UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2009
Commission
File Number: #033-31067
ECO
2
PLASTICS,
INC.
(Exact
name of small business issuer as specified in its charter)
Delaware
(State or
other jurisdiction of incorporation or organization)
31-1705310
(IRS
Employer Identification Number)
P. O. Box
760
5300
Claus Road
Riverbank,
CA 95367
(Address
of principal executive offices)(Zip Code)
(209)
863-6200
(Registrant's
telephone no., including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of
this chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files). Yes [ ] No
[X]
Indicate
by check mark whether the registrant is a large accelerated filer [ ], an
accelerated filer [ ], a non-accelerated filer [ ], or a smaller reporting
company [X].
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
The
number of shares of the Company's common stock issued and outstanding as of
October 31, 2009 is 560,401,057.
|
ECO2
PLASTICS, INC.
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TABLE
OF CONTENTS
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PART
I FINANCIAL INFORMATION
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Item
1
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Financial
Statements
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Condensed
Balance Sheets at September 30, 2009 (unaudited) and December 31,
2008
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3
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Condensed
Statements of Operations for the three and nine
months ended September 30, 2009 and 2008
(unaudited)
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4
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Condensed
Statement of Changes in Stockholders’ Equity for the nine months ended
September 30, 2009 (unaudited)
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5
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Condensed
Statements of Cash Flows for the nine months ended September 30, 2009
and 2008 (unaudited)
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6
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Notes
to Condensed Financial Statements (unaudited)
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7
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Item
2
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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20
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Item
3
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Quantitative
and Qualitative Disclosures About Market Risk
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27
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Item
4
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Controls
and Procedures
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27
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PART
II OTHER INFORMATION
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Item
1A
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Risk
Factors
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28
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Item
2
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
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30
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Item
6
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Exhibits
|
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30
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SIGNATURES
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31
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Items
1, 3,4 and 5 of PART II have not been included as they are not applicable
or the response is negative.
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ECO2
Plastics, Inc.
|
Condensed
Balance Sheets
|
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
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|
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|
|
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September
30,
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December
31,
|
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|
2009
|
|
|
2008
|
|
Current
assets:
|
|
(unaudited)
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
168
|
|
|
$
|
1,577
|
|
Accounts
receivable, net of allowance of $10
|
|
|
276
|
|
|
|
318
|
|
Inventories
|
|
|
31
|
|
|
|
48
|
|
Assets
held for sale
|
|
|
200
|
|
|
|
-
|
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Prepaid
expenses and other current assets
|
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|
5
|
|
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|
-
|
|
Total
current assets
|
|
|
680
|
|
|
|
1,943
|
|
Property
and equipment, net
|
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|
923
|
|
|
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9,104
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Deferred
debt issue costs, net
|
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53
|
|
|
|
139
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|
Other
assets
|
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|
39
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70
|
|
|
|
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|
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|
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Total
assets
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|
$
|
1,695
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|
$
|
11,256
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|
|
|
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Current
liabilities:
|
|
|
|
|
|
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|
|
Accounts
payable
|
|
$
|
2,574
|
|
|
$
|
1,481
|
|
Accounts
payable to related parties
|
|
|
168
|
|
|
|
132
|
|
Accrued
liabilities
|
|
|
428
|
|
|
|
651
|
|
Convertible
notes payable and accrued interest
|
|
|
|
|
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Due
to related parties, net of debt discount of $518 and
$1,171
|
|
|
235
|
|
|
|
1,589
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|
Due
to others, net of debt discount of $0 and $597
|
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-
|
|
|
|
857
|
|
Fair
value liability relating to price adjustable warrants
|
|
|
204
|
|
|
|
-
|
|
Current
portion of note payable to California Integrated Waste Management Board
(CIWMB)
|
|
|
214
|
|
|
|
209
|
|
Participation
Certificates obligations issued prior to 2004
|
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-
|
|
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|
354
|
|
Total
current liabilities
|
|
|
3,823
|
|
|
|
5,273
|
|
Non-current
liabilities:
|
|
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|
|
|
|
|
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Note
payable to CIWMB, net of current portion
|
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1,117
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1,299
|
|
Note
payable to City of Riverbank
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50
|
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-
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Convertible
notes payable and accrued interest
|
|
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|
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Due
to related parties, net of debt discount of $7,155 and
$3,078
|
|
|
1,059
|
|
|
|
41
|
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Due
to others, net of debt discount of $1,995 and $324
|
|
|
338
|
|
|
|
5
|
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Total
non-current liabilities
|
|
|
2,564
|
|
|
|
1,345
|
|
Total
liabilities
|
|
|
6,387
|
|
|
|
6,618
|
|
Commitments
and contingencies (Note 9)
|
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Stockholders'
equity (deficit):
|
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Preferred
stock, $0.001 par value, 1,700,000,000 shares authorized,
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Series
A convertible, 152,843,414 shares authorized, 149,995,655
and
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152,843,414
shares issued outstanding, preference in liquidation
$4,585
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150
|
|
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|
153
|
|
Series
B-1 convertible, 336,240,039 shares authorized, 328,630,238
shares
|
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|
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issued
and outstanding, preference in liquidation $6,573
|
|
|
329
|
|
|
|
329
|
|
Series
B-2 convertible, 140,000,000 shares authorized, none issued and
outstanding
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-
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-
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Series
C convertible, 400,000,000 shares authorized, none issued and
outstanding
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-
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-
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Common
stock, $0.001 par value, 2,500,000,000 shares authorized,
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560,401,057
and 556,453,298 shares issued and outstanding
|
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|
561
|
|
|
|
557
|
|
Additional
paid-in capital
|
|
|
117,001
|
|
|
|
106,351
|
|
Accumulated
deficit
|
|
|
(122,733
|
)
|
|
|
(102,752
|
)
|
Total
stockholders' equity (deficit)
|
|
|
(4,692
|
)
|
|
|
4,638
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity (deficit)
|
|
$
|
1,695
|
|
|
$
|
11,256
|
|
|
|
|
|
|
|
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|
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|
See
accompanying notes to condensed financial
statements
|
ECO2
Plastics, Inc.
|
Condensed
Statements of Operations
|
(in
thousands, except share and per share data)
|
(unaudited)
|
|
|
|
|
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|
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|
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Three
months ended
|
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Nine
months ended
|
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|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,423
|
|
|
$
|
2,525
|
|
|
$
|
3,022
|
|
|
$
|
5,445
|
|
Cost
of goods sold
|
|
|
1,175
|
|
|
|
1,893
|
|
|
|
2,081
|
|
|
|
4,852
|
|
Gross
margin
|
|
|
248
|
|
|
|
632
|
|
|
|
941
|
|
|
|
593
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant
operations and technology development
|
|
|
1,731
|
|
|
|
2,764
|
|
|
|
5,191
|
|
|
|
6,588
|
|
General
and administrative, including stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
of $173 and $281 and $519 and $1,093
|
|
|
563
|
|
|
|
1,162
|
|
|
|
1,876
|
|
|
|
3,563
|
|
Impairment
of recycling plant upon closure
|
|
|
7,578
|
|
|
|
-
|
|
|
|
7,578
|
|
|
|
-
|
|
Loss from
operations
|
|
|
(9,624
|
)
|
|
|
(3,294
|
)
|
|
|
(13,704
|
)
|
|
|
(9,558
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, including amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$1,092 and $474 and $3,758 and $5,474
|
|
|
(1,301
|
)
|
|
|
(529
|
)
|
|
|
(5,017
|
)
|
|
|
(6,098
|
)
|
Change
in fair value liability for price adjustable warrants
|
|
|
611
|
|
|
|
-
|
|
|
|
608
|
|
|
|
-
|
|
Loss
on modification of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,969
|
)
|
|
|
-
|
|
Other
income relating to pre-2004 obligations
|
|
|
354
|
|
|
|
|
|
|
|
354
|
|
|
|
|
|
Excess
of fair value of common stock issued in exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
notes, interest and accounts payable and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,458
|
)
|
Total
other income (expense)
|
|
|
(336
|
)
|
|
|
(529
|
)
|
|
|
(7,024
|
)
|
|
|
(9,556
|
)
|
Loss
before income taxes
|
|
|
(9,960
|
)
|
|
|
(3,823
|
)
|
|
|
(20,728
|
)
|
|
|
(19,114
|
)
|
Income
taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
|
(9,960
|
)
|
|
|
(3,823
|
)
|
|
|
(20,728
|
)
|
|
|
(19,114
|
)
|
Beneficial
conversion feature related to Series A and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B-1 Convertible Preferred Stock
|
|
|
-
|
|
|
|
(8,957
|
)
|
|
|
-
|
|
|
|
(8,957
|
)
|
Net
loss attributable to holders of common stock
|
|
$
|
(9,960
|
)
|
|
$
|
(12,780
|
)
|
|
$
|
(20,728
|
)
|
|
$
|
(28,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to holders of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
common share, basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computing net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss
attributible to holders of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
common share, basic and diluted
|
|
|
560,401
|
|
|
|
547,241
|
|
|
|
559,636
|
|
|
|
468,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed financial
statements.
|
ECO2
Plastics, Inc.
|
Condensed
Statement of Changes in Stockholders' Equity (Deficit)
|
For
the Nine Months Ended September 30, 2009
|
(in
thousands, except share data)
|
|
|
|
|
Convertible
Preferred Stock
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
Series
B-1
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
Total
|
|
Balance
at December 31, 2008
|
|
|
152,843,414
|
|
|
$
|
153
|
|
|
|
328,630,238
|
|
|
$
|
329
|
|
|
|
556,453,298
|
|
|
$
|
557
|
|
|
$
|
106,351
|
|
|
$
|
(102,752
|
)
|
|
$
|
4,638
|
|
Cumulative
effect of adjustments resulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
adoption of accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(893
|
)
|
|
|
747
|
|
|
|
(146
|
)
|
Adjusted
balance at January 1, 2009
|
|
|
152,843,414
|
|
|
|
153
|
|
|
|
328,630,238
|
|
|
|
329
|
|
|
|
556,453,298
|
|
|
|
557
|
|
|
|
105,458
|
|
|
|
(102,005
|
)
|
|
|
4,492
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
519
|
|
|
|
|
|
|
|
519
|
|
Shares
vested for executive compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,100,000
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
-
|
|
Stock
issue costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
(16
|
)
|
Preferred
stock converted to common stock
|
|
|
(2,847,759
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
2,847,759
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Beneficial
conversion feature for convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
notes
issued and modified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,041
|
|
|
|
|
|
|
|
11,041
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,728
|
)
|
|
|
(20,728
|
)
|
Balance
at September 30, 2009
|
|
|
149,995,655
|
|
|
$
|
150
|
|
|
|
328,630,238
|
|
|
$
|
329
|
|
|
|
560,401,057
|
|
|
$
|
561
|
|
|
$
|
117,001
|
|
|
$
|
(122,733
|
)
|
|
$
|
(4,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed financial statements.
|
|
ECO2
Plastics, Inc.
|
Condensed
Statements of Cash Flows
|
(in
thousands)
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(20,728
|
)
|
|
$
|
(19,114
|
)
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,269
|
|
|
|
1,080
|
|
Excess
of fair value of common stock issued in exchange for
|
|
|
|
|
|
|
|
|
accounts
payable, notes payable, accrued interest and warrants
|
|
|
-
|
|
|
|
3,458
|
|
Stock-based
compensation
|
|
|
519
|
|
|
|
1,098
|
|
Change
in fair value of price adjustable warrants
|
|
|
(608
|
)
|
|
|
-
|
|
Fair
value of price adjustable warrants issued included in interest
expense
|
|
|
666
|
|
|
|
-
|
|
Amortization
included in interest expense
|
|
|
3,758
|
|
|
|
5,474
|
|
Loss
on modification of debt
|
|
|
2,969
|
|
|
|
-
|
|
Impairment
provision
|
|
|
7,578
|
|
|
|
-
|
|
Non-cash
other income
|
|
|
(354
|
)
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
42
|
|
|
|
(25
|
)
|
Inventory
|
|
|
16
|
|
|
|
145
|
|
Accounts
payable
|
|
|
1,130
|
|
|
|
(417
|
)
|
Accrued
liabilities, including accrued interest
|
|
|
585
|
|
|
|
807
|
|
Other
|
|
|
(7
|
)
|
|
|
(15
|
)
|
Net
cash used by operating activities
|
|
|
(3,165
|
)
|
|
|
(7,509
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property, plant & equipment
|
|
|
(910
|
)
|
|
|
(2,369
|
)
|
Net
cash used by investing activities
|
|
|
(910
|
)
|
|
|
(2,369
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments
on CIWMB note payable
|
|
|
(175
|
)
|
|
|
(174
|
)
|
Proceeds
from issuance of notes payable
|
|
|
2,913
|
|
|
|
7,458
|
|
Repayments
of notes payable
|
|
|
-
|
|
|
|
(475
|
)
|
Proceeds
from issuance of preferred stock
|
|
|
-
|
|
|
|
4,500
|
|
Payments
of debt and stock issue costs
|
|
|
(72
|
)
|
|
|
(441
|
)
|
Net
cash provided by financing activities
|
|
|
2,666
|
|
|
|
10,868
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,409
|
)
|
|
|
990
|
|
Cash
and cash equivalents, beginning of year
|
|
|
1,577
|
|
|
|
101
|
|
Cash
and cash equivalents, end of period
|
|
$
|
168
|
|
|
$
|
1,091
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
48
|
|
|
$
|
74
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Debt
discount
|
|
$
|
11,041
|
|
|
$
|
4,504
|
|
Common
stock exchanged for notes payable, accrued interest and
warrants
|
|
$
|
-
|
|
|
$
|
13,031
|
|
Common
stock exchanged for accounts payable and accrued
liabilities
|
|
$
|
-
|
|
|
$
|
754
|
|
Preferred
stock exchanged for notes payable and accrued interest
|
|
$
|
-
|
|
|
$
|
7,862
|
|
Convertible
notes and interest payable terms modified
|
|
$
|
7,465
|
|
|
$
|
-
|
|
Deferred
compensation and accounts payable exchanged for notes
payable
|
|
$
|
185
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed financial statements.
|
|
ECO
2
Plastics, Inc.
