PTOI Plastic2Oil Inc (PK)

JBI, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada		90-0822950
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

PART I

 

ITEM 1.

BUSINESS

 

Overview

 

We manufacture processors which produce fuel products mainly from unsorted, unwashed waste plastics for distribution across a number of markets.  We continue to execute on our business strategy with the goal of becoming a leading North American  company that transforms waste plastic into ultra-clean, ultra-low sulphur fuel.

 

Currently, we provide environmentally-friendly solutions through our processors and technologies.  Our primary  offering is our Plastic2Oil®, or P2O®, solution, which is our proprietary process that converts waste plastic into fuel through a series of chemical reactions (our “P2O business”).  We collect mainly mixed plastics from commercial and industrial enterprises that generate large amounts of waste plastic for use in our process.  Generally, this waste plastic would otherwise be sent to landfills and its disposal potentially can be quite costly for companies.  We use this waste plastic as feedstock to produce Fuel Oil No. 2, Naphtha, and Fuel Oil No. 6 for various uses by our customers.  We own and operate our P2O processors and have the capability to produce and store the fuels at, and ship from, our facilities in Niagara Falls, NY.  We sell the fuels we produce to customers through two main distribution channels, fuel wholesalers and directly to commercial and industrial end-users.   At June 3, 2014, we had three fully-permitted operational P2O processors, one dedicated to Research & Development, two dedicated to fuel production. All three processors are located at our Niagara Falls, NY facility, and our fourth and fifth processors were in process of assembly offsite in Niagara Falls, NY for sale. For the reasons described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, the three operational P2O processors have been idle since late December 2013.

 

 

4

---

 

 

For financial reporting purposes, we operate in two business segments, (i) our P2O solution, which sells the fuel produced through our processors (ii) data storage and recovery (the “Data Business”). As part of our P2O business segment, we recently began to offer for sale built-to-order P2O processors for use at a customer’s site, although no such sales have been completed to date.  Previously, we operated a chemical processing and cleaning business, known as Pak-It and a retail and wholesale distribution business known as Javaco, Inc.  As of December 31, 2012, we had exited both of these businesses and their results in all periods presented are classified as discontinued operations. Our P2O business has been operating in a limited commercial capacity since December 2010 and we anticipate that this line of business will account for a majority of our revenues in 2014 and periods thereafter.  Historically, however, our revenues have been partially derived from our other lines of business and products, Javaco and Pak-It, which are classified in this Annual Report as discontinued operations. In the year ended December 31, 2013, we had total sales of approximately $693,125, of which $599,413 were derived from our P2O business and $93,712 were derived from our Data Business.   In the year ended December 31, 2012, we had total sales of $609,553 from our P2O business and $70,381 from our Data Business.

We conduct our P2O business at our facilities located in Niagara Falls, New York.  Our corporate address is 20 Iroquois Street, Niagara Falls, NY 14303.

 

Organizational History

 

We were incorporated on April 20, 2006 under the laws of the State of Nevada under the name 310 Holdings Inc. (“310”). On April 24, 2009, John Bordynuik, purchased 63% of the issued and outstanding shares of 310 and became our chairman and chief executive officer.   On June 25, 2009, we purchased certain assets from John Bordynuik, Inc., a corporation founded by Mr. Bordynuik. The assets acquired included tape drives, computer hardware, servers and a mobile data recovery container to read and transfer data from magnetic tapes.   From inception until August 2009, we were a shell company within the meaning of the rules of the Securities and Exchange Commission.  On August 24, 2009, we acquired all of the outstanding shares of Javaco, Inc., a wholly owned subsidiary of Domark International, Inc. On September 30, 2009, we acquired 100% of the issued and outstanding equity interests of Pak-It, LLC.  We formed JBI (Canada) Inc. on February 9, 2010 for purposes of distributing Pak-It products in Canada.  We formed Plastic2Oil of NY, #1, LLC on May 4, 2010, for the development and commercialization of our Plastic2Oil business in Niagara Falls, NY.

 

On October 5, 2009, we changed our corporate name to JBI, Inc.

On August 24, 2009, the Company acquired Javaco, Inc. (“Javaco”), a distributor of electronic components, including home theater and audio video products. On July 9, 2012, we announced the closure of our Javaco operations and sold substantially all of its assets to an unrelated third party. In July 2012, the Company closed Javaco and sold substantially all its inventory and fixed assets.  The operations of Javaco have been classified as discontinued operations for all periods presented (Note 19).

