ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This quarterly report of Form 10-Q, or Form 10-Q, including the following management's discussion and analysis, and other reports filed by the registrant from time to time with the securities and exchange commission (collectively the "filings") contain forward-looking statements which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. these forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. you can generally identify forward-looking statements through words and phrases such as "seek", "anticipate", "believe", "estimate", "expect", "intend", "plan", "budget", "project", "may be", "may continue", "may likely result", and similar expressions. when reading any forward-looking statement you should remain mindful that all forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and are subject to risks, uncertainties, assumptions and other factors relating to our industry and results of operations, including but not limited to the following factors:
Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made in our filings. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law.
In this quarterly report on Form 10-Q the term refers to Rotoblock refers to Rotoblock, the term Daifu refers to daifuWaste Management Holdings , Ltd . Rotoblock acquired daifu Waste Management as a wholly owned subsidiary on November 18, 2011 on a consolidated basis, and "we," "us" and "our" refer to Rotoblock , as the context indicates.
- our ability to establish, maintain and strengthen our brand;
- our ability to successfully integrate acquired subsidiaries, particularly Jonway, into our company and business;
- our ability to maintain effective disclosure controls and procedures;
- our limited operating history, particularly of ZAP and Jonway on a consolidated basis;
- whether the alternative energy and gas-efficient vehicle market for our electric products continues to grow and, if it does, the pace at which it may grow;
- our ability to attract and retain the personnel qualified to implement our growth strategies;
- our ability to obtain approval from government authorities for our products;
- our ability to protect the patents on our proprietary technology;
- our ability to fund our short-term and long-term financing needs;
- our ability to compete against large competitors in a rapidly changing market for electric and conventional fuel vehicles;
- changes in our business plan and corporate strategies; and
- other risks and uncertainties discussed in greater detail in various sections of this report, particularly the section captioned "Risk Factors."
Activity during quarter ended March 31, 2012
In the first quarters of 2012 and 2011, we were not able to recognize any revenues. In accordance with our policy of revenue recognition, we require the customer acceptance of the installation as operating satisfactorily. During the first quarter of both years, we experienced delays in obtaining customer contract sign-offs due to the Chinese holidays where many businesses are closed to celebrate. Although work continued on various installations, we did not reach the completion stage to properly recognize revenue.
Quarter Ended March 31, 2012 Compared to Quarter Ended March 31, 2011
Selling and distribution expenses decreased by $9,218 from $100,244 for the quarter ended March 31, 2011 to $91,026 for the period ended March 31, 2012. The decrease was primarily due to less travel expenses for personnel to conserve cash.
Administrative and other operating costs increased by $31,555 from 372,945 for the quarter ended March 31, 2011 to $404,500 for the period ended March 31, 2012. The increase was primarily due to the inclusion of Rotoblock corporate for the first quarter ended March 31, 2012. Since the merger did not occur until November 2011. The Company incurred additional expenses for the following: legal and professional fees, consulting expenses and stock based compensation.
Other income decreased $1.7 million from $1.7 million for the quarter ended March 31, 2011 to $32,044 for the quarter ended March 31, 2012. The decrease was primarily due to forfeiture of a customer's deposit on an installation for approximately $1.7 million in the first quarter ended March 31, 2011.
Financial expense. increased by $37,496 from $101 for the quarter ended March 31, 2011 to $37,673 for the period ended March 31, 2012. The inclusion of Rotoblock corporate for the first quarter ended March 31, 2012 added approx $30,000 for interest on the Samyang Convertible debt plus interest on the recently incurred convertible debt due to Asher Enterprises Inc. and the loan from a related party, American Pacific Medical Group Limited.
Interest income decreased by $159 from $331 for the quarter ended March 31, 2011 to $172 for the period ended March 31, 2012. The decrease was due to less overall average Company balances in bank savings accounts.
Net Income (loss) for the quarter ended March 31, 2012 was ($507,099) net loss compared to net income of $1.3 million for the period ended March 31, 2011.
Liquidity and Capital Resources
In assessing our liquidity, we monitor and analyze our cash on-hand, liquidation value of our investment in securities, and our operating and capital expenditure commitments. Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations.