Notes
to Condensed Financial Statements
As
of September 30, 2009
(unaudited)
Note
1. Description of Business and Summary of Significant Accounting
Policies
Organization
and business
– ECO
2
Plastics, Inc., (“ECO
2
”
or the “Company”) was incorporated under the laws of the State of Delaware in
2000, and formed for purposes of acquiring certain patented technology and
development of a worldwide market. We have developed a unique
and revolutionary process referred to as the ECO
2
TM
Environmental System (the “Eco
2
Environmental System”). The ECO
2
Environmental System cleans post-consumer plastics, without the use of water, at
a cost savings versus traditional methods (the “Process”). This Process is both
patented and patent-pending and is licensed from Honeywell Federal Manufacturing
& Technologies, LLC (“Honeywell”) and the Department of Energy on an
exclusive basis for the patent life. Since our inception, we
have
invested in the development of the technology and equipment comprising the
ECO
2
Environmental System, which includes a Process Patent granted in 2007. This
included building several scaled up versions of the Prototype ECO
2
Environmental System (the “Prototype”), testing of the Prototypes, building a
pilot plant, evaluating the product produced by the Prototype and real-time
testing. Our first full scale production facility was constructed in Riverbank,
California and was producing saleable product and ramping up as we further
developed the Process. Our goal is to build and operate plastic
recycling plants in the USA that utilize the ECO
2
Environmental System and to expand the ECO
2
Environmental System worldwide. Our growth strategy includes organic growth,
strategic acquisitions and licensing or partnership
agreements.
As
a result of new production technology beginning to come online in 2008, and to
reduce plant operating costs and use of cash during the ramp-up period, we
decided to direct most production to new technology equipment and accordingly
reduced operations of prior technology production equipment. As a
result, in November 2008, we terminated approximately 85 employees and reduced
our workforce to approximately 35 employees. During 2009, we expanded
production and increased our workforce. While we made significant
progress in refining our production processes and moved closer to volume and
quality goals, management and the Board concluded that we would not likely
achieve our goals utilizing the Riverbank facility. We determined
that the size and layout of the existing facility is no longer suitable for the
efficient flow of production processes. Process improvements implemented to date
have required the purchase and implementation of additional
equipment. In addition, management and the Board have determined that
we should upgrade our primary plastic flake wash line in order to enable
production at a higher volume and at a more competitive cost
structure. Equipment to be utilized for most efficient production
will require a production footprint for which the existing plant is not
suitable.
In
September 2009, the Board of Directors of the Company approved a plan to
relocate and upgrade production facilities to a new location in Northern
California, and in connection with this plan, we closed our Riverbank facility
and laid off approximately 50 employees. During the course of the
next six to nine months, we will not produce product for sale as we build our
new plant. We have been dismantling and staging equipment for
relocation, and we have approximately 10 employees. We have identified at least
one site suitable for the relocated facility as well as new equipment that will
be installed alongside certain existing equipment in order to complete an
improved production line, however, we have not made final decisions as to the
site location or equipment vendor. Company management projects that
development of the new plant will require approximately $9 million in additional
cash, including some funds required to pay currently outstanding accounts
payable. Company management expects that a significant portion of this amount
can be financed through equipment lease and other commercial credit facilities,
while the balance will need to be sourced from equity or debt
investors.
Business
risks and uncertainties
– We operate in the evolving field of plastics
materials recycling and our business is reliant on our licensing of technology
from Honeywell. New developments could both significantly and adversely affect
existing and emerging technologies in the field. Our success in developing
additional marketable products and processes and achieving a competitive
position will depend on, among other things, our ability to attract and retain
qualified management personnel and to raise sufficient capital to meet our
operating and development needs. There can be no assurance that we will be
successful in accomplishing our objectives.
Basis
of presentation and going concern
- The accompanying condensed financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, on the basis that contemplate our
continuation as a going concern. Since inception, we have reported net losses,
operating activities have used cash, we have working capital and stockholders’
deficits, and we recently ceased production in order to relocate our plant (see
Organization and business above). These matters raise substantial
doubt about our ability to continue as a going concern. As of November 5, 2009
we extended certain obligations which were due on October 31, 2009 to November
30, 2009, and thus cured the default without any request for remedy on the part
of the note holders. We reported a net loss of approximately $20.7 million for
the nine months ended September 30, 2009 and $24.0 million for the year ended
December 31, 2008, and operating activities used cash of approximately $3.2
million during the nine months ended September 30, 2009 and $9.9 million during
the year ended December 31, 2008. At September 30, 2009, we had a
working capital deficit of $3.1 million and accumulated losses from inception of
$122.7 million.
At
September 30, 2009, we had cash and cash equivalents of approximately $168,000
and do not have sufficient cash to meet our needs for the next twelve
months. During the three months ended June 30, 2009, we received cash
of approximately $2.0 million primarily from existing investors in connection
with the issuance of 8% convertible notes payable due in June 2012, convertible
into shares of (to be designated) Series D Convertible Preferred Stock at
$0.0017 per share. Additionally, in connection with this
fund-raising, certain terms of notes payable convertible into shares of our
Series C Convertible Preferred Stock of $4.0 million due in March 2009 and $3.5
million due in December 2011, were modified such that the maturity date was
changed to June 2012 and the per share conversion price was changed from $0.015
to $0.004 per share. During the three months ended September 30,
2009, we received cash from existing investors of (i) $150,000 in connection
with issuance of 8% convertible notes payable due in August 2012, convertible
into shares of (to be designated) Series D Convertible Preferred Stock at
$0.0017 per share, and (ii) $750,000 in connection with issuance of 8%
convertible notes payable due October 31, 2009, convertible into shares of
Series D Convertible Preferred Stock at $0.0017 per share.In October 2009, we
received cash of $375,000 from existing investors in connection with
issuance of 8% convertible notes payable due October 31, 2009, convertible into
shares of Series D Preferred Stock at a price of $0.0017 per share.
Our Board
of Directors and Chief Executive Officer continue to be actively involved in
discussions and negotiations with investors in order to raise additional funds
to finance improvements and other equipment, and to provide adequate working
capital for operations. There is no assurance that continued financing proceeds
will be obtained in sufficient amounts necessary to meet our needs. In view of
these matters, continuation as a going concern is dependent upon our ability to
meet our financing requirements, raise additional capital, and the future
success of our operations. The accompanying financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from our possible inability to continue as a
going concern.
Interim financial
statements
– The accompanying unaudited condensed financial statements
and related notes are presented in accordance with the rules and regulations of
the Securities and Exchange Commission with regard to interim financial
information. Accordingly, the condensed financial statements do not
include all of the information and notes to financial statements required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of our management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation of our financial position, results of operations and
cash flows for the interim periods presented have been
included. Results of operations for the September 30, 2009 interim
periods are not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 2009 or for any other future interim
period. The accompanying unaudited interim condensed financial
statements should be read in conjunction with the audited annual financial
statements included in our December 31, 2008 Annual Report on Form
10-K.
Summary of Significant
Accounting Policies
- Significant accounting policies used in preparation
of our financial statements are disclosed in notes to our audited annual
December 31, 2008 financial statements. A condensed summary of
disclosures regarding certain of such policies are set forth below.
Use of estimates in the
preparation of financial statements -
Preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. The more
significant accounting estimates inherent in the preparation of our financial
statements include estimates as to the depreciable lives of property and
equipment, valuation and impairment of long-lived assets, valuation of accounts
receivable, valuation and classification of equity related instruments and
derivatives issued and issuable, and valuation allowance for deferred income tax
assets.
Cash and cash
equivalents
– We consider deposits that can be redeemed on demand and
investments that have original maturities of less than three months when
purchased to be cash equivalents.
Impairment
of long-lived assets
– Management evaluates the recoverability
of the Company’s long-lived assets in accordance with accounting guidance with
respect to Accounting for the Impairment or Disposal of Long-lived Assets, which
generally requires the assessment of these assets for recoverability when events
or circumstances indicate a potential impairment exists. Events and
circumstances considered by the Company in determining whether the carrying
value of long-lived assets may not be recoverable include, but are not limited
to: significant changes in performance relative to expected operating results,
significant changes in the use of the assets, significant negative industry or
economic trends, a significant decline in the Company’s stock price for a
sustained period of time, and changes in the Company’s business strategy. In
determining if impairment exists, the Company estimates the undiscounted cash
flows to be generated from the use and ultimate disposition of these assets. If
impairment is indicated based on a comparison of the assets’ carrying values and
the undiscounted cash flows, the impairment loss is measured as the amount by
which the carrying amount of the assets exceeds the estimated fair value of the
assets.
Contingencies
-
Certain conditions may exist as of the date our financial statements are issued,
which may result in a loss, but which will only be resolved when one or more
future events occur or fail to occur. Our management and legal counsel assess
such contingent liabilities, and such assessment inherently involves an exercise
of judgment. In assessing loss contingencies related to legal proceedings that
are pending against us or unasserted claims that may result in such proceedings,
our legal counsel evaluates the perceived merits of any legal proceedings or
unasserted claims as well as the perceived merits of the amount of relief sought
or expected to be sought therein. If the assessment of a contingency indicates
that it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated, then the estimated liability would be
accrued in our financial statements. If the assessment indicates that a
potentially material loss contingency is not probable but is reasonably
possible, or is probable but cannot be reasonably estimated, then the nature of
the contingent liability, together with an estimate of the range of possible
loss if determinable would be disclosed.
Fair value of financial
instruments
- We measure our financial assets and liabilities in
accordance with generally accepted accounting principles. For certain of our
financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities, the carrying amounts approximate fair
value due to their short maturities. Amounts recorded for notes payable, net of
discount, also approximate fair value because current interest rates available
to us for debt with similar terms and maturities are substantially the same
.
Effective
January 1, 2008, we adopted accounting guidance for financial assets and
liabilities. The adoption did not have a material impact on our results of
operations, financial position or liquidity. This standard defines fair value,
provides guidance for measuring fair value and requires certain disclosures.
This standard does not require any new fair value measurements, but rather
applies to all other accounting pronouncements that require or permit fair value
measurements. This guidance does not apply to measurements related to
share-based payments. This guidance discusses valuation techniques, such as the
market approach (comparable market prices), the income approach (present value
of future income or cash flow), and the cost approach (cost to replace the
service capacity of an asset or replacement cost). The guidance utilizes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels. The following is a brief description
of those three levels:
Level
1: Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable, either directly or
indirectly. These include quoted prices for similar assets or liabilities in
active markets and quoted prices for identical or similar assets or liabilities
in markets that are not active.
Level
3: Unobservable inputs in which little or no market data exists, therefore
developed using estimates and assumptions developed by us, which reflect
those that a market participant would use.
Financial assets and liabilities
- We
currently measure and report at fair value cash and cash equivalents and fair
value liability for price adjustable warrants. Our cash and cash
equivalents are recorded at fair value as determined through market, observable
and corroborated sources. The fair value liability for price adjustable warrants
has been recorded as determined utilizing Black-Scholes option pricing
model. The following table summarizes our financial assets and
liabilities measured at fair value on a recurring basis as of September 30,
2009 (in thousands):
|
|
|
|
|
Quoted
prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
Balance
at
|
|
|
active
markets for
|
|
|
other
observable
|
|
|
Unobservable
|
|
|
|
September
30, 2009
|
|
|
identical
assets
|
|
|
inputs
|
|
|
inputs
|
|
Assets:
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Cash
|
|
$
|
168
|
|
|
$
|
168
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
financial assets
|
|
$
|
168
|
|
|
$
|
168
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value liability for price adjustable warrants
|
|
$
|
204
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
204
|
|
Total
financial liabilities
|
|
$
|
204
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following
is a roll forward through September 30, 2009 of the fair value measurements
using significant unobservable Level 3 inputs:
Balance
at December 31, 2008
|
|
$
|
-
|
|
Cumulative
effect of adoption of accounting principle
|
|
|
146
|
|
Balance
at January 1, 2009
|
|
|
146
|
|
Change
in fair value included in net operating loss
|
|
|
58
|
|
Ending
balance at September 30, 2009
|
|
$
|
204
|
|
Non-Financial Assets and Liabilities
-
We
currently measure impairment of property and equipment on a non-recurring
basis. The following table presents non-financial assets and
liabilities at fair value and related impairment included in operations as of
September 30, 2009.
|
|
Balance
at September 30, 2009
|
|
Quoted
prices in active markets for identical assets
|
|
Significant
other observable inputs
|
|
|
Significant unobservable
inputs
|
|
|
Total
Gains (Losses)
|
|
|
|
|
|
(Level
1)
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
|
|
$
|
923
|
|
|
|
|
|
|
$
|
923
|
|
|
$
|
(6,220
|
)
|
Assets
held for sale
|
|
|
200
|
|
|
|
|
|
|
|
200
|
|
|
|
(1,348
|
)
|
Total
non-financial assets
|
|
$
|
1,123
|
|
$ -
|
|
$ -
|
|
|
$
|
1,123
|
|
|
$
|
(7,568
|
)
|
Accounting for
derivatives
– We evaluate our convertible debt, options, warrants or
other contracts to determine if those contracts or embedded components of those
contracts qualify as derivatives to be separately accounted for under accounting
principles generally accepted in the United States of
America. The result of this accounting treatment is that under
certain circumstances the fair value of the derivative is recorded as a
liability and marked-to-market each balance sheet date. In the event
that the fair value is recorded as a liability, the change in fair value is
recorded in the statement of operations as other income or
expense. Upon conversion or exercise of a derivative instrument, the
instrument is marked to fair value at the conversion date and then that fair
value is reclassified to equity. Equity instruments that are initially
classified as equity that become subject to reclassification are reclassified to
liability at the fair value of the instrument on the reclassification
date.