 In September 2009, the Company acquired Pak-It, LLC (“Pak-It”).  Pak-It operated a bulk chemical processing, mixing, and packaging facility.  It also developed and patented a delivery system that packages condensed cleaners in small water-soluble packages. During 2011, the Company initiated a plan to sell certain operating assets of Pak-It and subsequently sold Pak-It in February 2012, with an effective date of January 1, 2012.  On February 10, 2012, we sold substantially all the assets of  Pak-It. The operations of Pak-It have been classified as discontinued operations for all periods presented (see Note 19).

In December 2010, the Company entered into a twenty year lease for a recycling facility in Thorold, Ontario.  During the period ended December 31, 2013, the Company determined that it would no longer operate the facility and shut down all operations.  The assets and operations related to the recycling facility have been reclassified as discontinued operations for all periods presented (Note 19).

Our common stock is quoted on the OTCQB Market under the symbol “JBII”.

 

5

---

 

 

Organizational Chart

The following chart outlines our corporate structure, as of June 3, 2014, and identifies the jurisdiction of organization of each of our material subsidiaries. Each material subsidiary is wholly-owned by the company.

 

 

JBI, Inc.	-	Parent company with corporate office in Niagara Falls, NY;
Plastic2Oil of NY #1, LLC	-	Operates our P2O business in Niagara Falls, NY.
JBI (Canada) Inc.	-	Conducts our P2O business in Canada, including management of our fuel blending site.

Our Primary Product - Plastic2Oil

P2O Overview

Our P2O processors have evolved into a modular solution with the completion of processor #3 in 2013. We use third party contract manufacturers for the manufacture of many of the key modular components of our processors, including the kilns and distillation towers as well as certain other key components that require specialized machining and fabrication.

Our P2O process is proprietary and converts waste plastic into fuel through a series of chemical reactions.  We developed this process in 2009 and began very limited commercial production in 2010 following our receipt of a consent order from the New York State Department of Environmental Conservation (“NYSDEC”) allowing us to commercially operate our first large-scale P2O processor at our Niagara Falls, New York facility.  Currently, we have three fully-permitted operational P2O processors, which are capable of producing Naphtha, Fuel Oil No. 2 and Fuel Oil No. 6, all of which are fuels produced to the specifications published by ASTM.  The fully-permitted P2O processor is dedicated to Research & Development activities. We have two additional processors in the process of assembly offsite. Our P2O process is capable of producing two by-products, an off-gas similar to natural gas and a petcoke carbon residue.  We primarily use our off-gas product in our operations to fuel the burners in our P2O processors.  We sell our fuel products through two main distribution channels comprised of fuel wholesalers and directly to commercial and industrial end-users.

The Company had to shut down its production late in the fourth quarter of 2013 due to severe cold weather that caused damage to condensers and other components of our processors.  Management estimates that the repair of the processors will require the expenditure of between $175,000 and $200,000. At June 3, 2014, we lacked the working capital or access to bank credit to make these repairs. We are reviewing our financing options, including the sale of shares of our common stock or other securities, in order to allow us to obtain sufficient funds to make the required repairs and resume operation of our processors. Management currently anticipates that the processors will remain idle at least until the third quarter of 2014. During the idle period, we significantly reduced our headcount by furloughing our operations personnel but retained a small team to perform general repairs and maintenance on the processors. Once the processors are repaired, we expect a small increase in our headcount in order to resume normal operations.

 

Our P2O process accepts mainly unsorted, unwashed waste plastics.  Although many sources of plastic waste are available, we have focused our feedstock sources on primarily post-commercial and industrial waste plastic.  Generally, we believe that this waste stream is more costly for companies to dispose of, making it more readily available in large quantities and cheaper for us to acquire than other potential types of feedstock.   We believe our P2O process offers a cost-effective solution for businesses that currently have to pay to dispose of these types of waste.

Currently, we understand that there are several plastic-to-oil processes operational globally. These facilities employ a wide range of technologies and yield varying purities of fuel output. We believe that our process has many advantages over other commercially available processes in that our P2O solution requires a comparatively lesser initial capital investment and yields high-quality, ultra-low sulphur fuel, with no need for further refinement. Additionally, our process uses comparatively little energy and physical space, which, in our view, makes it better suited for high-volume production and expansion to multiple sites.

