levels. The MEP and other government agencies such as the National Development and Reform Commission (“NDRC”), the MOH, the General Administration of Quality Supervision, Inspection and Quarantine of the PRC (“AQSIQ”) and the Ministry of Commerce (“MOFCOM”), have promulgated rules and regulations relating to the production and the procurement of medical waste equipment, the pricing of medical waste collection, the operation of the equipment, and the licensing and operation of medical waste treatment centers.
The medical waste industry is also subject to extensive provincial and local laws and regulations. This statutory and regulatory framework imposes a variety of compliance requirements, including requirements to obtain and maintain government permits. These permits grant the authority among other things:
· to make medical waste equipment;
· to construct and operate collection, transfer and processing facilities.
Permits must be periodically renewed and are subject to modification or revocation by the issuing authority. Regulations also govern the definition, generation, segregation, handling, packaging, transportation, treatment, storage and disposal of medical waste. In addition, extensive regulations minimize employee exposure to medical waste.
Permits licensing China’s medical waste equipment industry and medical waste collection and treatment industry are subject to two types of permits: Boiler and Pressure Vessel Manufacturing Permit and Hazardous Waste Management Permit.
· Boiler and Pressure Vessel Manufacturing Supervision and Management Methods of 2002. The Boiler and Pressure Vessel Manufacturing Supervision and Management Methods of 2002 authorize the AQSIQ and its provincial branches to issue and review Boiler and Pressure Vessel Manufacturing Permits.
· Hazardous Waste Management Permit Management Methods of 2004. The Hazardous Waste Management Permit Management Methods of 2004 authorize the MEP and its county level branches to issue and review hazardous waste management permits. Comprehensive hazardous waste management permit allows the handling of hazardous waste collection, storage and treatment; Hazardous waste collection permits allow only the collection of hazardous waste. Only an enterprise that holds a comprehensive hazardous waste management permit is allowed to collect, store, transport and dispose of medical waste.
Technology Regulations Different regulations apply to the four technologies used in medical waste treatment centers. The technologies are incineration; steam based engineering chemical disinfection and microwave disinfection. All regulations govern waste collection, storage and treatment, daily capacity limitations, selection of plant, facilities infrastructure, and green protection methods for a medical waste incineration plant (or medical waste disposal center). The regulations require the plant (or medical waste disposal center) to acquire a hazardous waste management permit.
State Planning: After SARS (Severe acute respiratory syndrome) broke out in 2003, the MEP issued the Hazardous Waste and Medical Waste Disposal Facility Construction Planning Of 2004. This policy had the following goals:
· By the end of 2006, to eliminate hazardous waste, medical waste and radioactive waste pollution issues, and achieve the safe storage and disposal of the nationwide hazardous waste, medical waste and radioactive waste.
· To plan and construct 31 large hazardous waste disposal centers to increase hazardous waste disposal capacity by 2.82 million tons per year; 300 medical waste disposal centers to increase medical waste disposal capacity to 2,080 tons per day.
· To invest RMB14.92 billion, including RMB6.98 billion in 31 large hazardous waste disposal centers, and RMB6.89 billion in medical waste disposal centers.
· To support installment of large hazardous waste disposal centers and medical waste disposal centers with national bond funds issued by the central government and local governments; to attracts private capital to the operations of large hazardous waste disposal centers and medical waste disposal centers.
· To take full advantage of franchise and other methods to prevent low level, disorderly competition and duplicate construction of hazardous waste centers and medical waste disposal centers.
· To implement a pricing policy for the treatment of hazardous waste and medical waste, establish reasonable pricing criteria; to provide preferential policies to those disposal centers that efficiently treat waste.
Important Domestic Regulations in P.R.C.: After the 2003 SARS breakout, government authority agencies including the MEP and MOH issued laws and regulations to regulate the development of medical waste collection, storage and treatment.
· Management Regulations on Medical Waste of Medical Institutions of 2003. These regulations regulate medical institutions in the collection, transportation storage and disposal of medical waste. The regulations give the MOH and its branches power to punish violations of the regulations.
· Medical Waste Management Regulations of 2003 by the State Council. These regulations govern the storage, transfer and disposition of medical waste. The regulations prohibit any company or individuals from transferring or selling medical waste illegally and provide for punishment of violations. . The regulations provide that medical waste is not permitted to be mixed with other waste and garbage. Medical waste is to be sorted and stored in special containers with special logos. The regulations also require medical institutions and medical waste management centers to provide training and protection for employees who are engaged in collection, transport, storage and disposal of medical waste. The regulations also require registration of medical waste with information about the source, species, weight or quantity, the transfer time, disposal methods, the final destination and the persons handling the treatment and disposal. The registration information is to be kept at least three years.
· Medical Waste Management Rules of Administrative Penalty of 2004 by MOH. These rules set forth sanctions for violations the above regulations.
· The Chinese Solid Waste Pollution Prevention Law of 2004. Under this law, any companies, agencies and individuals engaged in collection, storage, disposal and management activities of hazardous waste, must obtain an operations license from municipal and provincial-level branches of MEP.
- The Chinese Enterprise Income Tax Law of 2007. This income tax provides for tax incentives for investment and operations in state supported public infrastructure or environmental protection projects. The incentives include tax reduction or credits for investment in equipment that protects the environment, or promote energy and water conservation and production safety.
Competition
The market for MWT systems is still relatively new and fragmented in China. No company, either foreign or Chinese, dominates the industry. A few foreign companies are seeking to take advantage of the growth of the Chinese environment protection market. The foreign companies include Bondtech of USA, Webeco of Germany and Ecodas of France.
Only a few domestic companies are in the industry because of the newness of the market. Some of the domestic competitors are state-owned and tend to be aggressive in prices when bidding on projects. The domestic companies include Shandong Xinhua, Chongqing Zhide Boiler and Tianjin Green Tech.
Daifu competes on the basis of price and quality of our products, the ability to produce a diverse range of products and customer service. Our high-temperature, high-pressure treatment technology is more advanced and environment-friendly than the competing technologies, such as incineration, vacuuming or microwaving.
Item 1A.