Our principal sources of liquidity consist of our existing cash on hand, bank loans, our investment in securities with Samyang Optics, Ltd of $736,573. As of March 31, 2012, we had a loan of $410,000 due to American Pacific Medical Group Limited, a related party of daifuWaste Group, with loan interest rate at 7% per annum, from January 1, 2012. Also during the 1st quarter of 2012, we had convertible debt for $37,500 with Asher Enterprises Inc with interest rate at 8% per annum.
We will require additional capital to expand our current operations. In particular, we require additional capital to expand our customer base by the addition of qualified sales and professional staff to execute on our business plan and pursue our efforts in the research and development.
We intend to fund our long term liquidity needs related to operations through the incurrence of indebtedness, equity financing or a combination of both. Although we believe that these sources will provide sufficient liquidity for us to meet our future liquidity and capital obligations, our ability to fund these needs will depend on our future performance, which will be subject in part to general economic, financial, regulatory and other factors beyond our control, including trends in our industry and technological developments. However, we may not be able to obtain this additional financing on terms acceptable to us or at all.
We provided cash in operations of $116,614 and used cash in operations of $185,057 during the first quarter ended March 31, 2012 and 2011 respectively.
Cash provided from operations during the first quarter ended March 31, 2012 was the result of the net loss incurred for the periods of $507,099, offset by non-cash expenses of $144,404. In the first quarter of 2012, non-cash expenses were due to depreciation and amortization, non-cash interest, non-controlling interest, stock/warrants issued for compensation and consulting fees.
Cash used in operations for the first quarter ended March 31, 2011 was the result of the net profit of $1.3 million plus non-cash expenses of $73,864. In the first quarter of 2011, non-cash expenses were due to depreciation and amortization and stock based compensation for certain equity instruments.
For the first quarter ended March 31, 2012, the net change in operating assets and liabilities resulted in a cash increase of $479,309. The change was primarily due to the following: a increase in other receivables and prepayments of $96,353 as result of payments to suppliers and a decrease in customer's deposits offset by an increase in other payables and accrued liabilities of $317,449 as a result of accruals of $106,000 for executive pay, loan from Pacific Medical Group Limited of $238,000 and Vat Taxes of $47,000.
In 2011, the net change in operating assets and liabilities resulted in a cash decrease of $1.5 million. The change was primarily due to the following: a decrease of $1.5 million in deferred revenue to recognize a customer deposit that was forfeited, a decrease of $288,000 in accounts receivable, offset by increase of $176,796 in the inventory, an increase of $50,898 in other payables and accrued liabilities executive and staff salaries and an increase of $75,970 due to payments for suppliers.
Investing activities used cash no cash for the first quarter ended March 31, 2012, however, cash of $293,590 was used in the first quarter ended March 31, 2011 to acquire a 35% share interest in a MWT center in Qinghai Province. The center is expected to start business in the second quarter of 2012.
Financing activities used cash of $99,589 for the first quarter ended March 31, 2012 and provided cash of $163,375 for the first quarter ended March 31, 2011. In the first quarter ended March 31, 2012, we received cash of $17,000 through the issuance of convertible debt and used $116,589 of cash to deposit in a restricted cash account to ensure certain project performances. In the first quarter of 2011, we received total cash of $163,375 from the exercise of stock options of $85,000 and the release of previously restricted cash of $78,375.
We had cash and cash equivalents of $161,230 at March 31, 2012 as compared to $144,202 at December 31, 2011. We had working capital deficits of $5.4 and $6.4 million at March 31, 2012 and December 31, 2011, respectively.
We will need additional funding to sustain our operations at our current levels through the next twelve months.
Critical Accounting Policies and Use of Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in conformity with U.S. generally accepted accounting principles which requires our management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The amounts estimated could differ from actual results.
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 March 31, 2012 and 2011.
Inventories consist primarily of raw materials and are valued at the lower of cost or market value with cost determined on a specific identification basis. In assessing the ultimate realization of inventories, management makes judgments as to future demand requirements compared to current or committed inventory levels. The Company's reserve requirements generally increase/decrease due to management's projected demand requirements, market conditions and product life cycle changes. During the quarter ended March 31, 2012, the Company did not make any allowance for slow-moving or defective inventories.
Off-Balance Sheet Arrangements
For Complete Report, see SEC Filings for Rotoblock Corp.