 

6

---

 

P2O Process and Operations

There are various processes in existence for converting plastic and other hydrocarbon materials into products for use in the production of fuels, chemicals and recycled items. These processes include: pyrolysis (conversion using dry materials at high pressure and temperature in the absence of oxygen), catalytic conversion (conversion using a catalyst for stimulating a chemical reaction), depolymerization (conversion using superheated water and high pressure and temperature) and gasification (conversion at high temperature using oxygen or steam). Our patent-pending P2O conversion process involves the cracking of the plastic hydrocarbon chains at ambient pressure and comparatively low temperature using a catalyst.

We have developed our Plastic2Oil processors to be continuously running, energy-efficient and environmentally-friendly while converting waste plastics into end-user ready, and ultra-clean, ultra-low sulfur fuels. The processors are periodically shut-down for maintenance and residue removal. The fuels produced can be used directly by our customers without further refining or processing. Over a three year period, we have scaled our processing operations from a one gallon processor to three processors, each permitted to feed up to 4,000 pounds of feedstock per hour.  Some of the milestones that we have reached include:

 

●	Manufacturing and operating multiple processors at our Niagara Falls, NY site;
●	From inception, the processors were designed with safety and green emissions as top priorities.
●	Standardization and modularization of the components of our processors;
●	Ability to continuously feed waste plastic 24 hours a day;
●	Approximately 86% of waste plastic by weight is converted to liquid fuel conversion;
●	Approximately 8% of waste plastic by weight is converted to gas and is used to fuel the process;
●	Operating at atmospheric pressure, not susceptible to pinhole leaks and other problems with pressure and vacuum-based systems;
●	No requirement for incinerators, thermal oxidizers or scrubbers and no stack monitoring is necessary;
●	Three stack tests (two on the initial processor and one on the second processor) conducted by Conestoga-Rovers & Associates (“CRA”), prove emissions are extremely low;
●	Process validation by SAIC Energy, Environment & Infrastructure, LLC and IsleChem, LLC.
●	Permitted to operate three processors commercially in New York by the NYSDEC; and

 

Processor Input

Waste Plastics :  We are able to feed mainly mixed unwashed waste plastics into the Plastic2Oil processors. Waste plastic is widely available and we are focused on maximizing the types and densities of the plastic we procure for optimal processor performance.

Heat Transfer Fluid : We are also able to include Hydrocarbon based transfer fluid as feed into the Platic2Oil processors.

 

7

---

 

 

Processor Output

We are currently permitted to feed two tons, or 4,000 pounds, of waste plastic per hour into each processor by a continuous conveyor belt where it is heated by a burner that mainly burns off-gases produced from the P2O process. Plastic hydrocarbons are cracked into various shorter hydrocarbon chains and exit in a gaseous state. Any residue, metals and or non-usable substances remain in the reactor and are periodically removed. Through our proprietary process Fuel Oil No. 6, Fuel Oil No. 2, and Naphtha are condensed from the reactor through the remainder of the process. The fuel output is then transferred to storage tanks automatically by the system. Our process is mainly operated by an automated computer system that controls the conveyor feed rate, system temperatures, off-gas systems and the pumping out of newly created fuel to storage tanks. The plastic to liquid fuel conversion is approximately 86% by weight. Therefore, 20 tons of plastic would be processed into approximately 4,100 gallons of fuel. At June 3, 2014, we had three operational processors at our Niagara Falls, NY facility. One processor was dedicated to Research & Development.

 

Fuel Produced :  The fuel produced in our processors is ultra-low sulfur fuel and is ready for end-users without the need for further refinement.

Off-gas :  Approximately 8-10% of waste plastics fed into the processors are converted to a mixture of hydrogen, methane, ethane, butane and propane gas (“off-gas”).  Once our processors are in a state to begin the P2O process, they use their own off-gas to fuel the burners in the process.

Residue : There is approximately 2-4% residue from our process, which is petroleum coke or carbon black (“petcoke”) that needs to be removed on a periodic basis.

Feedstock

 

Our P2O process primarily uses post-commercial and industrial waste plastic that might otherwise be sent to a landfill by the commercial and industrial producers of such waste plastic.  We believe that this can be costly for these producers due to the large volumes of plastic waste that they generate. As such, our business model is premised on our ability to accept numerous types of waste plastics from such sources at a relatively low cost.  We believe that our ability to accept mainly mixed, unwashed waste plastics is a significant advantage of our P2O process compared to similar operations in our industry.

Fuel Products

Our P2O process makes both light and heavy fuel products which are; specifically Naphtha, Fuel Oil No. 2 and Fuel Oil No. 6, as defined by ASTM.  Our process also generates two main by-products, an off-gas similar to natural gas and a carbon residue known as petcoke.