Item 1A. Risk Factors
RISK FACTORS
Report investors should carefully consider and evaluate each of the following considerations and all other information set forth in this Report before deciding to invest in our common stock. To the best of our knowledge and belief, all risk factors that are material to investors in making an informed judgment have been set out below. If any of the following considerations and uncertainties develops into actual events, our business, financial conditions, results of operations and prospects could be materially and adversely affected. In such cases, the trading price of our Shares could decline and you may lose all or part of your investment in our Shares.
This Report also contains forward-looking statements having direct and/or indirect implications on our future performance. Our actual results may differ materially from those anticipated by these forward looking statements due to certain factors including the risks and uncertainties faced by us, as described below and elsewhere in this Report.
RISKS RELATED TO OUR BUSINESS
Daifu is a relatively new company and may experience volatility in our business.
Daifu only started to operate in 2001 and has not achieved significant revenue through 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.
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
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.
Daifu does not own any manufacturing facilities so our product quality and delivery time may experience negative variances.
Currently, Daifu manufactures our MWT systems through third-party OEM partners. The relationship is mutually beneficial, and we are satisfied with the quality of the manufactured systems and the price and terms. Still, because China has special requirements for pressurized containers, Daifu wants to start manufacturing directly. We are thus considering the acquisition of a special boiler company in China so that we can start to make the systems. However, no understandings, commitments or agreements are in place for the acquisition at this time, and we cannot assure that the acquisition can be completed timely on favorable terms and price. Not having our own manufacturing facilities may our hinder our future growth.
The medical waste treatment industry is heavily regulated by Chinese government and changes in government regulation may negatively impact Daifu's business.
The Chinese government has issued rules, regulations and standards for the disposal and treatment of medical waste as well as other hazardous waste. It also regulates who can operate and manage the municipal treatment centers. The standards and regulations regarding the treatment centers also change frequently. This regulatory environment creates uncertainty for us, and future changes may adversely affect our business.
Failure to achieve our acquisition strategy would impact our ability to grow.
Part of Daifu's strategy is to grow through acquisitions of other product lines, technologies or facilities that will complement or expand our existing business. We may fail to achieve this part of our business strategy. A limited number of potential targets are available in the MWT industry, including both system manufacturers and MWT centers. Daifu may not identify suitable acquisition candidates or negotiate attractive terms. In addition, Daifu may have difficulty obtaining financing necessary to complete acquisitions.
Acquisitions may dilute equity ownership and value and may result in more negatives than benefits.
Future acquisitions may involve the issuance of our equity securities that would dilute ownership interests of current shareholders. In addition, future acquisitions may adversely affect Daifu earnings or earnings per share. We also may incur additional debt or suffer adverse tax and accounting consequences from future acquisitions, and then the benefits from an acquisition may be less than the negatives. Failure to integrate acquired companies successfully could disrupt Daifu, and integration issues could distract management.
Even if we succeed in completing acquisitions, we might experience difficulties integrating the acquired businesses or assets. Acquisitions might result in unanticipated liabilities, unforeseen expenses and distraction of management’s time and attention.
Daifu now has a small number of customers, and results from operations and shareholder value could be adversely affected if we fail to acquire new customers. Daifu has a limited history of operation. In 2009, we acquired one new customer. In 2010, we acquired six new customers and in the six months ended June 30, 2011, we acquired two new customers. As discussed before, the sale cycle for our MWT systems is time-consuming and unpredictable. Failure to achieve significant sales growth, would adversely affect future revenues and stockholder value.
Our products could be subject to product liability claims by customers and/or consumers, which would adversely affect our profit margins, results of operations and stockholder value.
Daifu's MWT system is used in hospital, medical institutions and municipal medical waste treatment centers. If our products are not properly designed or built and/or personal injuries or environmental accidents are sustained from our equipment, we
could be subject to claims for damages based on theories of product liability and other legal theories. The costs and resources to defend claims could be substantial. We could be responsible for paying some or all of the damages if the claims succeed in court or through settlement. Also, our reputation could be adversely affected, whether or not the claims are successful. Any of these results would adversely affect our profit margins, results from operations and stockholder value.
Expansion of our business may put added pressure on our management and operational infrastructure impeding our ability to meet any increased demand for our system and possibly hurting our operating results.
Our business plan is to grow significantly to meet the anticipated growth in demand for our MWT systems and enter into the MWT center management business. Growth in our business may significantly strain our personnel, management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges, including:
our ability to successfully and rapidly expand sales of our system nationwide to meet the expected increased demand;
unexpected changes in the regulatory environment of our industry;
the costs associated with growth that are difficult to quantify, but could be significant; and
technological change.
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.
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 Research and Development
We emphasize research and development, in particular to develop advanced systems that lower emissions and increase efficiency of our MWT systems. Our continuing emphasis on research and development 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.
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 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. Failure to comply with the stock option rule and related rules will subject us or our PRC citizen employees participating in our stock incentive plan to fines and other legal or administrative sanctions Restrictions could be imposed on our execution of option plans, including the grant of options under the plans to our employees. The restrictions could adversely affect our ability to hire and retain employees.
Effect on our financial performance of changes of PRC laws and regulations on currency conversion
Under the present unified floating exchange rate system, the People’s Bank of China publishes a daily exchange rate for the RMB based on the previous day dealings in the inter-bank foreign exchange market. Under this unified floating exchange rate system, fluctuations in the exchange rate of the RMB against other currencies are to some extent subject to market forces. Moreover, no assurance can be given that the RMB will not be subject to devaluation or depreciation from administrative or legislative intervention by the PRC government or adverse market movements. A devaluation of the RMB may adversely affect our cash flow position in the repayment of any foreign currency debt. Conversely, an appreciation of RMB could lead to a reduction in the prices of imported products that would adversely our competitiveness against foreign MWT systems imported to the PRC. Expected increase in competition following the PRC’s entry into the World Trade Organization (WTO)
The PRC has gained entry into the WTO. The entry may result in the lowering or elimination of trade tariffs and import controls on imports of foreign MWT products into the PRC may be lowered or removed. A reduction of import tariffs and barriers will tend to increase competition from competitive foreign MWT products. The increased competition may result in lower prices and profitability for daifu's MWT systems.
RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK
Our directors, certain of our shareholders and their affiliates, who will in aggregate own approximately 73% of our enlarged share capital and Common Stock equivalents (including the shares underlying the Rotoblock Warrants)., will retain significant control, 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
We have 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 our Common Stock may be volatile, which could result in substantial losses for stockholders
The market price of our 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 our 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
Our directors and controlling shareholders collectively hold approximately 73% percent of our issued and outstanding Common Stock and Common Stock equivalents (including the shares underlying our Warrants). Any sale of our 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 report before deciding to invest in our securities.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
We do not own any property.
We currently are using office space located at 300 B Street in Santa Rosa, California for our overall corporate and business administration . The space consists of approximately 500 sq ft. We also have small operational offices Hong Kong and in Beijing.
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Removed and Reserved
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is quoted on the OTC Bulletin Board under the symbol “RTBC”.
Holders
We have approximately 178 record holders as of April 12, 2013. The number of registered shareholders does not include any estimate by us of the number of beneficial owners of common stock held in street name. The transfer agent and registrar for our common stock is Holladay Transfer & Trust Company.
Dividends
We have never declared or paid any cash dividends on our common stock, and we do not anticipate that we will pay any cash dividends on our common stock in the foreseeable future. Any future determination to declare and pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and other factors as our Board of Directors may deem relevant at that time.
Recent Sales of Unregistered Securities
Other than the issuance of our common stock to the Daifu shareholders pursuant to the Share Exchange Agreement in 2011, we have not engaged in any sales of any other unregistered securities.
Equity Compensation Plans
On December 15, 2011 we filed a Registration Statement on Form S-8 SEC to register 10 million shares of our common stock for future issuances to consultants, employees, attorneys, officers and directors at a proposed maximum offering price of $0.25 per common share. At December 31, 2012, no shares have been issued under the Registration Statement.
There were no stock options granted, issued or outstanding as of December 31, 2012.
Item 6.
Item 6. Selected Financial Data
Not applicable
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview and 2012 Highlights
During 2012 we completed four projects and have another four in progress as of December 31, 2012.
At present our installations for medical waste treatment are located in the following provinces of China : Sichuan ,Guangdon , Guangxi, Gansu, Henan and Beijing.
Results of Operations
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Sales for the year ended December 31, 2012 were $1.9 million compared to $1.7 million for the year ended December 31, 2011, which is an increase of approximately $200,000. The increase was due to four installations completed during 2012 as compared to five in 2011. During 2012, one of the installations had a higher than usual contract price.
Cost of Goods Sold increased by $455,000 from $1.1 millions for the year ended December 31, 2011 to $1.5 million for the year ended December 31, 2012. This increase was due to the installations with higher capacity completed in 2012. As a percentage of sales, the products costs were 76.5% and 62% for 2012 and 2011, respectively.
Gross profit decreased by $181,136 from $644,668 for the year ended December 31, 2011 to $463,532 for the year ended December 31, 2012. The decrease was due to additional costs incurred to repair some of the previously completed installations.
Sales and distribution expenses increased by $29,500 to $497,055 for the year ended December 31, 2012 compared to $467,518 the year ended December 31, 2011. The increase was due to greater expenses on the high capacity installations noted above. However, as a percentage of sales, the sales and distribution expenses decreased from 27.5 % in 2011 to 25.2% in 2012 as a result of tighter controls over technical and distribution expenses.
Administrative and other operating costs remained comparable for both 2012 and 2011 at $1.2 million.. The major elements of the expenses were for administration salaries,professional fees and stock based compensation. However, as a percentage of sales administrative and other operating expenses decreased from 73.7% to 63.2 %
Depreciation and amortization expense increased by $10,819 from $13,716 in 2011 compared to $24,535 for the year ended December 31, 2012. The increase reflects a full year depreciation on the Rotolock Corp U. S. office equipment in 2012 whereas 2011 only included the expense for last two months of the year subsequent to the acquisition of daifu..
Other income decreased from $1.8 million in 2011 to $91,329 in 2012. In 2011, the company had realized one-time revenue of $1.8 million in 2011 is primarily due to the cancellation of two sales contract by customers where installation deposits of approximately $1.7 million were forfeited to us.
Impairment of Goodwill of $3.5 million in 2012 represents the results of the testing of goodwill for impairment. The Company performs this annually in the fourth quarter of the year. Based upon the analysis, management determined that the carrying value of goodwill was impaired and was adjusted accordingly.
Financial expense increased from $8,758 for the year ended December 31, 2011 to $158,019 for the year ended December 31, 2012. The increase was mainly due to the additional borrowing of $500,000 during the year from related daifu companies and a director of the Company. The interest rates were from 5% to 8%
Interest income decreased slightly from $1,132 in 2011 to $649 in 2012 due to less overall Company balances in bank savings accounts.
Net Loss for the year ended December 31, 2012 was $4.9 million compared to net income of $764,000 for the year ended December 31, 2011.
Liquidity and Capital Resources
In assessing our liquidity, we monitor and analyze our cash on-hand, liquidation value of our investment in securities, and our operating and capital expenditure commitments. Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations.
Our principal sources of liquidity consist of our existing cash on hand, loans from related companies, our investment in securities with Samyang Optics, Ltd of $659,130. As of December 31, 2012, we had loans of $919,093 due to related parties of daifuWaste Group, with loan interest rates from 5 to 7% per annum, from January 1, 2012.
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 $587,236 and $471,042 during the years ended December 31, 2012 and 2011respectively. Cash used in operations in 2012 was the result of the net loss incurred for the year of $4.9 million, plus the addition of non-cash expenses of $3.9 million. In 2012, non-cash expenses were due to the impairment of goodwill, stock based compensation, depreciation and amortization and non-cash interest. Cash used in operations in 2011 was the result of the net income incurred for the year of $764,385, plus the addition of non-cash expenses of $98,864. In 2011, non-cash expenses were due to depreciation and amortization, non-cash interest and stock based compensation.
