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RTBC > SEC Filings for RTBC > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for ROTOBLOCK CORP


12-Nov-2013

Quarterly Report


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

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

- our limited operating history, particularly of Rotoblock and Daifu on a consolidated basis;

- our ability to protect the patents on our proprietary technology;

- our ability to fund our short-term and long-term financing needs;

- changes in our business plan and corporate strategies; and
- Other risks and uncertainties discussed in greater detail in various sections of this report, or set forth in part I, Item 1A of our Form 10-K under the heading "Risk Factors".

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

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

In this report, the term "Rotoblock" refers to Rotoblock, the term "Daifu" refers to daifuWaste Management Holdings, Ltd. Rotoblock acquired Daifu as a wholly owned subsidiary on November 18, 2011 on a consolidated basis, and "we", "us" and "our" refer to Rotoblock or the "Company", as the context requires.

Results of Operations

Note: Activity during quarter ended September 30, 2013

In the three months ended September 30, 2013, we were not able to recognize any revenues. In accordance with our policy of revenue recognition, we require the customer acceptance of the installation as operating satisfactorily. Although work continued on various installations, we did not reach the completion stage to properly recognize revenue.

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

                                                               Nine Months ended September 30
                                                          2013                           2012
 Statement of Operations Data:
 Net sales                                                100%                           100%
 Cost of sales                                         (62.9)%                         (72.6)%
 Operating expenses                                    (59.7)%                        (98.7)%
 Loss from operations                                  (22.6)%                        (71.4)%
Net loss                                               (84.5)%                         (75.1)%

Quarter Ended September 30, 2013 Compared to Quarter Ended September 30, 2012

Selling and distribution expenses decreased by $20,089 from $94,754 for the quarter ended September 30, 2012 to $74,665 for the quarter ended September 30, 2013. The reason for the decrease was due to less traveling expenses of sales team and headcount reduced in marketing team.

Administrative and other operating costs decreased by $164,469 from $270,291 for the quarter ended September 30, 2012 to $105,822 for the period ended September 30, 2013. The decrease was primarily due to reduction in staff cost and professional fees.

Depreciation decreased by $1,432 from $6,143 for the quarter ended September 30, 2012 to $4,711 for the quarter ended September 30, 2013. The reason for the decrease was due to some assets fully depreciated with no additional fixed assets was purchased.

Other income decreased by $7,176 from $15,524 for the quarter ended September 30, 2012 to $8,348 for the quarter ended September 30, 2013. The decrease was primarily due to less service and maintenance income for the medical waste equipment.

Financial expense increased by $1,255 from $40,433 for the quarter ended September 30, 2012 to $41,688 for the period ended September 30, 2013. The increase was due to additional related party loans.

Interest Income decreased slightly by $53 from $120 for the quarter ended September 30, 2012 to $67 for the quarter ended September 30, 2013. The decrease was due to less overall average Company balances in bank savings accounts.

Net Loss for the quarter ended September 30, 2013 was $218,470 compared to net loss of $236,283 for the quarter ended September 30, 2012.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Sales decreased by $296,436 from $1,342,954 for the nine months ended September 30, 2012 to $1,046,518 for the nine months ended September 30, 2013. The decrease was due to two equipment sales recognized for the nine months ended September 30, 2013, compared to three equipment sales recognized for the nine months ended September 30, 2012.

Cost of Goods Sold decreased by $317,128 from $975,583 for the nine months ended September 30, 2012 to $658,455 for the nine months ended September 30, 2013. The decrease was due to only two equipment sales being recognized for the nine months ended September 30, 2013 as mentioned above. As a percentage of sales, the cost of good sold was 73% and 63% for the nine months ended September 30, 2012 and for the nine months ended September 30, 2013 respectively.

Gross profit increased by $20,692 from $367,371 for the nine months ended September 30, 2012 to $388,063 for the nine months ended September 30, 2013. The increase was due to improvement in cost control for the two equipments recognized. As a percentage, the sales margins increased from 27% to 37% for the nine months ended September 30, 2012 and for the nine months ended September 30, 2013 respectively.

Selling and distribution expenses decreased by $24,864 from $288,100 for the nine months ended September 30, 2012 to $263,236 for the nine months ended September 30, 2013. The reason for the decrease was due to less traveling expenses of sales team and headcount reduced in marketing team.

Administrative and other operating costs decreased by $674,067 from $1,019,382 for the nine months ended September 30, 2012 to $345,315 for the nine months ended September 30, 2013. The decrease was primarily due to reductions in staff cost and professional fees.