Naphtha is a very light fuel product that is used as a cutting component for both high and regular grade gasoline. Fuel Oil No. 2 is a mid-range fuel commonly known as diesel and has numerous transportation, manufacturing and industrial uses.  Fuel Oil No. 6 is a heavy fuel generally used in industrial boilers and ships.  Our process produces high quality, ultra-low sulphur fuels, without the need for further refinement which enables us to sell our fuel directly from our processors to the end-user.

The off-gas that is produced by the P2O process is used to fuel the burner that heats the entire processor.

P2O Facilities

 

We currently have one main operating facility that we use in our P2O business, our P2O plant, as well as a second facility, our fuel blending site, for use in the future.  These are briefly described below. Additional information on our properties can be found in Item 2 of this report.

 

Niagara Falls, NY facility:  Our Niagara Falls, NY facility currently has two operating buildings, a 10,000 square foot building that currently houses one commercial-scale P2O processors, one P2O processor devoted to Research & Development activities, and a 7,200 square foot building housing the third commercial-scale P2O processor.  Our Niagara Falls operations are situated on eight acres which can accommodate expansion of our growing operations.  This facility also serves as the center of our research and development operations and our administrative offices.

Blending Site:  We own a 250,000 gallon fuel-blending facility in Thorold, Ontario, which, when in use, would allow us to blend and self-certify certain fuels that are produced from our process to meet government specifications.

 

8

---

 

 

Sales and Distribution

We sell our fuel products through two main channels: fuel brokers and direct to end-users.  We have no long-term contracts for fuel sales; rather, we sell our fuel through the issuance of routine purchase orders.

During the years ended December 31, 2013 and 2012, 81.0%, and 58.0%, respectively, of total net revenues were generated from four and three customers respectively.

Suppliers

The principal goods that we require for our P2O business are the waste plastic that we use as feedstock for production of our fuels.  We collect waste plastics from commercial and industrial businesses that generate large amounts of this waste stream. As of June 3, 2014 we had approximately 394,000 pounds of waste plastic and approximately 18,000 gallons of Heat Transfer Fluid available in inventory as feedstock, to support the resumption of operations upon the repairs, as mentioned above.

 

We also rely on third party manufacturers for the manufacture of many components of our processors including kilns and distillation towers.  During the years ended December 31, 2013 and 2012, 26.4%, and 25.5%, respectively, of total net purchases were generated from four vendors.  As at December 31, 2013 and 2012 four and three vendors, respectively, accounted for 27.9%, and 36.6%, respectively, of accounts payable.

Licenses, Permits and Testing

We maintain the following permits and licenses in connection with the operation of our P2O business.

License/Permit		Issuing Authority		Registration Number		Issue/Expiration Date
Air Permit		NYSDEC		9-2911-00348/00002		06/30/2014
Solid Waste Permit		NYSDEC		9-2911-00348/00003		06/30/2014
Bulk Fuel Blending License		Ontario Technical Standards & Safety Authority		000184322		10/12/2014
Waste Disposal Site		Ontario Ministry of the Environment		A121029		Perpetual (subject to annual reviews)

In 2010, our P2O process and processors were tested by IsleChem, LLC, an independent chemical firm providing contract research and development, manufacturing and scale-up services, using two small prototypes of our P2O processor.  The IsleChem test results indicated that our process is both repeatable and scalable. Following this testing, we assembled a large-scale P2O processor capable of processing at least 20 metric tons of plastic per day. In September 2010, we had a Stack Test performed by Conestoga-Rovers & Associates (“CRA”), an independent engineering and consulting firm, which concluded that, with a feed rate of 2,000 pounds of plastic per hour, our processor’s emissions were below the maximum emissions levels allowed by the NYSDEC simple air permit, which is needed to commercially operate the P2O processor at that location.  We used the CRA test results to apply for the required operating permits and in June 2011 we received an Air State Facility Permit (“Air Permit”) and Solid Waste Management Permit (“Solid Waste Permit”) for up to three processors at the Niagara Falls, NY facility.  In December 2011, we had a second stack test performed by CRA for an increased rate of 4,000 pounds per hour.  In January 2012, we received a final emissions report from CRA confirming that emissions were considerably decreased with an increased feed rate.  In December 2012, we had a stack test performed on the second processor.