In 2012, the net change in operating assets and liabilities resulted in a cash increase of $273,056. The change was primarily due to the following: increases of $324,294 in accounts receivable and $492,337 in other payables and accrued liabilities for executive pay, trade payables and China VAT, offset by decreases of $321,347 in other receivables and prepayments for deposit payments to suppliers, and $264,154 in deferred revenue.
In 2011, the net change in operating assets and liabilities resulted in a cash decrease of $1.3 million. The change was primarily due to the following: decreases in deferred revenue of $2.1 million, other receivables and prepayments of $501,176 and $467,136 in other payables and accrued liabilities for executive pay, trade payables and China VAT, which were partially off set by increases in the inventory of $184,703 and accounts receivable of $30,040.
Investing activities used cash of $ 0 and $217,408 during the year ended December 31, 2012 and 2011, respectively. In 2011, the cash was invested to acquire a 35% share interest in a MWT center in Qinghai Province. The center was expected to start business in the second quarter of 2012. However, due to delay in utilities supply, the Joint Venture is expected to start business once the PRC government approval is granted.
Financing activities provided cash of $494,359 and $271,373 during the year ended December 31, 2012 and 2011 respectively. In 2012, we received advances from related parties of $477,359 and issued a convertible note for $17,000 in cash. In 2011, restricted cash in the amount of $4.1 million was released to redeem all of our outstanding preferred stock for $4.3 million. The company also received $100,000 in cash from the exercise of stock options and an advance from a related party of $410,000.
We had cash and cash equivalents of $49,568 at December 31, 2012 as compared to $144,202 at December 31, 2011. We had working capital deficits of $3.6 million and $2.6 million at December 31, 2012 and 2011, respectively.
We will need additional funding to sustain our operations at our current levels through the next twelve months. We cannot provide assurance that the Company will become operating cash flow positive, or raise additional debt and/or equity capital. However, based on our prior demonstrated ability to raise capital, we believe that the Company’s capital resources should be adequate to continue operating and maintaining its business strategy during the fiscal year ending December 31, 2013. 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 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.
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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements or contractual or commercial commitments.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Rotoblock’s foreign currency exchange risks are as follows: Rotoblock benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the US dollar, may negatively affect the company’s consolidated revenues or operating costs and expenses as expressed in U.S. Dollars. Adjustments resulting from the process of translating foreign functional currency financial statements into US dollars are included in accumulated other comprehensive income (loss) in common shareholders equity. Foreign currency transaction gains and losses are included in current earnings. China uses their currency as the functional currency.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 and the index thereto commences on the next page.
ROTOBLOCK CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2012
(Expressed in US Dollars)
ROTOBLOCK CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and stockholders of Rotoblock Corporation
We have audited the accompanying consolidated balance sheets of Rotoblock Corporation (the “Company”) as of December 31, 2012 and 2011 and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in note 1 to the financial statements, the accompanying financial statements have been prepared assuming that the Company would continue as a going concern and the Company has a working capital deficiency of US$ 3,616,773 that may affect the Company's ability to continue its operation as a going concern. The Company’s shareholder has agreed to provide sufficient financial support to the Company so as to enable the Company to meet its liabilities as and when they fall due and to enable the Company to continue its business at least for the next twelve months. The execution of such financial support, in case of necessity, depends on the ability and capability of the shareholder in the next twelve months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Parker Randall CF
Parker Randall CF (H.K.) CPA Limited
Certified Public Accountant
Hong Kong
April 12, 2013
Nature and Continuance of Operations (Note 1); Commitments and Contingencies (Note 19); Subsequent Events (Note 23)
- See Accompanying Notes -
- See Accompanying Notes -
Supplemental Disclosures with Respect to Cash Flows (Note 22)
- See Accompanying Notes -
- See Accompanying Notes -
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
Note 1.	Nature and Continuance of Operations
Rotoblock Corporation (“Rotoblock” or the “Company”) was incorporated under the laws of the State of Nevada on March 22, 2004.
On March 30, 2004, the Company entered into a Share Exchange Agreement (the “Agreement”) with Rotoblock Inc., a Canadian corporation incorporated on September 2, 2003, wherein the Company agreed to issue to the stockholders of Rotoblock Inc. 300,000 common shares in exchange for the 144,000 shares that constituted all the issued and outstanding shares of Rotoblock Inc. Effective March 30, 2004, Rotoblock Inc. completed the reverse acquisition under the Agreement with the Company.
Immediately after the acquisition, the management of Rotoblock Inc. took control of the board and 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 was 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.
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
At the date of acquisition, the determination and allocation of the purchase price is summarized below:
(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.
(iii)The fair value of goodwill recorded on the reverse acquisition of the Company by daifu was assessed by management for impairment during the fourth quarter of fiscal 2012. Management determined the recoverable amount of goodwill to be $nil and, as a result, has recorded an impairment charge to the statement of income (loss) and comprehensive income (loss) as at December 31, 2012.
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.
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
The Company’s consolidated financial statements as at December 31, 2012 and for the year 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 $4,852,328 for the year ended December 31, 2012 (December 31, 2011 - net income of $764,385) and has a working capital deficiency of $3,616,773 at December 31, 2012 (December 31, 2011 - $2,635,787).
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, 2013. 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 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 following is a summary of significant accounting policies used in the preparation of these consolidated financial statements.
(a)Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP and are expressed in U.S. dollars.
(b)Fiscal period
During the prior year, the Company changed its fiscal year end from April 30 to December 31 due to the share exchange with and reverse acquisition of daifu, which has a fiscal year end of December 31.
(c)Risks and uncertainties
The Company operates in an emerging industry that is subject to market acceptance and technological change. daifu’s operations are conducted in the PRC. The Company’s operations are subject to significant risks and uncertainties, including financial, operational, technological and other risks associated with operating an emerging business, including the potential risk of business failure. Other risks include the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in political and social conditions and by changes in governmental policies with respect to laws and regulations, anti-inflationary measure, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
(d)Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less.
(e)Inventories
Inventories 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 year ended December 31, 2012, the Company did not make any allowance for slow-moving or defective inventories (December 31, 2011 - $nil).