Revenue recognition
-
We recognize revenue when there is persuasive evidence of an arrangement, the
product has been delivered to the customer, the sales price is fixed or
determinable, and collectability is reasonably assured. We recognize revenues
from sales of recycled products upon shipment to customers. Amounts
received in advance of when products are delivered are recorded as accrued
liabilities. Research or other types of grants from governmental
agencies or private organizations are recognized as revenues if evidence of an
arrangement exists, the amounts are determinable and collectability is
reasonably assured with no further obligations or contingencies
remaining.
Cost of goods sold
–
Cost of goods sold includes the cost of raw materials processed and
sold.
Basic and diluted net loss
attributable to holders of common stock per common share
- Basic net loss
attributable to holders of common stock per common share is computed by dividing
net loss attributable to holders of common stock, which is the net loss less the
beneficial conversion feature related to Series A and Series B-1 Convertible
Preferred Stock, by the weighted-average number of common shares outstanding
during the period. Diluted net loss per common share is determined using the
weighted-average number of common shares outstanding during the period, adjusted
for the dilutive effect of common stock equivalents, consisting of shares that
might be issued upon exercise of common stock options, warrants, convertible
promissory notes or convertible preferred stock. In periods where losses are
reported, the weighted-average number of common shares outstanding excludes
common stock equivalents, because their inclusion would be
anti-dilutive. Computations of net loss per share for the interim
periods ended September 30, 2009, exclude 382,058,677 shares issuable upon
exercise of outstanding and issuable warrants to purchase common stock,
3,617,507,002 shares issuable upon conversion of outstanding convertible notes
payable and accrued interest and 478,625,893 shares issuable upon conversion of
outstanding convertible preferred stock. Computations of net loss attributable
to holders of common stock per share for the interim periods ended September 30,
2008, exclude 195,422,058 shares issuable upon exercise of outstanding warrants
to purchase common stock, 264,312,856 shares issuable upon conversion of
outstanding convertible notes payable and 489,083,454 shares issuable upon
conversion of outstanding convertible preferred stock. These common
stock equivalents could have the effect of decreasing diluted net income per
share in future periods.
Recent accounting
pronouncements
- In 2007, the Financial Accounting Standards Board
(the “FASB”) issued accounting guidance which establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest and the valuation of retained non-controlling equity investments when a
subsidiary is deconsolidated. The guidance also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. This statement is effective for fiscal years beginning
after December 15, 2008, and we adopted it effective January 1, 2009, and there
was no effect of adoption. In the absence of possible future
investments, application of this pronouncement will have no effect on our
financial statements.
In 2008,
the FASB issued accounting guidance with respect to changes in disclosure
requirements for derivative instruments and hedging activities, which requires
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows. We
do not use derivative financial instruments nor do we engage in hedging
activities. This guidance is effective beginning January 1,
2009, the date we adopted it, and there was no effect upon
adoption.
In May
2008, the FASB released guidance with respect to accounting for convertible debt
instruments that may be settled in cash upon conversion, which is effective for
financial statements issued for fiscal periods beginning after December 15, 2008
and changes the accounting for convertible debt instruments that permit or
require the issuer to pay cash upon conversion. Under the guidance,
the issuer will no longer account for the convertible debt entirely as a
liability. Instead the issuer will allocate the proceeds from the
issuance of the instrument between liability and equity. The
resulting debt discount, (the difference between the principal amount of the
debt and the amount allocated to the liability component), is subsequently
amortized to interest expense over the instrument’s expected life using the
interest method. The guidance is not to be applied retrospectively to
instruments within its scope that were not outstanding during any of the periods
that will be presented in annual financial statements for the period of adoption
but were outstanding during an earlier period. We adopted this
guidance effective January 1, 2009, and there was no effect upon
adoption.
In June
2008, accounting guidance was issued, which is effective for fiscal years ending
after December 15, 2008, provides for, among other things, revisions to certain
provisions of existing accounting principles generally accepted in the United
States of America, including nullification of certain previously existing
guidance that upon conversion, unamortized discounts for instruments with
beneficial conversion features should be included in the carrying value of the
convertible security that is transferred to equity at the date of
conversion. This nullification was made to update guidance to
acknowledge the issuance of other accounting pronouncements, which revised
accounting guidance to require immediate recognition of interest expense for the
unamortized discount. In accordance with transition guidance
,
we retrospectively applied
the accounting guidance. During 2008, certain convertible promissory
notes payable were exchanged for shares of our common stock, and as a result of
adoption of this accounting guidance the remaining unamortized debt
discount of approximately $2.2 million was recognized as interest
expense. There was no cumulative effect for periods prior to
2008.
In June
2008, accounting guidance was issued with respect to determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock, which is
effective for fiscal years ending after December 15,
2008. Adoption of this guidance affects accounting for convertible
instruments and warrants with provisions that under certain circumstances
protect holders from declines in the stock price (“down-round” provisions).
Warrants with such provisions will no longer be recorded in equity. This
guidance is to be applied to outstanding instruments as of the beginning of the
fiscal year in which it is applied. The cumulative effect of the change in
accounting principle is recognized as an adjustment to the opening balance of
accumulated deficit for the year of adoption, presented separately. The
cumulative-effect adjustment is the difference between the amounts recognized in
the statement of financial position before initial application and the amounts
recognized in the statement of financial position upon its initial application.
Amounts recognized in the statement of financial position as a result of the
initial application are determined based on the amounts that would have been
recognized if the guidance had been applied from the issuance date of the
instrument. Effective January 1, 2009, we adopted this standard. In
connection with warrants issued in prior years, the financial reporting
(non-cash) effect of initial adoption of this accounting pronouncement resulted
in a cumulative effect of change in accounting principle of approximately
$146,000, based on a per share closing price of our stock of $0.02 at December
31, 2008. The fair value liability is revalued utilizing Black-Scholes valuation
model computations with the increase or decrease in fair value being reported in
the statement of operations as other income (expense). During the
three and nine months ended September 30, 2009, the fair value decreased
$611,000 and $608,000, based on a closing per share price of $0.005 per share at
September 30, 2009, which decreased our net loss. Weighted average assumptions
used in Black Scholes computations were expected lives of 1 to 8 years,
volatility rates of 140% to 165%, risk-free interest rates of 0.6% to 3.4% and
dividend rate of nil.
In April
2009, accounting guidance was released with respect to interim disclosures about
fair value of financial instruments to require disclosures about the fair value
of financial instruments for interim reporting periods, effective for reporting
periods ending after June 15, 2009. We have incorporated required
disclosures in these financial statements with no effect on our financial
position, results of operations or cash flows.
In May
2009, accounting guidance was issued regarding subsequent events, which
establish general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. In particular, guidance sets forth the
period after the balance sheet date during which management should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date, and the
disclosures that should be made about such events or transactions. This
accounting guidance is effective for reporting periods ending after
June 15, 2009, and should not result in significant changes in subsequent
events that an entity reports, either through recognition or disclosure, in
financial statements. Among other things, this guidance requires
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. We have
incorporated required disclosures in these financial statements.
Note
2. Inventories
Inventories
consist of the following (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
4
|
|
|
$
|
13
|
|
Finished
Good
|
|
|
27
|
|
|
|
35
|
|
Total
|
|
$
|
31
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
Note
3. Closure of Recycling Plant and Impairment
In
September 2009, the Board of Directors of the Company approved a plan to
relocate and upgrade production facilities to a new location in Northern
California, and in connection with this plan, we closed our Riverbank
facility. We have been dismantling and staging equipment for
relocation. Design and engineering efforts will follow, and construction is
expected to commence within six to nine months. Assets that will not
be used in the relocated facility, including installation costs, which have been
significant over the years, had a net book value of approximately $6.2 million,
after accumulated depreciation of $3.8 million have been removed from the
accounts. Additionally, an impairment provision of approximately $1.4
million has been recorded with respect to assets expected to be utilized in the
relocated plant to reduce the net book value of such assets to approximately
$910,000. In the absence of having obtained commitments for future
financing for the new plant, the estimate of fair value was based upon estimates
of the prices for similar assets that could be obtained in a current transaction
between willing parties. Estimated net proceeds for assets held for
disposal of $200,000 were classified as current assets pending near-term
sales. The Company recorded $7.6 million of expense as impairment on
closure of recycling plant, which primarily represents loss on disposal or
abandonment. The remaining net book value of assets to be relocated
has been retained in the accounts and will continue to be
depreciated.
Note 4. Concentrations and
Major Customers
Technology License
–
Our business is reliant on licensing of technology from
Honeywell. Pursuant to terms of a license agreement we entered into
with Honeywell, as amended, we obtained exclusive, nontransferable, worldwide
license rights for the life of the underlying patent to practice the methods and
to make, use, and sell the products and/or services and to certain sublicense
rights, which are covered by the proprietary rights, limited to the field of use
of separating and recovering motor oil from high density polyethylene plastic.
Under this agreement, we are required to pay royalties at a rate of $0.005 per
pound of recycled plastics sold, with minimum annual royalties of $200,000 for
2008 and $300,000 for 2009 and years thereafter. Honeywell may
terminate this agreement in the event of, among other things, the
nationalization of the industry which encompasses any products or services, any
suspension of payments under the terms of the agreement by government
regulation, a substantial change in our ownership (whether resulting from
merger, acquisition, consolidation or otherwise), another company or person
acquiring control of the Company, or the existence of a state of war between the
United States and any country where we have a license to manufacture
products or provide services.
Cash in excess of federally
insured limits
- Cash and cash equivalents are maintained at financial
institutions and, at times, balances may exceed federally insured
limits. We have never experienced any losses related to these
balances. There were no amounts on deposit in excess of federally
insured limits at September 30, 2009.
Major Customers
– Our
revenues are received from certain major customers. The loss of major
customers could potentially create a significant hardship for
us. During the three and nine months ended September 30, 2009,
revenues from customers, which during some interim periods exceed 10% of total
revenues are summarized as follows (dollars in thousands):
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Revenues
|
|
|
%
|
|
|
|
Revenues
|
|
|
%
|
|
|
Revenues
|
|
|
%
|
|
|
|
Revenues
|
|
|
%
|
|
Customer
A
|
|
$
|
859
|
|
|
|
60
|
%
|
|
|
$
|
723
|
|
|
|
31
|
%
|
|
$
|
1,809
|
|
|
|
60
|
%
|
|
|
$
|
730
|
|
|
|
14
|
%
|
Customer
B
|
|
|
-
|
|
|
|
0
|
%
|
|
|
|
941
|
|
|
|
40
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
|
1,387
|
|
|
|
26
|
%
|
Customer
C
|
|
|
113
|
|
|
|
8
|
%
|
|
|
|
102
|
|
|
|
4
|
%
|
|
|
166
|
|
|
|
5
|
%
|
|
|
|
1,030
|
|
|
|
20
|
%
|
Customer
D
|
|
|
-
|
|
|
|
0
|
%
|
|
|
|
91
|
|
|
|
4
|
%
|
|
|
128
|
|
|
|
4
|
%
|
|
|
|
736
|
|
|
|
14
|
%
|
Customer
E
|
|
|
98
|
|
|
|
7
|
%
|
|
|
|
101
|
|
|
|
4
|
%
|
|
|
117
|
|
|
|
4
|
%
|
|
|
|
520
|
|
|
|
10
|
%
|
Customer
F
|
|
|
22
|
|
|
|
2
|
%
|
|
|
|
103
|
|
|
|
4
|
%
|
|
|
178
|
|
|
|
6
|
%
|
|
|
|
255
|
|
|
|
5
|
%
|
Customer
G
|
|
|
173
|
|
|
|
12
|
%
|
|
|
|
44
|
|
|
|
2
|
%
|
|
|
346
|
|
|
|
11
|
%
|
|
|
|
61
|
|
|
|
1
|
%
|
As
further described in Note 7, Customer A is an owner of a relatively significant
amount of our convertible notes and warrants and its managing director is a
member of our Board of Directors.
Accounts
receivable from Customer F represents 66% of total accounts receivable at
September 30, 2009. Customer F is the California Department of
Conservation, which pursuant to terms of incentive grants is billed quarterly
and which results in a relatively large percentage of accounts receivables as
compared to revenues.
Note
5. Notes Payable and Convertible Notes Payable
We are
obligated to the California Integrated Waste Management Board (“CIWMB”) pursuant
to terms of a Promissory Note, which bears interest at 4.25% per annum with
principal and interest monthly payments of approximately $22,500 until fully
paid in May 2015. Pursuant to terms of a Security Agreement, among other things,
the promissory note is collateralized by equipment purchased for the recycling
plant, and a secondary security interest in our other machinery and equipment
and other assets.
In April
2009, we received $50,000 cash from the City of Riverbank, California pursuant
to a note payable due October 2013 with interest payable annually in March at an
annual rate of 4%.
In
September 2009, we received $750,000 cash from existing investors pursuant to 8%
promissory notes payable due October 31, 2009, which are convertible into shares
of Series D Preferred Stock at a price of $0.0017 per
share. Proceeds were used for working capital
purposes. On November 5, 2009, we extended the due date of the
obligations due October 31, 2009 to November 30, 2009 and thus cured the default
prior to any request for remedy on the part of the note holders.