The emissions tests conducted by CRA on our processors are summarized in the following table:

Emissions		Units		Original Stack Test (2010) – Processor #1		Final Stack Test (Dec. 2011) – Processor #1		Stack Test (Dec. 2012) – Processor #2
CO – Carbon Monoxide		ppm		3.16		3.1		3.7
SO 2 - Sulphur Dioxide		ppm		0.23		0.02		0.39
NOx – Oxides of Nitrogen		ppm		86.4		15.1		21.3
TNMHC – Total Non-Methane Hydrocarbons		ppm		0.25		3.92		0.62
PM – Particulate Matter		Lbs./hr.		0.016		0.002		0.012
Hexane		Lbs./hr.		Not tested		0.00001		0.0013

 

9

---

 

Industry Background

Alternative fuels are generally considered to be any substances that can be used as fuel, other than conventional fossil fuels such as naturally occurring oil, gas and coal. There have been many approaches taken to producing alternative fuels, including conversion of corn oil, vegetable oil and non-food-based materials. These approaches have demonstrated varying degrees of commercial potential. Some of the challenges that alternative fuel producers have faced include high feedstock supply costs, lower perceived value of fuel product, higher capital costs and dependence on government regulations for economic viability.

We believe our company is distinguishable from other producers of alternative or renewable fuels because our P2O solution represents a process and product that is commercially viable and designed to provide immediate benefit for industries, communities and government organizations with waste plastic recycling challenges.  Our business model is premised on the need for a more efficient and cost-effective alternative to disposing of waste plastic in jurisdictions where the cost of transporting and landfilling large amounts of plastic is quite costly.

Competition

Our P2O business has elements of both a recycling business and a fuel refiner/ production business, which makes it difficult to identify and make direct comparisons to competitors. Both the recycling and energy sectors are characterized by rapid technological change. Our future success will depend on our ability to achieve and maintain a competitive position with respect to technological advances in both of these sectors.  We believe that our business currently faces competition in the plastics-to-energy market, including competition from Envion, Polymer Energy, LLC, and Agilyx, each of which has developed alternative methods for obtaining and generating fuel from plastics.  See “Risk Factors—Risks Related to Our Business”. Because P2O solution end products include a variety of fuels, we also face competition from the broader petroleum industry.

Business Model

We believe that our Plastic2Oil business model provides a unique proposition for both the supply side and the end-user side of the waste-to-fuel value chain.  Our P2O technology is positioned to link these two sides by offering economic incentives in both directions. We believe P2O offers value to suppliers of waste plastic by saving transport and landfill Tipping Fees, and value to fuel end-users by providing ultra-low sulphur green fuel. Given these incentives, we believe that our Plastic2Oil business will be sought after by those industries that can benefit from the added value that we provide, thus allowing the potential for our company’s growth through sale of processors.

Business Strategy

Our long-term strategy is to become the leading vertically-integrated, North American company that is a processor manufacturer first, and fuel processor and fuel seller second. The key elements of our strategy to achieve this goal are as follows:

Marketing Strategy

We target post-commercial and industrial waste plastic partners. We believe this allows us to identify sources of large plastic waste streams, such as industrial sites, material recovery facilities, etc., and to sell fuel to customers through two main distribution channels: fuel wholesalers and directly to commercial and industrial end-users. We are also partnering with businesses and municipalities who collect waste plastics. Our vision is to help redirect these waste plastic streams, preventing them from entering landfills.

Manufacturing Strategy

Our P2O business model allows us to simultaneously pursue sales to multiple commercial opportunities (Partners) across the waste plastic and fuel markets. We will license our P2O technology including maintenance to operate all P2O processors, to be operated at our Partner sites. We intend to construct clusters of P2O processors at sources of large plastic waste streams, such as industrial sites, material recovery facilities and recycling centers.

 

10

---

 

Procurement Strategy

Our feedstock strategy is as follows:

●	Get the Right Material to Maximize Throughput .  Although the P2O processor can process many different types of plastic and create consistent fuels, we will focus on the types of plastic that will maximize the machine’s productivity.  This is typically high density material.
●	Contract for Long-Term Consistent Feedstock Supply .  By contracting with our suppliers, we are able to gain commitments for consistent flows of feedstock.  This also allows us to more accurately forecast our feedstock supply and fuel outputs.  An additional benefit of contracting with suppliers is that we are able to rely on this material flow as it relates to our continued growth planning.
●	Cost to the Processor .  We look at all feedstock opportunities considering the “cost to the processor”. This means we consider including the cost is the price we pay to the supplier, the cost of transportation or our costs to pre-process the feedstock material, the critical thing is the total cost incurred for “ready to process” material.