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
(f)
Property, equipment and depreciation
Property and equipment have been recorded at cost, net of accumulated depreciation (Note 7). Improvements are capitalized and maintenance, repairs and minor replacements are expensed as incurred. Depreciation is determined using straight-line method in PRC and declining-balance in basis in US, over its estimated useful life of:
(g)Long lived assets
Long-term assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable, pursuant to guidance established in ASC 360-10-35-15, “Impairment or Disposal of Long-Lived Assets”.
Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations (undiscounted and without interest charges). If impairment is deemed to exist, the assets are written down to fair value. Fair value is generally determined using a discounted cash flow analysis.
(h)Goodwill
Goodwill was acquired in the share exchange between the Company and daifu in 2011. Financial Accounting Standards Board (FASB), Goodwill and Other Intangible Assets (“ASC 350-20”) requires goodwill to be tested for impairment on an annual basis, and between annual tests in certain circumstances, and written down when impaired. The Company performs this analysis during the fourth quarter of each year.
(i)Revenue recognition
Revenue represents the invoiced value of goods sold and is recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller’s price to the buyer is fixed or determinable; and
- Collectability is reasonably assured (payments have been established).
(j)Cost of revenue
Regarding the trading of machine that deals with medical waste, the respective cost of revenue consists primarily of material cost, labor cost, subcontracting expenses and related expenses which are directly attributable to the trading.
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
(k)Basic and diluted net income (loss) per share
The Company computes net income (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method for share purchase warrants and for convertible preferred stock and promissory note using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
(l)Comprehensive income
ASC 220, “Comprehensive Income”, establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As at December 31, 2012, the Company has items that represent a comprehensive income and, therefore, has included a schedule of comprehensive income in the consolidated financial statements.
(m)Income taxes
Deferred income taxes are reported for timing differences between items of income or expense reported in the financial statements and those reported for income tax purposes in accordance with ASC 740, “Income Taxes”, which requires the use of the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax losses and credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides for deferred taxes for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is more likely than not.
(n)Segments of an enterprise and related information
ASC 280, “Segment Reporting” establishes guidance for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. ASC 280 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
(o)Stock-based compensation
The Company accounts for stock-based compensation using the provisions of ASC 718, “Compensation - Stock Compensation”, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees’ requisite service period (generally the vesting period of the equity grant).
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
(p)Foreign currency translation
The accompanying consolidated financial statements are presented in U.S. dollars. The functional currency of Rotoblock Inc. is the Canadian Dollar (“CAD”) and the functional currencies of daifu and its subsidiaries are the Hong Kong Dollar (“HK$”) and RMB. The consolidated financial statements of the Company are translated to U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. The consolidated financial statements are translated into United States Dollars from Canadian Dollars, Hong Kong Dollars and Renminbi at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effect of exchange rate differences is recorded in Accumulated Other Comprehensive Income.
(q)Research and development
Research and development costs are expensed as incurred.
(r)Patents
The Company accounts for patent costs in accordance with ASC 350, “Intangibles -Goodwill and Other”. In accordance with that statement, intangible assets with estimable lives, such as a patent, are amortized on a straight-line basis over the estimated useful lives and are reviewed for impairment in accordance with ASC 350-35-14, “Recognition and Impairment of an Impairment Loss”.
(s)Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from these estimates.
(t)Comparatives
Certain comparative figures have been reclassified in order to comply with the presentation adopted in the current year.
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 did not have an impact on the Company’s consolidated financial statements.
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
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 did not have an impact on the Company’s 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 did not have an impact on the Company’s consolidated financial statements.
Note 4. Other Income
Other income as at December 31, 2012 and 2011 consists of the following:
During the year ended December 31, 2011, daifu recorded sundry income of $1,742,969 upon forfeiture of advance payments received from customers in previous years.
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
Note 5. Prepayments, Deposits and Other Receivables
Prepayments, deposits and other receivables as at December 31, 2012 and 2011 consist of the following:
Note 6. Inventory
Inventories as at December 31, 2012 and 2011 consist of the following:
Note 7. Property, Plant and Equipment
During the year ended December 31, 2012, total additions to and dispositions of property, plant and equipment were $nil (December 31, 2011 - $nil).
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
Note 8. Investments in Associates
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
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 fair value of $1,000,000 and of $1,014,664 at the time of acquisition of daifu (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 investment 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 December 31, 2012, no engines have been sold. The Company has not capitalized any amount related to the patents.
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
Note 11. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities as at December 31, 2012 and 2011 consist of the following:
Note 12. Due to Related Parties
Due to related parties as at December 31, 2012 and 2011 consist of the following:
During the year ended December 31, 2012, cash in the amount of $301,530 was temporarily advanced from two related parties to daifu for operating use. This amount is unsecured, non-interest bearing and is repayable on request.
During the year ended December 31, 2012, $150,188 was borrowed from a director of the company for operating use. This amount bears interest at an annual rate of 5%. During the year ended December 31, 2012, a total of $1,685 of interest has been accrued on the liability.
During the year ended December 31, 2011, $410,000 was borrowed from a related party for redemption of outstanding preferred stock of daifu (Note 15). A further $25,641 was borrowed during the year ended December 31, 2012; both are with an annual interest rate of 7%. During the year ended December 31, 2012, a total of $30,049 of interest has been accrued on the liability.
Note 13. Related Party Transactions
During the year ended December 31, 2012, the Company paid/accrued $34,530 (December 31, 2011 - $15,209) and issued 1,442,148 shares, par value $0.001 per share, valued at $123,753 (December 31, 2011 - $nil) to the Company’s Chief Executive Officer, (“CEO”) as payment of salary and bonus.
During the year ended December 31, 2012, the Company paid/accrued $151,841 to directors for salaries and wages. (December 31, 2011 - $425,800).
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
During the year ended December 31, 2012, the Company granted 1,000,000 common share purchase warrants to the Company’s CEO as part of his compensation package. The share purchase warrants entitle the officer to purchase up to 1,000,000 shares of the Company at a price of $0.25 per share up to January 20, 2017. The fair value of the share purchase warrants was determined to be $40,000 and is recorded in the Company’s statement of income (Note 15).