Convertible
notes payable to related parties due within one year as of September 30, 2009,
consist of the following (in thousands):
|
|
|
|
|
Accrued
|
|
|
Unamortized
|
|
|
|
|
|
|
Notes
|
|
|
interest
|
|
|
debt
discount
|
|
|
Total
|
|
Series
D convertible promissory notes due October 31, 2009
|
|
$
|
750
|
|
|
$
|
3
|
|
|
$
|
(518
|
)
|
|
$
|
235
|
|
Convertible
notes payable and related accounts due after one year as of September 30, 2009,
consist of the following (in thousands):
|
|
|
|
|
Accrued
|
|
|
Unamortized
|
|
|
|
|
|
|
Notes
|
|
|
interest
|
|
|
debt
discount
|
|
|
Total
|
|
Series
C convertible promissory notes due June 2012
|
|
|
|
|
|
|
|
Due
to related parties
|
|
$
|
5,746
|
|
|
$
|
521
|
|
|
$
|
(5,463
|
)
|
|
$
|
803
|
|
Due
to others
|
|
|
1,719
|
|
|
|
197
|
|
|
|
(1,632
|
)
|
|
|
285
|
|
Subtotal
|
|
|
7,465
|
|
|
|
718
|
|
|
|
(7,095
|
)
|
|
|
1,088
|
|
Series
D convertible promissory notes, due June 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
to related parties
|
|
|
1,900
|
|
|
|
48
|
|
|
|
(1,692
|
)
|
|
|
256
|
|
Due
to others
|
|
|
408
|
|
|
|
8
|
|
|
|
(363
|
)
|
|
|
53
|
|
Subtotal
|
|
|
2,308
|
|
|
|
56
|
|
|
|
(2,055
|
)
|
|
|
309
|
|
Total
|
|
$
|
9,773
|
|
|
$
|
774
|
|
|
$
|
(9,150
|
)
|
|
$
|
1,397
|
|
Series D Convertible
Promissory Notes, due June 2012
– During the three months ended June 30,
2009, pursuant to terms of a convertible note purchase agreement we entered into
with holders of the majority of our existing outstanding Series C convertible
notes payable, we received cash of approximately $2.0 million and retired
$150,000 of deferred compensation due to our chief executive officer and
approximately $35,000 of accounts payable to two service providers, and in
exchange we issued approximately $2.2 million of convertible notes payable,
which bear interest at 8% and are due, together with accrued interest, in June
2012 (the “Series D Notes”). During the three months ended September
30, 2009, we received $150,000 and in exchange issued $150,000 of Series D
Notes. The Series D Notes are convertible into shares of our (to be
designated) Series D Convertible Preferred stock, and upon written election at
the discretion of holders of 60% or more of the aggregate principal amount of
Series D Notes then outstanding, the entire principal amount of such notes,
together with all accrued interest shall be converted at a price per share equal
to $0.0017 (subject to appropriate adjustment for all stock splits,
subdivisions, combination, recapitalizations and the like). The to be
newly designated Series D Convertible Preferred stock shall have rights,
preferences and privileges substantially similar to those of the Company’s
Series C Preferred stock, except that the liquidation preference shall be senior
to the Series C, Series B and Series A preferred stock, at a price per share
equal to $0.0017 (subject to appropriate adjustment for all stock splits,
subdivisions, combination, recapitalizations and the like). We have
pledged as collateral pursuant to terms of a Security Agreement substantially
all of our assets, subject only to a security interest granted to
CIWMB. We recorded debt discount of approximately $2.3 million
relating to the beneficial conversion feature of Series D Notes, of which
$192,000 and $252,000 was amortized to interest expense during the three and
nine months ended September 30, 2009, with the remainder to be amortized
approximately $192,000 during the remainder of 2009, $769,000 in each of 2010
and 2011 and $518,000 in 2012. Pursuant to terms of a Second Amended
and Restated Subordination and Intercreditor Agreement (the “Intercreditor
Agreement”) Series C Convertible Notes are subordinate to Series D
Notes.
Amendment and restatement of
conversion price and maturity date of Series C Convertible Notes
– In
connection with the above-described convertible note purchase agreement, among
other things, we restated and amended certain terms of the Series C Convertible
Notes, such that the conversion rate into which the notes are convertible into
shares of our Series C Convertible Preferred Stock was revised from $0.015 to
$0.004 per share, and the maturity date of the notes, together with accrued
interest, was extended to June 2012. Generally accepted accounting
principles provides that an exchange of debt instruments with substantially
different terms should be accounted for as a debt extinguishment, and that a
substantial modification of terms of a debt instrument should be accounted for
like that of an exchange of debt instruments with substantially different
terms. Further guidance is provided with respect to what is
considered to be substantially different to include, among others, that a
substantial modification has occurred if the change in the fair value of the
embedded conversion feature (calculated as the difference between the fair value
of the embedded conversion feature immediately before and after the
modification) is at least 10% of the carrying amount of the original debt
instrument immediately prior to the modification. The carrying
amount, or net book value, of the modified debt and related accounts
approximated $5.2 million immediately prior to the modification and the change
in fair value of the embedded conversion feature exceeded 10% of the net book
value. Accordingly, the modification is accounted for as a debt
extinguishment which involves writing off unamortized debt discount and debt
issue costs and recording a debt discount for the modified
notes.
As a
result, we recorded a loss on modification of debt of approximately $3.0
million, representing the write-off of unamortized debt discount and deferred
debt issue costs of the notes prior to modification of terms and also recorded a
debt discount of approximately $8.0 million relating to the beneficial
conversion feature of the modified notes. During the three and nine
months ended September 30, 2009, approximately $665,000 and $887,000,
respectively, of the discount was amortized to interest expense, with the
remainder to be amortized approximately $665,000 during the remainder of 2009,
$2.6 million in each of 2010 and 2011, and $1.3 million in 2012.
Series C Convertible
Promissory Notes, originally due March 2009
– During 2008, we received
cash of approximately $3.9 million and a promissory note with related accrued
interest totaling approximately $101,000 and in exchange issued convertible
notes payable due March 31, 2009 of approximately $4.0 million and warrants to
purchase approximately 134 million shares of our common stock at a per share
price of $0.015 that expire April 2015. The notes bear interest at
15%, with interest payable upon maturity, and are convertible into shares of our
common stock, and upon written election at the discretion of holders of 60% or
more of the aggregate principal amount of these notes then outstanding, the
entire principal amount of such notes, together with all accrued interest shall
be converted into shares of our Series C Convertible Preferred Stock
at a price per share equal to $0.015 (subject to appropriate adjustment for all
stock splits, subdivisions, combination, recapitalizations and the
like). We have pledged as collateral pursuant to terms of a Security
Agreement, as amended and restated, substantially all of our assets, subject
only to a security interest granted to CIWMB. Debt discount relating
to these notes approximated $4.0 million, of which approximately $2.2 million
was amortized to interest expense during 2008, with the remainder of $2.8
million amortized to interest expense during the three months ended March 31,
2009. The fair value of warrants was computed using a Black-Scholes
option pricing model with the following assumptions: contractual term
of 6.5 years, volatility of 156% (historical), zero dividends and interest rate
of approximately 3.1%.
In
connection with issuance of Series C Convertible Promissory Notes due December
2011, upon election of holders of more than 65% of the aggregate principal
amount of Series C Convertible Promissory Notes due March 2009 then outstanding,
pursuant to terms of an Amended and Restated Subordination and Intercreditor
Agreement the notes originally due in 2009 are subordinated to the notes due in
2011 and no payments of principal or interest will be made until the notes due
in 2011 are retired. Subsequent to March 31, 2009, terms of the notes
due March 31, 2009 became the same as Series C Convertible Promissory Notes due
December 2011, except that the notes originally due in March 2009 remain
subordinate to notes originally due in December 2011 (together, both issuances
are referred to as “Series C Convertible Notes” and both were further modified
with the Series D Notes purchase agreement described above).
Series C Convertible
Promissory Notes, originally due December 2011
- Additionally, in 2008,
we received cash of approximately $3.4 million and an amount due to an officer
for deferred compensation of $50,000 and in exchange issued convertible notes
payable due in December 2011of approximately $3.5 million and warrants to
purchase approximately 115 million shares of our common stock at a per share
price of $0.015 that expire in April 2015. The notes bear interest at
8%, with interest payable upon maturity. The Convertible Notes
due December 2011 are convertible into shares of our Series C Convertible
Preferred stock, and upon written election at the discretion of holders of 70%
or more of the aggregate principal amount of Convertible Notes due December 2011
then outstanding, the entire principal amount of such notes, together with all
accrued interest shall be converted at a price per share equal to $0.015
(subject to appropriate adjustment for all stock splits, subdivisions,
combination, recapitalizations and the like). We have pledged as
collateral pursuant to terms of a Security Agreement, as amended and restated,
substantially all of our assets, subject only to a security interest granted to
CIWMB. Debt discount relating to these notes approximated $3.5
million, of which approximately $46,000 was amortized to interest expense during
2008, and $476,000 was amortized to interest expense during 2009. The
fair value of warrants was computed using a Black-Scholes option pricing model
with the following assumptions: contractual term of 6.3 years, volatility of
151% (historical), zero dividends and interest rate of approximately
1.5%. These notes were further modified with the Series D Notes
purchase agreement described above. In connection with
modification of terms of these notes, the remaining unamortized debt discount of
$2.9 million was written off as part of recording the loss on modification of
debt.
Issuance of Common Stock in
exchange for Notes Payable and Warrants
– During 2008, we issued
approximately 243.9 million shares of our common stock in exchange for full
satisfaction of all then outstanding convertible notes payable, which
approximated $13.2 million and related accrued interest of approximately $1.7
million, and the return of outstanding warrants to purchase approximately 38.6
million shares of our common stock having an exercise price of $0.06 per share
and expiring in April 2015, which such warrants were acquired when the notes
were issued. The total number of shares issued was in excess of what
would have been received had the notes been converted according to original
terms. The excess of fair value of consideration issued over the fair
value of what would have been received has been recorded as a loss of
approximately $2.8 million.
Issuance of Convertible
Preferred Stock in exchange for notes payable
- During 2008, holders of
notes payable, which had an outstanding principal amount of approximately $7.5
million and related accrued interest payable of $525,000, exchanged such notes
and accrued interest for 152,843,413 shares of our Series A Convertible
Preferred Stock and 111,240,040 shares of our Series B-1 Convertible Preferred
Stock. The unamortized balance of deferred debt discount relating to
the notes of $201,000 was written off upon the transaction with the offset
decreasing additional paid in-capital.
At
September 30, 2009, aggregate maturities of notes payable were as follows (in
thousands):
|
|
|
|
|
City
of
|
|
|
Convertible
|
|
|
|
|
Year
ending December 31,
|
|
CIWMB
|
|
|
Riverbank
|
|
|
Notes
|
|
|
Total
|
|
2009
|
|
$
|
51
|
|
|
$
|
-
|
|
|
$
|
750
|
|
|
$
|
801
|
|
2010
|
|
|
219
|
|
|
|
-
|
|
|
|
-
|
|
|
|
219
|
|
2011
|
|
|
229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
229
|
|
2012
|
|
|
240
|
|
|
|
-
|
|
|
|
9,773
|
|
|
|
10,013
|
|
2013
|
|
|
249
|
|
|
|
50
|
|
|
|
-
|
|
|
|
299
|
|
Thereafter
|
|
|
345
|
|
|
|
-
|
|
|
|
-
|
|
|
|
345
|
|
|
|
$
|
1,333
|
|
|
$
|
50
|
|
|
$
|
10,523
|
|
|
$
|
11,906
|
|
Note
6. Preferred Stock, Common Stock and Stock Warrants
Authorized Shares
– We have authorized Four Billion Two Hundred Million (4,200,000,000)
shares of capital stock, of which Two Billion Five Hundred Million
(2,500,000,000) shares are classified as common stock and One Billion Seven
Hundred Million (1,700,000,000) shares are classified as preferred stock, of
which we have designated and authorized 152,843,413 shares as Series A Preferred
Stock (the “Series A Preferred Stock”), 336,240,040 shares as Series B-1
Convertible Preferred Stock (the “Series B-1 Preferred Stock”), 140,000,000
shares as Series B-2 Convertible Preferred Stock (the “Series B-2 Preferred
Stock”, and together with the Series B-1 Preferred Stock, the “Series B
Preferred Stock”), and 400,000,000 shares as Series C Convertible Preferred
Stock (the “Series C Preferred Stock”). See Note 10 – Subsequent
Events regarding proposed reverse stock split and changes in designations of
preferred stock.
Preferred Stock
– In
connection with the June 2009 convertible note purchase agreement as previously
described, a new series of convertible preferred stock will be
designated. The to be newly designated Series D Convertible Preferred
stock shall have rights, preferences and privileges substantially similar to
those of the Company’s Series C Preferred stock, except that the liquidation
preference shall be senior to the Series C, Series B and Series A preferred
stock, at a price per share equal to $0.0017 (subject to appropriate adjustment
for all stock splits, subdivisions, combination, recapitalizations and the
like). A summary of the significant rights and privileges of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
(together, the Preferred Stock”) is as follows:
Dividends -
Holders of
Preferred Stock shall be entitled to receive, on a
pari passu
basis, when, as
and if declared by the Board of Directors, out of any of our assets legally
available therefore, dividends at a rate of 5% of the Original Issue
Price of such share of Preferred Stock (in each case, as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like with respect to
such shares) per annum prior and in preference to the holders of our common
stock, and in preference to the holders of any of our other equity securities
that may from time to time come into existence to which the Preferred Stock
ranks senior (such junior securities, together with our common stock, “Junior
Securities”). No dividends will be paid on Junior Securities in any
year unless such dividends of the Preferred Stock are paid in full or declared
and set apart. Additionally, whenever we pay a dividend on our common
stock, each holder of a share of Preferred Stock shall be entitled to receive,
at the same time the dividend is paid on the common stock, a dividend equal to
the amount that would have been paid in respect of the common stock issuable
upon conversion of such share of Preferred Stock. As of September 30,
2009, no dividends have been declared.
Liquidation -
In the event of
a voluntary or involuntary liquidation, dissolution, or winding up of the
Company, holders of Series D Preferred Stock (to be designated as described
above) are entitled to be paid out first, prior and in preference to any
distribution of any of the assets of the Company to holders of our Series C
Preferred Stock, Series B-1 Preferred Stock, Series A Preferred
Stock, common stock or any of our other stock ranking junior to the Series D
Preferred Stock, an amount per share equal to the Original Issue Price of
$0.0017 per share of Series D Preferred Stock, plus all declared and unpaid
dividends on such shares. After payment of the full liquidation preference of
the Series D Preferred Stock, if assets or surplus funds remain, holders of
Series C Preferred Stock shall be entitled to be paid out first, prior and in
preference to any distribution of any of the assets of the Company to holders of
our Series B Preferred Stock, Series A Preferred Stock or our common
stock or any other of our stock ranking junior to the Series C
Preferred Stock, an amount per share equal to the Original Issue Price of $0.015
per share, plus all declared and unpaid dividends on such
shares. After payment of the full liquidation preference of the
Series C Preferred Stock, if assets or surplus funds remain, holders of Series B
Preferred Stock shall be entitled to be paid out first, prior and in preference
to any distribution of any of the assets of the Company to holders of our Series
A Preferred Stock or our common stock, or any other of our stock
ranking junior to the Series B Preferred Stock, an amount per share equal to the
Original Issue Price of $0.02 per share, plus all declared and unpaid dividends
on such shares. After payment of the full liquidation
preference of the Series B Preferred Stock, if assets or surplus funds remain,
holders of Series A Preferred Stock shall be entitled to be paid out first,
prior and in preference to any distribution of any of the assets of the Company
to holders of our common stock, or any other of our stock ranking
junior to the Series A Preferred Stock, an amount per share equal to the
Original Issue Price of $0.03 per share, plus all declared and unpaid dividends
on such shares.