Competitive Strengths

We believe that our competitive strengths are as follows:

Our processors convert unwashed waste plastics into “in specification fuels” ready for use by the customer. Our process does not generate any waste water. The fuel is Halide free and there is no further need for refinement. The process does not produce any hazardous waste.

In addition to producing fuel, our P2O solution simultaneously addresses the problem of disposing of waste plastic.    We offer an alternative to disposing of waste plastic in a landfill. Our processors can accept mainly mixed, unwashed plastic feedstock.  In the United States and Canada, a substantial amount of plastic is currently considered waste and is disposed of in landfills, resulting in Tipping Fees levied by the landfill or other waste disposal facility fees.  We believe that the current low landfill diversion rates for waste plastic in the United States and Canada, together with the costs of transporting and disposing of plastic in bulk, present a significant opportunity to provide an alternative to conventional recycling and waste disposal.

The P2O process provides a highly efficient means of converting plastic into fuel. Our proprietary P2O process and catalyst provide a highly efficient means of converting plastic into fuel. Our business model depends on us being able to provide both a cost-competitive means of disposing of waste plastic and an efficient and non-energy intensive means of producing fuel.  Our process requires comparatively minimal electricity to operate, and the energy balance of the process is positive, meaning that more energy can be produced than is consumed by the process.

Low capital costs and small footprint.   We have designed the processors with a modular design with standardized components, making construction of our processors relatively simple and cost effective.  We have designed our processors to take up approximately 3,000 square feet of space, giving the processors a relatively small footprint.  We believe that this design facilitates the construction and operation of multiple processors on a single site. We estimate that the costs of constructing our processors on industrial partner sites will be substantially less than the cost of constructing waste-to-fuel facilities offered by our competitors.

Lower emissions

In the United States, businesses and other producers of emissions are subject to various regulatory requirements, including the National Emission Standards for Hazardous Air Pollutants, or “NESHAP.” These emission standards may be established according to Maximum Achievable Control Technology requirements set by the EPA, often referred to as “MACT standards”. MACT standards apply to a number of sources of emissions, including operators of boilers, process heaters and certain solid waste incinerators. Because our P2O fuel products have ultra-low sulphur content, we believe that our P2O fuel can assist industrial partners with meeting MACT requirements through reduced hazardous emissions.

Our processors produce fuels that have very low sulphur content, which allows the end-user to potentially lower the emissions generated by its operations while using our fuels. These lower emissions potentially could save the end-user from expensive environmental compliance costs, stemming from such initiatives as the NESHAP regulations and more specifically the MACT standards for each pollution source.

Validation of repeatability and scalability of P2O processors.

Our P2O business has been validated for repeatability and scalability by extensive testing by our customers and multiple independent tests by outside consultants and third party laboratories.

 

11

---

 

Other Businesses

 

Data Recovery & Migration

In June 2009, we purchased certain assets from John Bordynuik, Inc., a corporation founded by John Bordynuik, our former Chief Executive Officer and current Chief of Technology. The assets acquired from John Bordynuik, Inc. included tape drives, computer hardware, servers and a mobile data recovery lab to read and transfer data from magnetic tapes and these assets are used in our Data Recovery & Migration business.

Magnetic tapes were previously a primary media for data storage. Because of its cost effectiveness, magnetic tape was widely used by government, scientific, educational and commercial organizations for decades. Over time, these tapes can become vulnerable to deterioration when exposed to natural elements, which can render the tapes difficult to read or unreadable using the original tape-reading equipment.  Our Data Business involves reading old magnetic tapes, interpreting and restoring the data where necessary and transferring the recovered data to storage formats used in current systems. The recovered data is verified for accuracy and returned to customers in the media storage format of their choice. Our process gives customers the ability to conveniently catalogue and safely archive difficult-to-retrieve data on readily accessible, contemporary storage media. Users of these services generally include businesses or organizations that have historically stored information on magnetic tape, such as government agencies, oil and gas companies and academic institutions.

The process for data recovery was developed and is very highly dependent on Mr. John Bordynuik.  The Data Business’s reliance on Mr. Bordynuik has been a key driver to achieving revenue in 2013 and 2012. In light of our business strategy focus on our P2O business, we anticipate that revenues and profits generated from our Data Business operations will represent a decreasing share, if any, of our total revenues and profits in future reporting periods.  Due to these factors, we recorded an impairment of $36,500 in 2012 related to the assets of the Data Business.

