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RTBC > SEC Filings for RTBC > Form 10-K on 15-Apr-2013All Recent SEC Filings

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Form 10-K for ROTOBLOCK CORP


15-Apr-2013

Annual Report


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.

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