Redemption
– The Preferred
Stock are not redeemable, except that, in the event of a Change of Control (as
defined), holders of a majority of the then outstanding shares of Series A
Preferred Stock and/or Series B Preferred Stock and/or Series C Preferred Stock
and/or Series D Preferred Stock (when designated) separately as four groups, can
require redemption of the Series A Preferred Stock and/or Series B Preferred
Stock and/or Series C Preferred Stock and/or Series D Preferred Stock, as the
case might be, at a redemption price per share equal to the amount per share to
which such holder would be entitled upon a liquidation, dissolution or winding
up of the Company. A “Change of Control”, as defined, means (i) the
beneficial acquisition by any person or group of 45% or more of the voting power
of our outstanding common stock, (ii) the occupancy of a majority of Board seats
by persons other than the directors occupying such seats as of the date of the
initial issuance of shares of Series B Preferred Stock (the “Current Directors”)
or persons nominated by Current Directors or their nominated successors, or
(iii) there shall occur a change in our Chief Executive Officer without the
consent of holders of a majority of the outstanding shares of Series B Preferred
Stock. A Change of Control will be treated as a liquidation,
dissolution or winding up of the affairs of the Company with respect to certain
matters, except as otherwise agreed by holders of a majority of the then
outstanding Series B Preferred Stock and/or Series C Preferred
Stock.
Preferred Stock Issued for
Cash and Exchange of Debt and Other Securities
– In June 2008, we issued
(i) 165 million shares of our Series B-1 Preferred Stock for $3.3 million cash,
(ii) approximately 152.8 million shares of our Series A Preferred Stock and
111.2 million shares of our Series B-1 Preferred Stock in exchange for
outstanding promissory notes having a principal balance of approximately $7.5
million and related accrued interest payable of $525,000, and (iii) 60 million
shares of our Series B-1 Preferred Stock in exchange for shares of our “old”
preferred series A preferred stock, which was issued in exchange for $1.2
million cash received during 2008, and which such series was eliminated upon
exchange. The fair value of shares of common stock that
preferred shares are convertible into exceeded the recorded value of notes and
accrued interest exchanged and cash received by approximately $9.0 million; this
beneficial conversion feature is presented in a manner similar to that of a
constructive dividend, increasing the net loss in the computation of net loss
per share attributable to holders of common stock for the interim periods ended
in June 2008. In connection with terms of the First Amendment to
Securities Subscription Agreement pertaining to the purchase of Series A and B
Preferred Stock, we granted to certain purchasers rights to purchase up to an
aggregate of 140 million shares of our Series B-2 Convertible Preferred Stock on
or prior to March 31, 2009 at a price of $0.0175 per share; the rights to which
expired unexercised.
Common Stock Issued for
Conversion of Preferred Stock
– During the nine months ended September
30, 2009, there were 2,847,759 shares of Series A Preferred Stock converted into
that same number of shares of our common stock.
Common Stock Issued Upon
Induced Conversion of Debt and Exchange of Warrants
- During the nine
months ended September 30, 2008, we issued approximately 243.9 million shares of
our common stock in exchange for full satisfaction of outstanding convertible
notes payable, which approximated $13.2 million and related accrued interest of
approximately $1.7 million, and the return of outstanding warrants to purchase
approximately 38.6 million shares of our common stock having an exercise price
of $0.06 per share and expiring in April 2015, which such warrants were acquired
when the notes were issued.
Additionally,
in 2008, we made a special offer to holders of warrants to purchase our common
stock to exchange all outstanding warrants into shares of our common
stock in a number of shares equal to 60% to 75% (depending on the warrant) of
the number of warrant shares exchanged. Holders of approximately
124.2 million warrants accepted the offer and we issued approximately 81.9
million shares of our common stock. The shares were valued at
approximately $536,000 based on the closing stock price on the exchange date,
and the excess of fair value issued over the fair value of securities received
was recorded as a loss of $556,000.
Warrants
– In
connection with borrowings and other transactions, we have issued warrants to
purchase our common stock. The fair value of warrants issued during
2008 was estimated using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%; expected volatility of
approximately 150% to 180% (based on historical volatility over the terms);
risk-free interest rates of approximately 3% to 5%; and contractual terms of 3.5
to 10 years. The weighted-average fair value of warrants granted
during 2008 was $0.03.
Stock Warrants Issued for
Services
- During 2008, we issued to a consultant warrants for the
purchase of 7.5 million shares of our common stock at an exercise price of
$0.015, with a term of approximately 6.5 years and recorded general and
administrative expense of approximately $145,000 based on the fair value as
determined utilizing the Black-Scholes valuation model. The closing stock price
at the issuable date was $0.02 per share. In addition, during 2008,
we issued to a consultant warrants for the purchase of 300,000 shares of our
common stock at an exercise price of $0.02, with a term of approximately 6.5
years, the estimated fair value of which approximated $11,000 as determined
utilizing the Black-Scholes valuation model. The closing stock price
at the issuable dates averaged $0.04 per share.
In 2008,
we entered into an offer of employment with an individual to serve as our Senior
Vice President of Operations, pursuant to which, among other things, in
additional to cash compensation and other customary employee related benefits we
agreed to issue a warrant to purchase 15 million shares of our common stock, 25%
of which vest at the end of one year and the remainder vest equally on a monthly
basis over the next three years. The warrants have a term of
approximately 6.5 years and an exercise price of $0.015 per share and were
valued at approximately $287,000 as determined utilizing the Black-Scholes
valuation model and will be expensed over the vesting period. The
closing stock price at the issuable date was $0.02 per share. We recognized
expense of approximately $37,000 in 2008, and $112,000 during the nine months
ended September 30, 2009.
In 2008,
we entered into an offer of employment with an individual to serve as our Chief
Financial Officer, pursuant to which, among other things, in additional to cash
compensation and other customary employee related benefits we agreed to issue a
warrant to purchase 20 million shares of our common stock, 25% of which vest at
the end of one year and the remainder vest equally on a monthly basis over the
next three years. The warrants have a term of approximately 6.5 years
and an exercise price of $0.015 per share and were valued at approximately
$382,000 as determined utilizing the Black-Scholes valuation model and will be
expensed over the vesting period. The closing stock price at the issuable date
was $0.02 per share. We recognized expense of approximately $8,000 in 2008, and
$149,000 during the nine months ended September 30, 2009.
Certain
of our outstanding warrants have exercise prices that are subject to downward
adjustments in the event we sell certain of our equity securities at per share
prices less that originally established exercise
prices. Additionally, certain of such warrants also contain
provisions providing for an increase in the number of shares warrants that may
be exercised. The following schedules of warrants outstanding and
activity give effect to such adjustments.
Warrants
issued to lenders for borrowings, all of which are
exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted
average
|
|
|
|
|
|
|
|
|
|
exercise
|
|
|
|
remaining
contract
|
|
|
intrinsic
value
|
|
|
|
outstanding
|
|
|
price
|
|
|
|
life
(in years)
|
|
|
(in
thousands)
|
|
Balance
at December 31, 2008
|
|
|
257,181,087
|
|
|
$
|
0.02
|
|
|
|
|
6.3
|
|
|
$
|
1,205
|
|
Increase
for price adjustment
|
|
|
33,901,960
|
|
|
$
|
0.0017
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
|
291,083,047
|
|
|
$
|
0.01
|
|
|
|
|
5.5
|
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued to consultants for services, all of which are
exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
exercise
|
|
|
|
remaining
contract
|
|
|
intrinsic
value
|
|
|
|
outstanding
|
|
|
price
|
|
|
|
life
(in years)
|
|
|
(in
thousands)
|
|
Balance
at December 31, 2008
|
|
|
52,025,630
|
|
|
$
|
0.03
|
|
|
|
|
7.5
|
|
|
$
|
37
|
|
No
activity
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
|
52,025,630
|
|
|
$
|
0.03
|
|
|
|
|
6.8
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued to employees and directors, 2,544,444 of which are
exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
exercise
|
|
|
|
remaining
contract
|
|
|
intrinsic
value
|
|
|
|
outstanding
|
|
|
price
|
|
|
|
life
(in years)
|
|
|
(in
thousands)
|
|
Balance
at December 31, 2008
|
|
|
37,850,000
|
|
|
$
|
0.03
|
|
|
|
|
6.3
|
|
|
$
|
175
|
|
Issuable
to executive for compensation
|
|
|
1,100,000
|
|
|
$
|
0.40
|
|
|
|
|
4.0
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
|
38,950,000
|
|
|
$
|
0.04
|
|
|
|
|
5.5
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
warrants:
|
|
|
|
|
|
weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
exercise
|
|
|
|
remaining
contract
|
|
|
intrinsic
value
|
|
|
|
outstanding
|
|
|
price
|
|
|
|
life
(in years)
|
|
|
(in
thousands)
|
|
Balance
at December 31, 2008
|
|
|
347,056,717
|
|
|
$
|
0.02
|
|
|
|
|
6.5
|
|
|
$
|
1,417
|
|
Increase
for price adjustment
|
|
|
33,901,960
|
|
|
$
|
0.0017
|
|
|
|
|
|
|
|
|
|
|
Issuable
to executive for compensation
|
|
|
1,100,000
|
|
|
$
|
0.40
|
|
|
|
|
4.0
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
|
382,058,677
|
|
|
$
|
0.02
|
|
|
|
|
5.8
|
|
|
$
|
140
|
|
Additional
information regarding all warrants outstanding as of September 30, 2009, is as
follows:
|
|
|
|
|
|
|
|
|
exercise
|
|
Weighted
average
|
Shares
|
|
|
price
|
|
remaining
life
|
|
60,000
|
|
|
$
|
0.001
|
|
1.8
years
|
|
43,604,779
|
|
|
$
|
0.0017
|
|
5.5
years
|
|
283,771,601
|
|
|
$
|
0.015
|
|
5.5
years
|
|
30,692,667
|
|
|
$
|
0.02
|
|
7.0
years
|
|
1,100,000
|
|
|
$
|
0.05
|
|
.8
years
|
|
18,979,630
|
|
|
$
|
0.06
|
|
5.5
years
|
|
1,000,000
|
|
|
$
|
0.07
|
|
5.5
years
|
|
1,000,000
|
|
|
$
|
0.12
|
|
6.5
years
|
|
750,000
|
|
|
$
|
0.22
|
|
5.5
years
|
|
1,100,000
|
|
|
$
|
0.30
|
|
5.5
years
|
|
382,058,677
|
|
|
|
|
|
5.8
years
|
The
intrinsic value of stock warrants is calculated by aggregating the difference
between the closing market price of our common stock at the reporting period end
and the exercise price of warrants which have an exercise price less than the
closing price.
Note
7. Related Party Transactions
Certain
of our Directors, Officers and their affiliates are holders of our convertible
notes payable in the aggregate amount of approximately $8.4 million and $5.7
million at September 30, 2009 and December 31, 2008,
respectively. Such amounts represent approximately 80% and 77% of the
face amount of outstanding convertible notes payable at September 30, 2009 and
December 31, 2008. Accrued interest payable on the notes payable
owned by related parties approximated $571,000 and $134,000 at September 30,
2009 and December 31, 2008, respectively.
In
November 2008, we entered into a supply agreement with a company (the
“Purchaser”), which holds approximately $2.3 million of our convertible notes
and warrants to purchase approximately 50 million shares of our common stock,
and which has the right to and has designated a person to be a member of our
Board of Directors. Pursuant to terms of the Supply Agreement, among
other things, if the Purchaser is in need of at least 1.5 million pounds of
Products (as defined) for any calendar month during the three year term, then
the Purchaser shall order its requirements for 1.5 million pounds from us, and
we have agreed to sell Products to the Purchaser in accordance to a contractual
pricing formula. During the nine months ended September 30, 2009 and
2008, sales of Product to Purchaser approximated $1.8 million and $730,000,
respectively. Due to closure of the recycling plant, the supply
agreement is subject to termination.
The
Company incurs legal fees pursuant to an agreement for legal services with a law
firm, the managing partner of which was until December 2008 one of our
Directors. During the nine months ended September 30, 2009 and 2008, we incurred
fees for legal services from this firm of approximately $142,000 and $261,000,
respectively. During 2009, $25,000 of accounts payable was
exchanged for $25,000 of Series D Notes Payable. At September 30,
2009, accounts payable due to the firm for services of $168,000 are included in
accounts payable to related party.
Note
8. Participation Certificates Obligations Issued Prior to 2004
In 2000,
the Company’s then Board of Directors authorized the issuance of common stock to
various investors. An agreement between the Company’s then President
and investors allowed participants in the Italian General Plastics Development
Program to make advances based on Company common stock. Funds thus generated
(approximately $815,000) were to be repaid when the Company became a public
company. Upon repayment of funds advanced, investors would retain their stock
ownership. To comply with Italian regulations, the Company’s then President
personally issued shares of Company common stock to the investors. Funds
advanced by investors were made to and deposited in accounts in the former
President's name. The Company’s former President has represented that
funds received were assets of Company and that the Company assumed the related
obligations, and accordingly, based on the substance of the transactions, funds
advanced have been presented as Company liabilities in the accompanying balance
sheet. Prior to December 31, 2004, the Company entered into various
agreements, including a settlement and release agreement, with certain investors
pursuant to which the investors received shares of Company common stock in
exchange for their participation certificates. Since 2004, the
balance outstanding approximates $354,000. During 2009, it was
determined that due to statute of limitations, these obligations are no longer
payable, and accordingly, the Company removed the obligations from the balance
sheet and recognized other income during the three and nine months ended
September 30, 2009.