Pak-It

 

From September 2009 until February 2012, through Pak-It, we were engaged in the manufacture of cleaning chemicals.  As previously reported, we sold substantially all of the assets of this business in February 2012 because management felt that Pak-It’s business was no longer aligned with our strategic focus on our P2O business.  For all years reported, the results of operations of Pak-It have been recorded as discontinued operation, as recorded in Footnote 19 of the Consolidated Financial Statements.

Javaco

From August 2009 until July 2012, through Javaco, we were a retailer and wholesale distributor of equipment, hardware and tools for the safety, maintenance and construction industries.  As previously reported, in July 2012, we closed Javaco and liquidated substantially all of the fixed assets and inventory because management felt that Javaco’s business was no longer aligned with our strategic focus on our P2O business. For all years reported, the results of operations of Javaco have been recorded as discontinued operations, as recorded in Footnote 19 of the Consolidated Financial Statements.

Intellectual Property

To ensure the protection of our proprietary technology, we have applied for patent protection for both the P2O process and P2O processor.  As of June 3, 2014, no patents have been issued.   Management anticipates filing additional patent applications for various aspects of our P2O process in the near future.  A lack of patent protection could have a material adverse effect on our ability to gain a competitive advantage for our process and processors, since it is possible that our competitors may be able to duplicate the P2O process for their own purposes.  We also rely on our trade secrets to provide protection from portions of our process and proprietary catalyst.  See “Risk Factors—Risks Related to Our Business”.

We also hold a U.S. patent relating to our Data Business for the recovery of tape information.

Research and Development

Given our strategic focus on developing our P2O business, we anticipate that our research and development activities related to our P2O processors and the construction, operation and systems management of those processors. Specifically, we will seek to increase the operational capabilities and performance of our P2O processors as opportunities arise. Research and development expenditures were $465,671, and $445,947 in 2013 and 2012, respectively.

 

12

---

 

 

Employees

As of June 3, 2014, we employed 11 persons on a full-time basis, of which 2 were executive management, 3 were in finance and administration, 1 were in procurement, sales and marketing, 4 were in operations and 1 were in technology/ research and development

None of our employees are subject to a collective bargaining agreement and we believe that our labor relations are good.

Environmental and Other Regulatory Matters

As we further develop and commercialize our P2O business, we will be subject to extensive and frequently developing federal, state, provincial and local laws and regulations, including, but not limited to those relating to emissions requirements, fuel production, fuel transportation, fuel storage, waste management, waste storage, composition of fuels and permitting.  Compliance with current and future regulations could increase our operational costs.  Management believes that the company is currently in substantial compliance with applicable environmental regulations and permitting.

Our operations require various governmental permits and approvals. We believe that we have obtained, or are in the process of obtaining, all necessary permits and approvals for the operations of our P2O business; however, any of these permits or approvals may be subject to denial, revocation or modification under various circumstances.  Failure to obtain or comply with the conditions of permits and approvals or to have the necessary approvals in place may adversely affect our operations and may subject us to penalties.

Company Information

We are a reporting company and file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy these reports, proxy statements and other information at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 or e-mail the SEC at publicinfo@sec.gov for more information on the operation of the public reference room. Our SEC filings are also available at the SEC’s website at http://www.sec.gov. Our Internet address is http://www.plastic2oil.com. There we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC.

ITEM 1A.

RISK FACTORS

The following risk factors should be considered in evaluating our businesses and future prospects. These risk factors represent what we believe to be the known material risk factors with respect to our business and our company. Our businesses, operating results, cash flows and financial condition are subject to these risks and uncertainties, any of which could cause actual results to vary materially from recent results or from anticipated future results.

Risks Related to our Business

We are an early stage company with a history of net losses, and we may not achieve or maintain profitability.

We have incurred net losses since our inception, including losses of $13,234,265, and $13,322,205 in 2013 and 2012, respectively. We expect to incur losses and potentially have negative cash flow from operating activities for the near future. We have divested of our significant non-core businesses, which historically had generated revenues for the Company and have transitioned our focus solely on the development of our P2O business. To date, our revenues from our P2O business have been limited and we expect to invest significant additional capital in the further development and expansion of our P2O business and for marketing and general and administrative expenses associated with our planned growth and management of operations as a public company. As a result, even if our revenues increase substantially, we expect that our expenses could exceed revenues for the foreseeable future. It is not certain when we will achieve profitability. If we fail to achieve profitability, or if the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. We may experience significant fluctuations in our revenues, significantly driven in part by the market price of fuel and we may incur losses from period to period. The impact of the foregoing may cause our operating results to be below the expectations of investors and securities analysts, which may result in a decrease in the market value of our securities.