During the year ended December 31, 2012, cash in the amount of $301,530 was temporarily advanced from two related parties to daifu for operating use. This amount is unsecured, non-interest bearing and is repayable on request.
During the year ended December 31, 2012, $150,188 was borrowed from a director of the company for operating use. This amount bears interest at an annual rate of 5%. During the year ended December 31, 2012, a total of $1,685 of interest has been accrued on the liability.
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 year ended December 31, 2012 for use in operations. During the year ended December 31, 2012, a total of $30,049 of interest payable has been accrued on the liability.
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 December 31, 2012 consists of principal and accrued interest of $2,000,000 and $346,521, 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.
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. On October 2, 2012, Asher converted $10,000 of the promissory note into 215,517 shares valued at $0.0464 per shares.
All unpaid principal, together with any unpaid and accrued interest was due and payable on December 7, 2012. At present the parties are determining a new, mutually agreeable maturity date for the note.
The balance of the Promissory Note as at December 31, 2012 consists of principal and accrued interest of $27,500 and $2,277, respectively.
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
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.
During the year ended December 31, 2012, the Company issued a total of 1,098,000 shares, par value $0.001 per share, to consultants of the company as payment for consulting fees valued at $183,750. As at December 31, 2012, $15,108 was included in prepayments.
During the year ended December 31, 2012, the Company issued a total of 1,442,148 shares, par value $0.001 per share, to an officer of the Company as payment of salary and bonus valued at $123,753.
On October 2, 2012, the Company issued 215,517 shares, par value $0.001 per share, to Asher Enterprises on partial conversion of a convertible promissory note (Note 14).
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 December 31, 2012, 998,000 shares have been issued under the plan.
Share Purchase Warrants
On January 20, 2012, the Company granted 1,000,000 warrants to an officer of the Company as part of the officer’s compensation package. The warrants entitle the officer to purchase up to 1,000,000 shares of the Company at a price of $0.25 per share up to January 20, 2017 (Note 13).
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
The following share purchase warrants were outstanding as at December 31, 2012:
The following is a summary of warrant activities during the year ended December 31, 2012:
The weighted average grant date fair value of the 1,000,000 warrants granted on January 20, 2012 was determined to be $40,000 using the Black-Scholes Option Pricing Model and the following assumptions:
Restricted Common Shares
As at December 31, 2012, a total of 82,264,167 common shares are outstanding. Of these, 77,256,354 were restricted from trading as defined under Rule 144 of the United States Securities Act of 1933.
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
Note 16. Earnings Per Share
Earnings (loss) per share, calculated on a basic and diluted basis, is as follows:
For the year ended December 31, 2012, exercisable common share equivalent shares totaling 13,383,554 (December 31, 2011 - 654,077) (consisting of shares issuable on the exercise of share purchase warrants in addition to shares to be issued on conversion of promissory notes) have been excluded from the calculation of diluted loss per share because their effect is anti-dilutive.
Note 17. Non-Controlling Interest
daifu has a non-controlling interest in one of its subsidiaries. The balance of the non-controlling interests as at December 31, 2012 and 2011 are as follows:
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
Note 18. Income Taxes
Income tax expense differs from the amount that would result from applying the federal and state income tax rates to earnings before income taxes. These differences result from the following items:
The Company has non-capital loss carry-forwards that of approximately $5,879,114 that may be available for tax purposes.
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
As at 31 December 2012, the Company has unused non-capital losses for U.S. federal income tax purposes of approximately $4,205,660 that are available to offset future taxable income. This unused net operating loss carry forward balance for income tax purposes expires between the years 2025 and 2032.
As at 31 December 2012, the Company has unused non-capital losses for Canadian tax purposes of approximately $569,173 that are available to offset future taxable income. This unused non-capital loss carry forward balance for income tax purposes expires between the years 2014 and 2030.
As at 31 December 2012, the Company has unused non-capital losses for tax purposes in the PRC of approximately $779,331 that are available to offset future taxable income. This unused non-capital loss carry forward balance for income tax purposes expires between the years 2013 and 2017.
As at 31 December 2012, the Company has unused non-capital losses for tax purposes in Hong Kong and Samoa of approximately $324,950 that are available to offset future taxable income. This unused non-capital loss carry forward balance for income tax purposes has no expiry date.
Note 19. 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 December 31, 2012, there are no material litigations pending or threatened against the Company.
The Company’s commitments are as follows:
a)On January 7, 2011, the Company issued 3,334 common shares valued at $nil per common share in error. On July 14, 2011, the Company cancelled these 3,334 common shares. As at December 31, 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 (the “Convertible Promissory Note Agreement”) with Samyang for $2,000,000 cash (Note 14). 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 balance of the Convertible Promissory Note as at December 31, 2012 consists of principal and accrued interest of $2,000,000 and $346,521, respectively (December 31, 2011 - $2,000,000 and $226,192, respectively).
At December 31, 2012, should Samyang exercise its option under the Convertible Promissory Note Agreement, the Company would be required to issue 2,133,201 common shares in settlement of its obligation to Samyang.
c)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.
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.
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
The balance of the Promissory Note as at December 31, 2012 consists of principal and accrued interest of $27,500 and $2,277, respectively.
As at December 31, 2012, should Asher exercise its option under the Asher Agreement, the Company would be required to issue 1,026,793 common shares in settlement of its obligation to Asher.
Note 20. Segmented Information
The Company 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.
Year ended December 31, 2011 PRC BVI Other Total
$ $ $ $
Revenues and other income 1,715,133 1,727,473 118,756 3,561,362
Cost of sales and other expenses (1,802,790) (49,017) (945,170) (2,796,977)
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
Note 21. Financial Instruments
The carrying value of cash and cash equivalents, 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.
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
(b)Currency Risk
The Company’s reporting currency is the U.S. dollar. Foreign currency transactions are primarily undertaken in HK$ and RMB. The Company has not, to the date of these consolidated financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
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 $14,559 higher ($14,559 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 $2,158 higher ($2,158 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.
Note 22. Supplemental Disclosures with Respect to Cash Flows
During the year ended December 31, 2012, the Company issued 215,517 common shares valued at $0.0464 per share on partial conversion of $10,000 of the Asher convertible promissory note (Note 14).