Note
9. Commitments and Contingencies
Legal
– We are
subject to various lawsuits and other claims in the normal course of
business. In February 2009, a former vendor filed a Complaint for
Breach of Negotiable Instrument, Breach of Contract and Demand for Jury Trial
against us in the United States District Court for the District of
Minnesota. The former vendor, among other things, prayed for
judgments against us of approximately $626,000. In June 2009, we
executed a settlement and security agreement with the former
vendor. Terms of the settlement provide for, among other things, us
to pay the former vendor $175,000, with $100,000 having been paid in June 2009
and the remaining $75,000 payable quarterly commencing in September 2009 with
the final payment due in June 2010. As collateral for amounts due, we
granted the former vendor a security interest in substantially all of our
assets, such security interest being subordinate to security interests of Senior
Debt, as defined.
Under
certain circumstances, we establish accruals for specific liabilities in
connection with legal actions deemed to be probable and reasonably
estimable. No material amounts have been accrued in these
accompanying financial statements with respect to legal matters. Our management
does not expect that the ultimate resolution of legal matters in future periods,
if any, will have a material effect on our financial condition or results of
operations.
Leases
– We lease
space for our recycling plant and office in Riverbank,
California. In 2008, we entered into amendments of our lease
agreement, as amended, exercising our option to extend the expiration of the
lease from May 2009 through March 2010 and to rent additional
space. In September 2009, the Board of Directors of the Company
approved a plan to relocate and upgrade production facilities to a new location
in Northern California, and in connection with this plan, we closed our
Riverbank facility. We are seeking a tenant to take over our existing
lease of the Riverbank plant site upon our departure.
Supply Agreement
– In
November 2008, we entered into a supply agreement with a company (the
“Purchaser”), which holds approximately $2.3 million of our convertible notes
and warrants to purchase approximately 50 million shares of our common stock,
and which has the right to and has designated a person to be a member of our
Board of Directors. The Supply Agreement was entered into prior to
the Purchaser’s acquisition of securities. Pursuant to terms of the
Supply Agreement, among other things, if the Purchaser is in need of at least
1.5 million pounds of Products (as defined) for any calendar month during the
three year term, then the Purchaser shall order its requirements for 1.5 million
pounds from us, and we have agreed to sell Products to the Purchaser in
accordance to a contractual pricing formula.
Note
10. Subsequent Events through November 4, 2009 (the date
preceding initial filing of Form 10-Q)
Pursuant
to the Preliminary Schedule 14C filed by the Company on July 6, 2009, which was
amended in August and September 2009 and will again be amended in November 2009
and supplemented with a simultaneous Schedule 13E-3 filing, our Board of
directors has approved and stockholders owning approximately 559.4 million
shares of our common stock, Series A Preferred and Series B Preferred stock,
representing a majority of our outstanding equity securities, have consented in
writing to effect a one-for-two thousand (1:2000) reverse split of our issued
and outstanding common stock, Series A Preferred and Series B-1 Preferred stock
(the “Reverse Stock Split”). The Board has set the close of business
on the twentieth day following the mailing of an Information Statement to our
shareholders as the date on which the Reverse Stock Split will become
effective. Each share of our common stock, Series A Preferred and
Series B-1 Preferred issued and outstanding immediately prior to that effective
date will be reclassified as and changed into 0.0005 of one share of common
stock, Series A preferred and Series B-1 Preferred stock,
respectively. The principal effect of the Reverse Stock Split will be
to decrease the number of outstanding shares. The Reverse stock Split will not
alter the number of our authorized shares of common stock, which will remain at
2.5 billion shares, or our preferred stock which will remain at 1.7 billion
shares.
Simultaneous
with the effectiveness of the Reverse Stock Split, we intend to adjust the
authorized amount of capital stock for each series of preferred stock that has
already been designated, including, the Series A Preferred, Series B-1
Preferred, Series C Preferred, in an amount proportional to that of the Reverse
Stock Split.
In
October 2009, we received cash of $375,000 from existing investors and, in
exchange, we issued Series D convertible promissory notes due October 31, 2009,
the terms of which are described above, for the same amount.
On
November 5, 2009, we extended the due date of the September 2009 and October
2009 obligations due October 31, 2009 to November 30, 2009 and thus cured the
default prior to any request for remedy on the part of the note
holders.
Item
2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
FORWARD
LOOKING STATEMENTS CAUTIONARY
This
Item 2 and this September 30, 2009 Quarterly Report on Form 10-Q (the “Quarterly
Report”) may contain "forward-looking statements." In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "plans," "intends," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
and other comparable terminology. These forward-looking statements include,
without limitation, statements about our market opportunity, our strategies,
competition, expected activities and expenditures as we pursue our business
plan, and the adequacy of our available cash resources. Although we believe that
the expectations reflected in any forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Actual results may differ materially from the predictions
discussed in these forward-looking statements. Changes in the circumstances upon
which we base our predictions and/or forward-looking statements could materially
affect our actual results. Additional factors that could materially affect these
forward-looking statements and/or predictions include, among other things: (1)
our limited operating history; (2) the risks inherent in the investigation,
involvement and acquisition of a new business opportunity; (3) unforeseen costs
and expenses; (4) our ability to comply with federal, state and local government
regulations; and (5) other factors over which we have little or no
control.
We
do not undertake any obligation to publicly update any forward-looking
statement, whether as a result of new information, future events, or otherwise,
except as required by law. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results or achievements to be materially different from any future results or
achievements expressed or implied by such forward-looking statements. Such
factors include the factors described in Item 1A. Risk Factors included
elsewhere in this Quarterly Report and the factors described in our audited
financial statements and elsewhere in our December 31, 2008 Annual Report on
Form 10-K (the “Annual Report”).
Further,
in connection with, and because we desire to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, we
caution readers regarding certain forward-looking statements in the following
discussion and elsewhere in this report and in any other statement made by, or
on our behalf, whether or not in future filings with the Securities and Exchange
Commission. Forward-looking statements are statements not based on historical
information and which relate to future operations, strategies, financial results
or other developments. Forward-looking statements are necessarily based upon
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
beyond our control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward-looking statements made by, or on our behalf.
The
following should be read in conjunction with our interim unaudited condensed
financial statements included in this Quarterly Report and our annual audited
financial statements included in our Annual Report.
Background
ECO
2
Plastics,
Inc., (“ECO
2
” or the
“Company”) was incorporated under the laws of the State of Delaware in 2000, and
formed for purposes of acquiring certain patented technology and development of
a worldwide market. We have developed a unique and
revolutionary process referred to as the ECO
2
TM
Environmental System (the “ECO
2
Environmental System”). The ECO
2
Environmental System cleans post-consumer plastics, without the use of water, at
a cost savings versus traditional methods (the “Process”). This Process is both
patented and patent-pending and is licensed from Honeywell Federal Manufacturing
& Technologies, LLC (“Honeywell”) and the Department of Energy on an
exclusive basis for the patent life. Since our inception, we
have
invested in the development of the technology and equipment comprising the
ECO
2
Environmental System, which includes a Process Patent granted in 2007. This
included building several scaled up versions of the Prototype ECO
2
Environmental System (the “Prototype”), testing of the Prototypes, building a
pilot plant, evaluating the product produced by the Prototype and real-time
testing. Our first full scale production facility was constructed in Riverbank,
California and was producing saleable product and ramping up as we further
developed the Process. Our goal is to build and operate plastic
recycling plants in the USA that utilize the ECO
2
Environmental System and to expand the ECO
2
Environmental System worldwide. Our growth strategy includes organic growth,
strategic acquisitions and licensing or partnership
agreements.
As a
result of new production technology beginning to come online in 2008, and to
reduce plant operating costs and use of cash during the ramp-up period, we
decided to direct most production to new technology equipment and accordingly
reduced operations of prior technology production equipment. As a
result, in November 2008, we terminated approximately 85 employees and reduced
our workforce to approximately 35 employees. While we made
significant progress in refining our production processes and moved closer to
volume and quality goals, management and the Board concluded that we would not
like achieve our goals utilizing the Riverbank facility. We
determined that the size and layout of the existing facility is no longer
suitable for the efficient flow of production processes. Process improvements
implemented to date have required the purchase and implementation of additional
equipment. In addition, management and the Board have determined that
we should upgrade our primary plastic flake wash line in order to enable
production at a higher volume and at a more competitive cost
structure. Equipment to be utilized for most efficient production
will require a production footprint for which the existing plant is not
suitable.
In
September 2009, the Board of Directors of the Company approved a plan to
relocate and upgrade production facilities to a new location in Northern
California, and in connection with this plan, we closed our Riverbank facility
and laid off approximately 50 employees. During the course of the
next six to nine months, we will not produce product for sale as we build our
new plant. We have been dismantling and staging equipment for
relocation, and we have approximately 10 employees. We have identified a at
least one site suitable for the relocated facility as well as new equipment that
will be installed alongside certain existing equipment in order to complete an
improved production line, however, we have not made final decisions as to the
site location or equipment vendor. Company management projects
that development of the new plant will require approximately $9 million in
additional cash, including some funds required to pay currently outstanding
accounts payable. Company management expects that a significant portion of this
amount can be financed through equipment lease and other commercial credit
facilities, while the balance will need to be sourced from equity or debt
investors.
The
accompanying condensed financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
on the basis that contemplate our continuation as a going concern. Since
inception, we have incurred recurring net losses from operations and operating
activities have used cash, we have a net working capital deficit and
net capital deficiencies,, and we recently ceased production in order to
relocate our plant (see Organization and business above). The Report
of Independent Registered Public Accounting Firm included in our Annual Report
stated that these conditions, among others, raise substantial doubt about the
our ability to continue as a going concern. We reported a net loss of
approximately $20.7 million for the nine months ended September 30, 2009 and
$24.0 million for the year ended December 31, 2008, and operating activities
used cash of approximately $3.2 million during the nine months ended September
30, 2009 and $9.9 million during the year ended December 31, 2008. At
September 30, 2009, we had a working capital deficit of $3.1 million and
accumulated losses from inception of $121.3 million.
At
September 30, 2009, we had cash and cash equivalents of approximately $168,000
and do not have sufficient cash to meet our needs for the next twelve
months. Our Board of Directors and Chief Executive Officer continue
to be actively involved in discussions and negotiations with investors in order
to raise additional funds to finance improvements and other equipment, and to
provide adequate working capital for operations. During the three months ended
June 30, 2009, we received cash of approximately $2.0 million primarily from
existing investors in connection with the issuance of 8% convertible notes
payable due in June 2012, convertible into shares of (to be designated) Series D
Convertible Preferred Stock at $0.0017 per share. Additionally, in
connection with this fund-raising, certain terms of notes payable convertible
into shares of our Series C Convertible Preferred Stock of $4.0 million due in
March 2009 and $3.5 million due in December 2011, were modified such that the
maturity date was changed to June 2012 and the per share conversion price was
changed from $0.015 to $0.004 per share. During the three months
ended September 30, 2009, we received cash from existing investors of (i)
$150,000 in connection with issuance of 8% convertible notes payable due in
August 2012, convertible into shares of (to be designated) Series D Convertible
Preferred Stock at $0.0017 per share and (ii) $750,000 in connection with
issuance of 8% convertible notes payable due October 31, 2009, convertible into
shares of Series D Convertible Preferred Stock at $0.0017 per share. In October
2009, we received cash of approximately $375,000 from existing investors in
connection with issuance of 8% convertible notes payable due October 31, 2009,
convertible into shares of Series D Preferred Stock at $0.0017 per
share.
There is
no assurance that continued financing proceeds will be obtained in sufficient
amounts necessary to meet our needs. In view of these matters,
continuation as a going concern is dependent upon our ability to meet our
financing requirements, raise additional capital, and the future success of our
operations. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classifications of liabilities that
may result from the possible inability to continue as a going
concern.
Critical
Accounting Policies and Estimates
The
preparation of financial statements included in this Quarterly Report requires
our management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
On an on-going basis, management evaluates its estimates and judgments.
Management bases its estimates and judgments on historical experiences and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions. The more significant accounting
estimates inherent in the preparation of the our financial statements include
estimates as to the depreciable lives of property and equipment, impairment of
long-lived assets, valuation of equity related instruments issued, and the
valuation allowance for deferred income tax assets. Our accounting policies
are described in the notes to financial statements included in this Quarterly
Report and in our Annual Report.
We
believe that the following discussion addresses our most critical accounting
policies and estimates, which are those that we believe are most important to
the portrayal of our financial condition and results of operations and which
require our most difficult and subjective judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. We also have other policies that we consider key accounting policies;
however, these policies do not meet the definition of critical accounting
estimates because they do not generally require us to make estimates or
judgments that are difficult or subjective.
Going
concern presentation
- The accompanying financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. Since inception, we have reported losses and operating activities
have used cash, have reported net working capital deficiencies and have had net
capital deficiencies, which raises substantial doubt about our ability to
continue as a going concern. The Report of Independent Registered Public
Accounting Firm included in our 2008 Annual Report stated that these conditions,
among others, raise substantial doubt about the Company’s ability to continue as
a going concern. Our Board of Directors and management intend to raise
additional financing to fund future operations and to provide additional working
capital. However, there is no assurance that such financing will be obtained in
sufficient amounts necessary to meet our needs. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
Revenue
recognition
– We recognize revenue when there is persuasive evidence
of an arrangement, the product has been delivered to the customer, the sales
price is fixed or determinable, and collectability is reasonably assured. We
recognize revenues from sales of recycled products upon shipment to
customers. Amounts received in advance of when products are delivered are
recorded as liabilities until earned. Research or other types of grants from
governmental agencies or private organizations are recognized as revenues if
evidence of an arrangement exists, the amounts are determinable and
collectability is reasonably assured with no further obligations or
contingencies remaining.