Depreciation decreased by $2,296 from $18,377 for the nine month ended September 30, 2012 to $16,081 for nine months ended September 30, 2013. The reason for the decrease was due to some assets fully depreciated with no additional fixed assets was purchased.

Other income decreased by $39,614 from $67,110 for the nine months ended September 30, 2012 to $27,496 for the nine months ended September 30, 2013. The decrease was primarily due to less service income and maintenance income for medical waste equipment.

Impairment in Fair Value of Available-for-sale Investments of $555,142 represents in decline in market value of the stock of Samyang Optics Co. Ltd. held by the Company.

Financial expense increased by $3,652 from $117,141 for the nine months ended September 30, 2012 to $120,793 for the nine months ended September 30, 2013. The increase was due to additional related party loans.

Interest Income decreased by $310 from $502 for the nine months ended September 30, 2012 to $192 for the nine months ended September 30, 2013. The decrease was due to less overall average Company balances in bank savings accounts.

Net Loss for the nine months ended September 30, 2013 was $884,805 compared to net loss of $1,008,013 for the nine months ended September 30, 2012.

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 parties and our investment in securities with Samyang Optics, Ltd of $488,931.

We will require additional capital to maintain 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 $246,108 and of $570,902 during the nine months ended September 30, 2013 and 2012 respectively.

Cash used in operations during the first nine months ended September 30, 2013 was the result of the net loss incurred for the periods of $884,805, offset by non-cash expenses of $712,783. In the first nine months of 2013, non-cash expenses were due to depreciation and amortization, non-cash interest, non-controlling interest, stocks issued for consulting fees and the impairment of available for sale investments.

Cash used in operations during the first nine months ended September 30, 2012 was the result of the net loss incurred for the period of $1,008,013, offset by non-cash expenses of $408,076. In the first nine months of 2012, non-cash expenses were due to depreciation and amortization, non-cash interest, non-controlling interest, stocks/warrants issued for compensation and consulting fees.

For the first nine months ended September 30, 2013, the net change in operating assets and liabilities resulted in a cash decrease of $74,086.

The change was primarily due to the following: a decrease of $329,728 in deferred revenue, a decrease of $24,651 in other payables and accrued liabilities mainly for VAT Taxes paid, an increase of $116,684 in accounts receivable, a decrease of $263,334 and of $133,643 in inventory and other receivables respectively.

For the first nine months ended September 30, 2012, the net change in operating assets and liabilities resulted in a cash increase of $29,035.

The change was primarily due to the following: a decrease of $26,501 in deferred revenue, an increase of $334,061 in other payables and accrued liabilities as a result of executive pay, legal and accounting fee and VAT Taxes, an increase of $417,287 in accounts receivable and an increase of $169,971 in inventory, offset by a decrease of $308,733 in other receivables and prepayments.

Financing activities provided cash of $311,388 and of $532,669 for the first nine months ended September 30, 2013 and for the first nine months ended September 30, 2012 respectively.

In the first nine months ended September 30, 2013 we received cash advances from related parties.

In the first nine months ended September 30, 2012, we received cash of $17,000 through the issuance of convertible debt and used $64,022 of cash to deposit in a restricted cash account to ensure certain project performances. Also we received $579,691 from three related parties of daifuWaste Group for operating use.

We had cash and cash equivalents of $103,392 at September 30, 2013 as compared to $49,568 at December 31, 2012. We had working capital deficits of $3.9 million and $3.6 million at September 30, 2013 and December 31, 2012, respectively.

We will need additional funding to sustain our operations at our current levels through the next twelve months. Our working capital deficit of $3.9 million at September 30, 2013 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.

Critical Accounting Policies and Use of Estimates

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

Estimates

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

Stock Based Compensation

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

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

Allowance for Doubtful Accounts

The Company provides an allowance for doubtful accounts when management estimates collectability to be uncertain. Accounts receivable are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer, overall customer credit-worthiness and historical experience. The Company determined that no allowance was needed at September 30, 2013 and December 31, 2012.

Inventories

Inventories consist primarily of raw materials and are valued at the lower of cost or market value with cost determined on a specific identification basis. In assessing the ultimate realization of inventories, management makes judgments as to future demand requirements compared to current or committed inventory levels. The Company's reserve requirements generally

increase/decrease due to management's projected demand requirements, market conditions and product life cycle changes. During the first nine months ended September 30, 2013 and for the year ended December 31, 2012, the Company did not make any allowance for slow-moving or defective inventories.

Off-Balance Sheet Arrangements

None.

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