During the year ended December 31, 2012, the Company issued 1,098,000 common shares valued at $183,750 for consulting services provided to the Company (Note 15).
During the year ended December 31, 2012, the Company issued 1,442,148 common shares valued at $123,753 to an officer of the Company as payment of salary and bonus (Note 15).
During the year ended December 31, 2012, the Company accrued $31,734 of interest on related party loans (Note 12).
During the year ended December 31, 2012, the Company accrued $2,277 (2011 - $nil) in interest related to the Asher promissory note (Note 14).
ROTOBLOCK CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S Dollars)
During the year ended December 31, 2012, the Company accrued $120,329 (2011 - $14,466) in interested related to the Samyang promissory note (Note 14).
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.
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 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.
Note 23. Subsequent Events
On March 21, 2013, the Company accepted the resignations of its Chief Operating Officer and Chief Executive Officer. The Board has appointed an interim Chief Executive Officer, pending the hiring of a replacement.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Change in Independent Accountants
Effective February 28, 2012, the certifying auditor of Daifu, Parker Randall CF (H.K.) CPA Limited (“Parker Randall”), submitted its resignation. James Stafford Chartered Accountants, Vancouver, B.C. Canada (“Stafford”) was to continue as the certifying accountants for the Company and Daifu on a consolidated basis. However on March 21, 2012, Stafford submitted their resignation as certifying accountants of the Company.
Effective March 21, 2012, Parker Randall was re-engaged as our certifying accountants.. We believe that Parker Randall, because of their familiarity with the business of Daifu ) and because of Parker Randall’s location in Hong Kong, they are best able to assume the overall audit responsibility for our consolidated financial statements.
During the period of engagement from November 2006 through March 21, 2012, the auditor’s reports issued by Stafford did not contain an adverse opinion, a disclaimer of opinion, nor were the reports qualified or modified as to uncertainly, audit scope or accounting principles. However, the audit reports did reflect uncertainties regarding the ability of the Company to continue as a going concern. During the referenced period, there were no disagreements between the Company and Stafford on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Stafford would have caused Stafford to make reference to the matter in reports on the Company’s financial statements, had any such reports been issued. During the period of engagement, there were no reportable events as that term is defined in Item 304(a)(1)(iv) of Regulation S-K.
Change in Fiscal Year
Effective February 28, 2012, our board of directors approved the change of the Company’s fiscal year end from April 30 to December 31. The change in fiscal year end commenced with the fiscal ended December 31, 2011 on Form 10-K.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Principal Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Principal Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2012.
Management’s Report on Internal Control over Financial Reporting
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the specified time periods. Our Principal Executive Officer and our Principal Financial Officer (collectively, the “Certifying Officers”) are responsible for maintaining our disclosure controls and procedures. Prior to the filing of this report, our Certifying Officers evaluated the effectiveness of our disclosure controls and procedures for the period covered by this report. Based on the evaluation, our Certifying Officers concluded that our disclosure controls and procedures were effective to provide reasonable assurance that (a) information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and (b) that it is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure. We have conducted a review of the effectiveness of our internal control over financial reporting as disclosed herein.
Our management is also responsible for establishing and maintaining a system of adequate internal control over financial reporting. Internal control over financial reporting is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles, and receipts and expenditures are being made only in accordance with authorizations of management and our directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
We believe our internal control over financial reporting is effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles. Since our most recent evaluation, there have been no changes in our internal control or in other factors that could significantly affect our internal control, nor were any corrective actions required with regard to significant deficiencies and material weaknesses. Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement and instance of fraud. Internal control is susceptible to manipulation, especially in instances of fraud caused by the collusion of two or more people, including our senior management. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our Certifying Officers, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2012 and the date of the filing of the annual report.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm, pursuant to provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit us to provide only management’s report.
This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of Rotoblock, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
Management
The following table sets forth the names, positions and ages of the executive officers and directors. Directors are elected at the annual meeting of stockholders and serve for one year or until their successors are elected and qualify. Officers are elected by the Board of Directors and their terms of office are, except to the extent governed by employment contract, at the discretion of the Board of Directors.
During 2012, the Company accepted the resignations of Michael H. Choy and Freddy Goman Yu Ting Chong and appointed Mr. Liu as Chairman. The officers and directors listed above are expected to hold their offices/positions until the next annual meeting of our stockholders. The officers and directors are our only officers, directors and control persons.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than ten percent of our common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes of ownership of our common stock. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To the best of our knowledge, all Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with. In making these disclosures, we have relied solely on a review of the copies of such reports furnished to us and written representations by our directors, executive officers and greater than ten percent stockholders. than ten percent of our common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes of ownership of our common stock. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To the best of our knowledge, all Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with. In making these disclosures, we have relied solely on a review of the copies of such reports furnished to us and written representations by our directors, executive officers and greater than ten percent stockholders.
Code of Ethics
At this time, we have not adopted a formal Code of Ethics that applies to the Chief Financial Officer. We have, however, followed an informal Code of Ethics requiring Board of Director approval of any material transaction involving our Chief Financial Officer. We believe this procedure reasonably deters material wrongdoing and promotes honest and ethical conduct from our executive officers.
Nominating Committee
At the present time, we do not have a standing nominating committee or a committee performing similar functions. At the present stage of our business development, it is the view of our Board of Directors that such a committee would be of little assistance in recommending nominations for director-nominees. In addition, at the present time we do not have a defined policy or procedure for shareholders to submit recommendations or nominations for directors. The Board of Directors believes that, given the current stage of our development, a specific nominating policy would be premature and of little assistance until the Company’s operations develop to a more advanced level. 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 makes recommendations for election or appointment.
Item 11.
Item 11. Executive Compensation
The following table sets out the compensation received for the fiscal years ended December 31, 2012 and 2011 with respect to each of the individuals who were our principal executive officers at any time during the last fiscal year and the most highly compensated executive officers whose total salary and bonus exceeded $100,000.
(1) Mr. Schneider was appointed the Chief Executive Officer on January 12, 2012 and resigned effective March 21, 2013.