Income
taxes
– We account for income taxes in accordance with accounting
guidance, which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in our
financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to amounts expected to be realized. We continue to provide a full
valuation allowance to reduce our net deferred tax asset to zero, inasmuch as
management has not determined that realization of deferred tax assets is more
likely than not.
Stock-based
compensation
– We account for stock-based compensation in accordance with
accounting guidance, which requires recording an expense over the requisite
service period for the fair value of options or warrants granted. We use
the Black-Scholes option pricing model as our method of valuation for
stock-based awards. Our determination of the fair value of
stock-based awards on the date of grant using an option pricing model is
affected by our stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are
not limited to, the expected stock price volatility over the term of the
award. Although the fair value of stock-based awards is determined in
accordance with accounting guidance, the Black-Scholes option pricing model
requires the input of highly subjective assumptions, and other reasonable
assumptions could provide different results.
Impairment
of long-lived assets
– Our management evaluates the recoverability of our
long-lived assets in accordance with accounting guidance, which generally
requires the assessment of these assets for recoverability when events or
circumstances indicate a potential impairment exists. Events and circumstances
considered by management in determining whether the carrying value of long-lived
assets may not be recoverable include, but are not limited to: significant
changes in performance relative to expected operating results, significant
changes in the use of the assets, significant negative industry or economic
trends, a significant decline in our stock price for a sustained period of time,
and changes in our business strategy. In determining if impairment exists,
management estimates the undiscounted cash flows to be generated from the use
and ultimate disposition of these assets. If impairment is indicated based on a
comparison of the assets’ carrying values and the undiscounted cash flows, the
impairment loss is measured as the amount by which the carrying amount of the
assets exceeds the fair market value of the assets.
Accounting
for Derivatives
– Management evaluates our convertible debt, options,
warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted
for in accordance with accounting guidance. The result of this
accounting treatment is that under certain circumstances the fair value of the
derivative is marked-to-market each balance sheet date and recorded as a
liability. In the event that the fair value is recorded as a
liability, the change in fair value is recorded in the statement of operations
as other income or expense. Upon conversion or exercise of a
derivative instrument, the instrument is marked to fair value at the conversion
date and then that fair value is reclassified to equity. Equity instruments that
are initially classified as equity that become subject to reclassification under
accounting guidance are reclassified to liabilities at the fair value of the
instrument on the reclassification date.
Recent
accounting pronouncements
- Effective January 1, 2008, we adopted
accounting guidance with respect to fair value measurements for financial assets
and liabilities. Adoption did not have a material impact on our results of
operations, financial position or liquidity. This guidance defines fair value,
provides guidance for measuring fair value and requires certain disclosures, and
does not require any new fair value measurements, but rather applies to all
other accounting pronouncements that require or permit fair value measurements.
This guidance does not apply measurements related to share-based
payments. The guidance discusses valuation techniques, such as the
market approach (comparable market prices), the income approach (present value
of future income or cash flow), and the cost approach (cost to replace the
service capacity of an asset or replacement cost). The guidance utilizes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels. The following is a brief description
of those three levels:
Level
1: Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable, either directly or
indirectly. These include quoted prices for similar assets or liabilities in
active markets and quoted prices for identical or similar assets or liabilities
in markets that are not active.
Level
3: Unobservable inputs in which little or no market data exists, therefore
developed using estimates developed by us, which reflect those that a market
participant would use.
In March
2008, the FASB issued accounting guidance which changes disclosure requirements
for derivative instruments and hedging activities, and requires enhanced
disclosures about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for
under existing accounting guidance
,
and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. Effective January 1, 2009, we adopted this accounting
guidance. We do not use derivative financial instruments nor engage
in hedging activities, and the adoption did not have an effect on our financial
position, results of operations or cash flows.
In May
2008, the FASB released accounting guidance that changes the accounting for
convertible debt instruments that permit or require the issuer to pay cash upon
conversion. Under this guidance, the issuer will no longer account
for the convertible debt entirely as a liability. Instead the issuer
will allocate the proceeds from the issuance of the instrument between liability
and equity. The resulting debt discount, (the difference between the
principal amount of the debt and the amount allocated to the liability
component), is subsequently amortized to interest expense over the instrument’s
expected life using the interest method.
In June
2008, the Emerging Issues Task Force of the FASB issued accounting guidance with
respect to Determining Whether an Instrument (or Embedded Feature) Is Indexed to
an Entity’s Own Stock, which is effective for fiscal years ending after
December 15, 2008. Adoption requirements affect accounting for convertible
instruments and warrants with provisions that protect holders from certain
declines in the stock price (“down-round” provisions). Warrants with such
provisions will no longer be recorded in equity. The guidance is to be applied
to outstanding instruments as of the beginning of the fiscal year in which the
guidance is applied. The cumulative effect of the change in accounting principle
is recognized as an adjustment to the opening balance of accumulated deficit for
the year of adoption, presented separately. The cumulative-effect adjustment is
the difference between the amounts recognized in the statement of financial
position before initial application of the new accounting guidance and the
amounts recognized in the statement of financial position upon its initial
application. The amounts recognized in the statement of stockholders’ equity as
a result of the initial application are determined based on the amounts that
would have been recognized if the new accounting guidance had been applied from
the issuance date of the instruments. Effective January 1, 2009, we adopted this
accounting guidance. In connection with warrants issued in prior
years, the financial reporting (non-cash) effect of initial adoption of this
accounting requirement resulted in a cumulative effect of change in accounting
principle of approximately $146,000, based on a per share price of $0.02 at
December 31, 2008, which decreased additional paid-in capital by $893,000 and
decreased accumulated deficit by $747,000 and recorded a fair value liability
for price adjustable warrants of $146,000. The fair value liability is revalued
quarterly utilizing Black-Scholes valuation model computations with the increase
or decrease in fair value being reported in the statement of operations as other
income (expense).
Results of Operations
Comparison of Three
months ended September 30, 2009 and 2008
Revenues
were approximately $1.4 million during the three months ended September 30, 2009
as compared to $2.5 million in the comparative prior year period. Revenues
decreased due primarily to decreased production volumes resulting from ceasing
prior technology production in November 2008, and halting production in
September 2009 in connection with closure of our recycling
plan.
We derive
our revenues from certain major customers. The loss of major
customers could potentially create a significant financial hardship for
us. Customer A is the Purchaser as described below. During the three
months ended September 30, 2009, revenues from customers, which during some
interim periods exceed 10% of total revenues, are summarized as follows (dollars
in thousands):
|
|
Three
months ended September 30,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Revenues
|
|
|
%
|
|
|
|
Revenues
|
|
|
%
|
|
Customer
A
|
|
$
|
859
|
|
|
|
60
|
%
|
|
|
$
|
723
|
|
|
|
31
|
%
|
Customer
B
|
|
|
-
|
|
|
|
0
|
%
|
|
|
|
941
|
|
|
|
40
|
%
|
Customer
F
|
|
|
173
|
|
|
|
12
|
%
|
|
|
|
44
|
|
|
|
2
|
%
|
In
November 2008, we entered into a supply agreement with a company (the
“Purchaser”), which holds approximately $2.3 million of our convertible notes
and warrants to purchase approximately 50 million shares of our common stock,
and which has the right to and has designated a person to be a member of our
Board of Directors. Pursuant to terms of the Supply Agreement, among
other things, if the Purchaser is in need of at least 1.5 million pounds of
Products (as defined) for any calendar month during the three year term, then
they shall order their requirements for 1.5 million pounds from us, and we have
agreed to sell Products to them in accordance to a contractual pricing
formula. The Purchaser is Customer A.
Cost of
goods sold consists of the cost of raw materials processed and was approximately
$1.2 million during the three months ended September 30, 2009 as compared to
$1.9 million during the comparative prior year period. There was a gross profit
of $248,000 during the three months ended September 30, 2009 as compared to
$633,000 in the comparative prior year period. As a percent of
revenues, gross profit was 17% and 25% during the three months ended September
30, 2009 and 2008, respectively. The reduction in margin reflects primarily
a reduction in market incentive program revenue from the State of
California.
Plant
operations and technology development expenses decreased to $1.7 million during
the three months ended September 30, 2009 as compared to $2.8 million during the
comparative prior year period due primarily to decreased
production. Operating expenses are comprised primarily of payroll and
related, utilities, occupancy, supplies, and repairs and maintenance
expenses. Payroll and related costs decreased to $590,000 during the
2009 period as compared to $877,000 during the comparative 2008 period, and
other plant expenses and supplies decreased from $1.6 million during the three
months ended September 30, 2008 to $809,000 during the comparative 2009
period.
General
and administrative expenses decreased to $563,000 during the three months ended
September 30, 2009 as compared to $1.2 million during the comparative prior year
period. Payroll and related costs approximated $485,000, including
$173,000 of non-cash stock-based compensation during the 2009 period as compared
to $361,000, including $136,000 of stock-based compensation in the 2008
period.
As a
result of closing the Riverbank facility, the Company recorded a loss on
impairment of approximately $7.6 million.
As a
result of the above described decrease in gross profit, plant operations and
technology development expenses, and general and administrative expenses, loss
from operations before the loss on impairment decreased to $2.0 million and
increased to $9.6 million after impairment during the three months ended
September 30, 2009, as compared to $3.3 million during the comparative prior
year period.
We
recorded interest expense of approximately $1.3 million during the three months
ended September 30, 2009 as compared to $529,000 during the comparative prior
year period. Interest expense includes amortization of debt issue costs
and debt discount of approximately $1.1 million during the 2009 period and
$473,000 during the 2008 period.
During
the three months ended September 30, 2009, we recorded other income related to
the change in fair value of price adjustable warrants of approximately $611,000
as a result of the decrease in closing price of our common stock at September
30, 2009 as compared to June 30, 2009. Additionally, it was
determined that due to statute of limitations, certain pre 2004 obligations are
no longer payable, and accordingly, we removed the obligations from the balance
sheet and recognized other income of $354,000 during the three months ended
September 30, 2009.
Our net
loss increased to approximately $10.0 million for the three months ended
September 30, 2009 from $3.8 million for the comparative prior year period,
reflecting primarily a $1.3 million reduction in loss from operations before the
loss on impairment offset by the impairment loss of $7.6 million.
Comparison
of Nine months ended September 30, 2009 and 2008
Revenues
were approximately $3.0 million during the nine months ended September 30, 2009
as compared to $5.4 million in the comparative prior year period. Revenues
decreased due primarily to decreased production volumes resulting from ceasing
prior technology production in November 2008, as well as closing the plant in
September 2009.
The
Company derives its revenues from certain major customers. The loss
of major customers could potentially create a significant financial hardship for
the Company. Customer A is the Purchaser as previously described.
During the nine months ended September 30, 2009, revenues from customers, which
during some interim periods exceed 10% of total revenues are summarized as
follows (dollars in thousands):
|
|
Nine
months ended September 30,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Revenues
|
|
|
%
|
|
|
Revenues
|
|
|
%
|
|
Customer
A
|
|
$
|
1,809
|
|
|
|
60
|
%
|
|
$
|
730
|
|
|
|
14
|
%
|
Customer
B
|
|
|
-
|
|
|
|
0
|
%
|
|
|
1,387
|
|
|
|
26
|
%
|
Customer
C
|
|
|
166
|
|
|
|
5
|
%
|
|
|
1,030
|
|
|
|
20
|
%
|
Customer
D
|
|
|
128
|
|
|
|
4
|
%
|
|
|
736
|
|
|
|
14
|
%
|
Customer
E
|
|
|
117
|
|
|
|
4
|
%
|
|
|
520
|
|
|
|
10
|
%
|
Customer
F
|
|
|
346
|
|
|
|
11
|
%
|
|
|
61
|
|
|
|
1
|
%
|
Cost of
goods sold consists of the cost of raw materials processed and was approximately
$2.1 million during the nine months ended September 30, 2009 as compared to $4.9
million during the comparative prior year period. There was a gross profit of
$941,000 during the nine months ended September 30, 2009 as compared to $593,000
in the comparative prior year period. As a percent of revenues, gross
profit was 31% and 11% during the nine months ended September 30, 2009 and 2008,
respectively.
Plant
operations and technology development expenses decreased to $5.2 million during
the nine months ended September 30, 2009 as compared to $6.6 million during the
comparative prior year period due primarily to decreased
production. Operating expenses are comprised primarily of payroll and
related, utilities, occupancy, supplies, and repairs and maintenance
expenses. Payroll and related costs decreased to $1.5 million during
the 2009 period as compared to $2.3 million during the comparative 2008 period,
which was the primary reason for the decrease overall.
General
and administrative expenses decreased to $1.9 million during the nine months
ended September 30, 2009 as compared to $3.6 million during the comparative
prior year period. Payroll and related costs approximated $807,000,
including $346,000 of non-cash stock-based compensation during the 2009 period
as compared to $2.0 million, including $861,000 of stock-based compensation in
the 2008 period.
As a
result of closing the Riverbank facility, the Company recorded a loss on
impairment of approximately $7.6 million during 2009.
As a
result of the above described increase in gross profit, decrease in plant
operations and technology development expenses, and decrease in general and
administrative expenses, loss from operations decreased to $6.1 million before
the loss on impairment and increased to $13.7 million after the impairment loss
during the nine months ended September 30, 2009, from $9.6 million during the
comparative prior year period.
We
recorded interest expense of approximately $5.0 million during the nine months
ended September 30, 2009 as compared to $6.1 million during the comparative
prior year period. Interest expense includes amortization of debt issue
costs and debt discount of approximately $3.8 million during the 2009 period and
$5.5 million during the 2008 period and for the 2009 period includes $666,000 of
non-cash expense relating to adjustments in warrant prices and number of
warrants for price adjustable warrants. The decrease in interest
expense for 2009 as compared to 2008 was primarily due to the recognition of
approximately $2.2 million of unamortized debt discount on convertible notes
payable with beneficial conversion feature discount as interest expense upon
conversion in 2008.
In
connection with modification of terms of our Series C convertible notes payable,
we recorded a loss on modification of debt of approximately $3.0 million in
2009.
During
the nine months ended September 30, 2009, we recorded other income related to
the change in fair value of price adjustable warrants of approximately $608,000,
primarily as a result of the decrease in closing price of our common stock at
September 30, 2009 as compared to June 30, 2009. Additionally, it was
determined that due to statute of limitations, certain pre 2004 obligations are
no longer payable, and accordingly, we removed the obligations from the balance
sheet and recognized other income of $354,000 during the nine months ended
September 30, 2009.
Our net
loss increased to approximately $20.7 million for the nine months ended
September 30, 2009 from $19.1 million for the comparative prior year period, for
reasons as described above.
The
beneficial conversion feature related to Series A and Series B-1 convertible
preferred stock of approximately $9.0 million is added to the net loss of $19.1
million for the nine months ended September 30, 2008, which resulted in a net
loss attributable to holders of common stock of $28.1 million.
Inflation
Although
our operations are influenced by general economic conditions, we do not believe
that inflation had a material effect on our results of operations.
Liquidity
and Capital Resources
Sources
of Cash
Historically,
our cash needs have been met primarily through proceeds from private
placements of our equity securities and debt instruments including debt
instruments convertible into our equity securities. During 2009, we received
approximately $2.9 million from issuances of convertible notes payable,
primarily from existing investors. Our Board of Directors and Chief
Executive Officer continue to be actively involved in discussions and
negotiations with investors in order to raise additional funds to finance new
equipment, and to provide adequate working capital for operations with a
near-term goal of generating positive cash flow from
operations.
Cash
Provided (Used) by Operating, Investing and Financing Activities
During
the nine months ended September 30, 2009 cash used by operating activities
decreased to approximately $3.2 million from $7.5 million during the comparative
prior year period, due primarily to the scale-back and subsequent closure of
recycling operations.
During
the nine months ended September 30, 2009, cash used by investing activities
decreased to $910,000 relating to capital expenditures on the recycling plant as
compared to $2.4 million during the comparative prior year
period.
During
the nine months ended September 30, 2009, cash provided by financing activities
was approximately $2.7 million as compared to $10.9 million during the
comparative prior year period.
Liquidity
At
September 30, 2009, we have cash and cash equivalents of approximately $168,000
and do not have sufficient cash to meet our needs for the next twelve
months.
Our Board
of Directors and Chief Executive Officer continue to be actively involved in
discussions and negotiations with investors in order to convert outstanding
convertible notes payable and to raise additional funds to finance process
improvements and other equipment, and to provide adequate working capital for
operations with a near-term goal of generating positive cash flow from
operations. There is no assurance that continued financing proceeds will be
obtained in sufficient amounts necessary to meet our needs. In view of these
matters, continuation as a going concern is dependent upon our ability to meet
its financing requirements, raise additional capital, and the future success of
our operations.
Off-Balance
Sheet Arrangements
At
September 30, 2009, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk.
We do not
use derivative financial instruments. Our financial instruments consist of cash
and cash equivalents, trade accounts receivable, accounts payable and borrowing
obligations. Investments in highly liquid instruments purchased with a remaining
maturity of 90 days or less at the date of purchase are considered to be cash
equivalents.
Our
exposure to market risk for changes in interest rates relates primarily to our
cash and cash equivalents and short and long-term obligations, all of which have
fixed interest rates. Thus, fluctuations in interest rates would not have a
material impact on the fair value of these securities. Based on our
cash and cash equivalents balances at September 30, 2009, a 100 basis point
increase or decrease in interest rates would result in an immaterial increase or
decrease in interest income on an annual basis.
Cash and
cash equivalents are maintained at financial institutions and, at times,
balances may exceed federally insured limits. We have never
experienced any losses related to these balances. At September 30,
2009, there were no amounts on deposit in excess of federally insured
limits.
Item 4T. Controls and
Procedures
(a)
Disclosure Controls and
Procedures
. As of the end of the period covered by this Quarterly Report
on Form 10-Q, we carried out an evaluation, under the supervision and with the
participation of our senior management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective for gathering, analyzing and disclosing
the information that we are required to disclose in reports filed under the
Securities Exchange Act of 1934, as amended.
(b)
Internal Control Over Financial
Reporting.
There have been no changes in our internal controls over
financial reporting or in other factors during the fiscal quarter ended
September 30, 2009, that materially affected, or are reasonably likely to
materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
Risks Related to Our Business
Our
production process has not yet, and may not achieve expected production volumes
or production costs.
ECO2’s
proprietary patented and patent-pending process has yet to achieve expected
production volumes, and there are no assurances that these volumes will be
attained. Moreover, we have not been able to produce output in volume
at a cost low enough to be profitable under current market
conditions. We are working to overcome the technical obstacles posed
by our unique technology, to improve production processes and lower production
costs. We have identified additional equipment that may help achieve
operational goals and continues to evaluate additional
technologies. The operational enhancements currently in process may
not deliver desired results, and we may never be able to improve operations to
the point where we can operate profitably on a sustained basis. Actual results
may differ materially from those predicted and changes in the circumstances on
which we base our predictions could materially affect our actual results. In
September 2009, we closed our existing plant in Riverbank and have not yet
received commitments for future financing required to relocate and upgrade
equipment in a new plant.
We
have had losses since our inception. We expect losses to continue in the near
future and there is a risk we may never become profitable.
We have
incurred losses and experienced negative operating cash flows since inception.
While we cannot guarantee future results, levels of activity, performance or
achievements, we expect our revenues to increase in the coming quarters once our
production facilities are relocated to a new site and upgraded. The
financing required to relocate and upgrade equipment in a new plant has not yet
been committed. Actual results may differ materially from those
predicted and changes in the circumstances upon which we base our predictions
could materially affect our actual results.
We
need to raise additional capital to continue to operate. Our
independent registered public accounting firm, Salberg & Company,
P.A., has expressed doubt about our ability to continue as a going concern,
which may hinder our ability to obtain future financing.
We need
to raise additional capital to continue to operate and to improve production
processes with the goal of achieving sustainable, profitable
operations. Such financing may not be available, or may not be
available on reasonable terms.
Salberg
& Company, P.A., in its report of independent registered public accounting
firm for the years ended December 31, 2008 and 2007, has expressed “substantial
doubt” as to our ability to continue as a going concern based on net losses and
negative cash flows in 2008, and a working capital deficit at December 31, 2008.
Our financial statements do not include any adjustments that might result from
the outcome of that uncertainty.
We
have few proprietary rights, the lack of which may make it easier for our
competitors to compete against us.
The
exclusive Patent License Agreement, as amended, (the “License Agreement”) for
our technology with Honeywell FM&T for the system is for the life of the
patent, or until terminated by Honeywell FM&T in the event of (i) our
bankruptcy; (ii) an assignment for the benefit of our creditors, (iii) the
nationalization of the industry which encompasses any of the products and/or
services, limited only within the nationalizing country; (iv) any suspension of
payments hereunder by governmental regulation, (v) our failure to
commercialize the licensed technology under this License Agreement; (vi) or the
existence of a state of war between the United States of America and any country
where we have a License to manufacture products and/or services.
If
we are unable to manage our growth, our growth prospects may be limited and our
future profitability may be adversely affected.
We intend
to expand our sales and marketing programs and our manufacturing capability.
Rapid expansion may strain our managerial, financial and other resources. If we
are unable to manage our growth, our business, operating results and financial
condition could be adversely affected. Our systems, procedures, controls and
management resources also may not be adequate to support our future operations.
We will need to continually improve our operational, financial and other
internal systems to manage our growth effectively, and any failure to do so may
lead to inefficiencies and redundancies, and result in reduced growth prospects
and profitability.
We
are subject to intellectual property infringement claims, which may cause us to
incur litigation costs and divert management attention from our
business.
Any
intellectual property infringement claims against us, with or without merit,
could be costly and time-consuming to defend and divert our management’s
attention from our business. If our products were found to infringe a third
party’s proprietary rights, we could be required to enter into royalty or
licensing agreements in order to be able to sell our products. Royalty and
licensing agreements, if required, may not be available on terms acceptable to
us or at all.
The
success of our business is heavily dependent upon our ability to secure raw
plastic.
Our
ability to generate revenue depends upon our ability to secure raw plastic (PET
and HDPE). There is a world-wide market for these materials, and we face
competition from China and other low-cost users. To the extent that
we are unable to secure enough raw plastic, our business, financial condition
and results of operations will be materially adversely affected.
The
Company is susceptible to commodity pricing for both raw material and final
product sales, which could result in margins that will not allow the Company to
operate profitably.
The
Company purchases PET bales in an open market and sells the finished product in
an open market. In order to generate a profit, the Company must
process material at a cost, which is lower than the spread between buying and
selling prices. There may be times when competitive pricing changes
the spread and such changes are outside of our control. For example,
aggressive buying by firms in China could result in an increase in bale prices,
while at the same time, excess production capacity for virgin PET supply could
result in a decrease in selling prices of the finished product.
Penny
stock regulations.
The
Securities Enforcement Penny Stock Act of 1990 requires specific disclosure to
be made available in connection with trades in the stock of companies defined as
“penny stocks.” The Commission has adopted regulations that generally define a
penny stock to be any equity security that has a market price of less than $5.00
per share, subject to certain exceptions. Such exceptions include any equity
security listed on NASDAQ and any equity security issued by an issuer that has
(i) net tangible assets of at least $2,000,000, if such issuer has been in
continuous operation for three years; (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years; or (iii) average annual revenue of at least $6,000,000, if such issuer
has been in continuous operation for less than three years. Unless an exception
is available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith as well as the written consent of the
purchaser of such security prior to engaging in a penny stock transaction. The
regulations on penny stocks may limit the ability of the purchasers of our
securities to sell their securities in the secondary marketplace. Our common
stock is currently considered a penny stock.
We
may encounter potential environmental liability which our insurance may not
cover.
We may,
in the future, receive citations or notices from governmental authorities that
our operations are not in compliance with our permits or certain applicable
regulations, including various transportation, environmental or land use laws
and regulations. Should we receive such citations or notices, we would generally
seek to work with the authorities to resolve the issues raised by such citations
or notices. There can be no assurance, however, that we will always be
successful in this regard, and the failure to resolve a significant issue could
result in adverse consequences to us.
While we
maintain insurance, such insurance is subject to various deductible and coverage
limits and certain policies exclude coverage for damages resulting from
environmental contamination. There can be no assurance that insurance will
continue to be available to us on commercially reasonable terms, that the
possible types of liabilities that may be incurred by us will be covered by its
insurance, that our insurance carriers will be able to meet their obligations
under their policies or that the dollar amount of such liabilities will not
exceed our policy limits. An uninsured claim, if successful and of significant
magnitude, could have a material adverse effect on our business, results of
operations and financial condition.
We
will need to hire additional employees as we grow.
We will
need to hire additional employees to implement our business plan. In order to
continue to grow effectively and efficiently, we will need to implement and
improve our operational, financial and management information systems and
controls and to train, motivate and manage our employees. We intend to review
continually and upgrade our management information systems and to hire
additional management and other personnel in order to maintain the adequacy of
its operational, financial and management controls. There can be no assurance,
however, that we will be able to meet these objectives.
We
may be unable to obtain and maintain licenses or permits, zoning, environmental
and/or other land use approvals that we need to use a landfill and operate our
plants.
These
licenses or permits and approvals are difficult and time-consuming to obtain and
renew, and elected officials and citizens’ groups frequently oppose them.
Failure to obtain and maintain the permits and approvals we need to own or
operate our plants, including increasing their capacity, could materially and
adversely affect our business and financial condition.
Changes
in environmental regulations and enforcement policies could subject us to
additional liability and adversely affect our ability to continue certain
operations.
Because
the environmental industry continues to develop rapidly, we cannot predict the
extent to which our operations may be affected by future enforcement policies as
applied to existing laws, by changes to current environmental laws and
regulations, or by the enactment of new environmental laws and
regulations. Any predictions regarding possible liability under such
laws are complicated further by current environmental laws which provide that we
could be liable, jointly and severally, for certain activities of third parties
over whom we have limited or no control.
If
environmental regulation enforcement is relaxed, the demand for our products may
decrease.
The
demand for our services is substantially dependent upon the public’s concern
with, and the continuation and proliferation of, the laws and regulations
governing the recycling of plastic. A decrease in the level of public concern,
the repeal or modification of these laws, or any significant relaxation of
regulations relating to the recycling of plastic would significantly reduce the
demand for our services and could have a material adverse effect on our
operations and financial condition.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
During
the period covered by this Form 10-Q, we sold the following securities which
were not registered under the Securities Act of 1933 (the “Act”):
Convertible Notes
Payable
– In September 2009, we received $750,000 cash from existing
investors pursuant to 8% promissory notes payable due October 31, 2009, which
are convertible into shares of Series D Preferred Stock at a price of
$0.0017 per share.
Item 6. Exhibits
[See
Exhibit Index below after signatures]
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
ECO
2
PLASTICS,
INC.
s/s Rodney S.
Rougelot
_________
Rodney S.
Rougelot
Director,
Chief Executive Officer
s/s Raymond M.
Salomon
______
Raymond
M. Salomon
Chief
Financial Officer
DATE
November
5, 2009
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
|
|
|
|
|
|
|
10.1
|
|
First
Amendment to Form of Promissory Note
|
|
Attached
|
|
|
|
|
|
10.2
|
|
First
Amendment to Form of Promissory Note Dated 9/8/09
|
|
Attached
|
|
|
|
|
|
31.1
|
|
Certification
of CEO pursuant to Section 302 of the
|
|
|
|
|
Sarbanes-Oxley
Act
|
|
Attached
|
|
|
|
|
|
31.2
|
|
Certification
of CFO pursuant to Section 302 of the
|
|
|
|
|
Sarbanes-Oxley
Act
|
|
Attached
|
|
|
|
|
|
32.1
|
|
Certification
of CEO pursuant to Section 906 of the
|
|
|
|
|
Sarbanes-Oxley
Act
|
|
Attached
|
|
|
|
|
|
32.2
|
|
Certification
of CFO pursuant to Section 906 of the
|
|
|
|
|
Sarbanes-Oxley
Act
|
|
Attached
|
|
|
|
|
|