(2) Mr. Schneider was issued 1 million warrants exercisable at $0.25 per share. The warrants were valued at $0.04 using the Black-Sholes Option Pricing Model and the following assumptions: risk free interest rate of 0.91%, expected life of 5 years and annualized volatility of 526.57%.
(3) On January 12, 2012.Mr. Liu resigned as CEO of Rotoblock.
Employment Agreements
Rotoblock has only one employment agreement at December 31, 2012 with Mr.Chu Keung Andrew Chow as Chief Financial Officer as of July 1, 2012. This agreement provides for a base annualsalary of $120,000, The initial term is for one year with automatic yearly renewals unless terminated earlier under the provisions of the agreement. NOTE: Andrew Schneider had an employment agreement dated January 20, 2012. It provided for a base salary of $125,000, stock grant and warrants.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
None of our officers or directors exercised any warrants since acquisition date of November 18, 2011.
No pension or retirement benefit plan has been adopted and none is proposed at this time.
Director Compensation
The Company has not yet established a policy to compensate independent directors of the company.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information known to Rotoblock with respect to beneficial ownership of Rotoblock’s Common Stock as of March 28, 2013 for (i) each director, (ii) each holder of 5.0% or greater of Rotoblock’s Common Stock, (iii) Rotoblock’s Chief Executive Officers and the two most highly compensated executive officers other than the Chief Executive Officers and the Chief Financial Officer named in the table entitled “Summary Compensation Table” below (the “named executive officers”), and (iv) all executive officers and directors as a group. Unless otherwise listed below, the address for each investor is Rotoblock’s address: 300 B Street, Santa Rosa, CA 95401.
Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, to Rotoblock’s knowledge the persons named in the table below have sole voting and investment power with respect to all shares of Common Stock beneficially owned. In addition, unless otherwise indicated, all persons named below can be reached at Rotoblock, 300B Street, Santa Rosa, CA 95401. The number of shares beneficially owned by each person or group as of March 28, 2013 includes shares of Common Stock that such person or group had the right to acquire on or within 60 days after March 28, 2013, including, but not limited to, upon the exercise of options or the vesting of restricted stock units. References to options in the footnotes of the table below include only options to purchase shares outstanding as of March 28, 2013 that were exercisable on or within 60 days after March 28, 2013, and references to restricted stock units in the footnotes of the table below include only restricted stock units outstanding as of March 28, 2013 that would vest and could settle on or within 60 days after March 28, 2013. For each individual and group included in the table below, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of the 82,953,862 shares of Common Stock outstanding on March 28, 2013 plus the number of shares of Common Stock that such person or group had the right to acquire on or within 60 days after March 28, 2013.
(1) In general, a person is considered a beneficial owner of a security if that person has or shares the power to vote or direct the voting of such security, or the power to dispose of such security. A person is also considered to be a beneficial owner of any securities of which the person has the right to acquire beneficial ownership within (60) days.
(2) Michael Choy has beneficial control.
(3) Includes 4.1 million shares issuable upon exercise of warrants.
(4) Includes 3.5 million shares issuable upon exercise of warrants.
Item 13.
Item 13. Certain Relationships and Related Transactions
Notes Payable to Related Parties
During 2012, we borrowed $509,093 from related entities with interest rates ranging from 5 to 7%.
The balances due related parties as of December 31, 2012 was $919,093 which is comprised of the following: American Pacific Medical group for $465,690, daifu MD Internet Information Service Ltd., for $95,220,Physican Medical Technology Co. Ltd for $206,310 and loan from a director and shareholder of $151,873.
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 year ended December 31, 2012 for use in operations. During the year ended December 31, 2012, a total of $30,049 of interest payable has been accrued on the liability.
Item 14.
Item 14. Principal Accountant Fees and Services
The following is a summary of the fees billed to Rotoblock by Parker Randall CF (H.K.) CPA Limited for professional services rendered for the fiscal years ended December 31, 2012 and December 31, 2011:
Audit Fees. Consists of fees billed for professional services rendered for the integrated audit of Rotoblock’s consolidated financial statements and of its internal control over financial reporting, for review of the interim consolidated financial statements included in quarterly reports and for services that are normally provided by Parker Randall in connection with statutory and regulatory filings or engagements.
Audit-Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of Rotoblock’s consolidated financial statements and are not reported under “Audit Fees.” These services include employee benefit plan audits, accounting consultations in connection with transactions, merger and acquisition due diligence, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.
Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and international tax compliance, assistance with tax reporting requirements and audit compliance, assistance with customs and duties compliance, value-added tax compliance, mergers and acquisitions tax compliance, and tax advice on international, federal and state tax matters. None of these services were provided under contingent fee arrangements.
All Other Fees. Consists of fees for products and services other than the services reported above. These services included translation of filings and other miscellaneous services. No management consulting services were provided.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
The Board of Director’s functions as the Audit Committee. The policy is to pre-approve all audit and permissible non-audit services to be provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent registered public accounting firm and management are required to report periodically to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. The Board of Director’s may also pre-approve particular services on a case-by-case basis.
All audit fees were approved by the Board of Directors.
Item 15.
Item 15. Exhibits
The following Exhibits 3(i) and 3 (ii), marked with an asterisk and required to be filed hereunder, are incorporated herein by reference and can be found in their entirety in our original Form SB-2 Registration Statement, filed on June 7, 2004. Exhibit 99.1 can be found in its entirety in our Form 10K-SB for the fiscal year ended April 30, 2006, filed on July 31, 2006. Those exhibits are incorporated herein by this reference.
Exhibit No. Description
* Incorporated by reference
(a) Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K of November 15, 2011, as amended, but included herein with all schedules and exhibits.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Chien Chih Liu and Chow Chu Keung as his or her attorney-in-fact for him or her, in any and all capacities, to sign this annual report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Position Date
By: /S/ Chien Chih Liu
Chien Chih Liu
Director and Chairman and Chief Executive Officer
(principal executive officer)
April 12, 2013
By: /S/ Chu Keung Andrew Chow
Chu Keung Andrew Chow
Chief Financial Officer and Director
(principal financial and accounting officer)
April 12, 2013