We have a limited operating history and are focused on our P2O business, which may make it difficult to evaluate our current business and predict our future performance.

After divesting certain non-core business lines, we are solely focused on our P2O business and our limited operating history may make it difficult to evaluate our current business and predict future performance as we continue to expand and grow, as well as modify the current processors to become more efficient. Additionally, with the shutdown of the Regional Recycling of Niagara in 2013 and the divestitures of Pak-It and Javaco in 2012, our historical results are not indicative of future revenues.  Any assessment of our current business and predictions about our future success or viability may not be as accurate as otherwise possible if we had a longer operating history. We have encountered, and may continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries. If we do not address these risks successfully, our business could be harmed.

 

13

---

 

 

Our process and processors may fail to produce fuel at the volumes we expect.

Even with a reliable supply of sufficient volumes of waste plastic, our processors may fail to perform due to mechanical failure or unscheduled maintenance resulting in potentially significant downtime.  Our processors do not have a long operating history, and accordingly the equipment and systems in any given processor may not operate as planned or for as long as expected based on preliminary testing and trials.

We may be required to replace parts more often than expected due to excessive wear and tear or malfunction due to their use during the evolution of our process.  Replacement of parts or components of the processor could result in additional unplanned downtime, resulting in lower fuel volume productions.

Different feedstock may result in different fuel yields including potentially higher production of off-gas or petcoke residue, which would proportionately reduce the amount of salable fuels produced.  The presence of contaminants in our feedstock could reduce the purity of the fuel that we produce and require further investment in more costly separation processes or equipment. Additionally, contaminants that are present in the feedstock could result in damage to the processor which would cause unplanned downtime and lower than expected fuel volumes.

Unexpected problems with either the processor or our feedstock supplies may force us to cease or delay production and the time and costs involved with such delays may be significant. Any or all of these risks could prevent us from achieving the production volumes and yields, and producing fuel at the costs, necessary to achieve profitability from our business. Failure to achieve expected production volumes and yields, or achieving them only after significant additional expenditures, could substantially harm our financial condition and operating results.

We need substantial additional capital in the future in order to develop our business.

Our future capital requirements will be substantial, particularly as we continue to develop our P2O business.   We believe that our current cash and cash equivalents will not allow us to expand commercial operations at the Niagara Falls, NY Facility.  Because the costs of developing the P2O business on a commercial scale are highly contingent on our approach to commercialization, and are subject to many variables, including site-specific development costs and the number of processors to be placed at a given location, we cannot reliably reasonably estimate the amount of capital required to expand the P2O business beyond the Niagara Falls, NY facility.  If we are successful in achieving our plans to enter into other P2O industrial partnerships, we may require significant additional funding to execute such partnerships and may not be able to rely on funding through our own earnings. Funding would be required for constructing P2O processors, site specific build-outs and developing other aspects of our business with our industrial partners.

To date, we have funded our operations primarily through private offerings of equity securities. If future financings involve the issuance of equity securities, our existing stockholders could suffer dilution. If we were able to raise debt financing to expand our operations, we may be subject to restrictive covenants that could limit our ability to conduct our business. Our plans and expectations may change as a result of factors currently unknown to us, and we may need additional funds sooner than planned.  We may also choose to seek additional capital sooner than required due to favorable market conditions or strategic considerations.

Our future capital requirements will depend on many factors, including:

●	the financial success of our P2O business and processors;
●	the timing of, and costs involved in, entering into agreements with suitable industrial partners, and the timing and terms of those agreements;
●	the cost of constructing P2O processors and the amount of other capital expenditures related to site development;
●	our ability to negotiate distribution or further sale agreements for the fuel we produce, and the timing and terms of those agreements;
●	the timing of, and costs involved in obtaining, the necessary government or regulatory approvals and permits

Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If funds are necessary or required and are not available to us on a timely basis, we may delay, limit, reduce or terminate:

●	our R&D activities;
●	our plans to expand our business through industrial partnerships;
●	our activities in negotiating agreements necessary in connection with the commercial scale operation of the P2O business; and
●	the development of the P2O business, generally.

 

14

---

 

If we fail to raise sufficient funds and continue to incur losses, our ability to fund our operations, construct processors, enter into agreements with suitable industrial partners, take advantage of other strategic opportunities and otherwise develop our business could be significantly limited. We may not be able to raise sufficient additional funds on terms that are favorable or acceptable to us, if at all. If adequate funds are required for operations and are not available, we may not be able to successfully execute our business plan or continue our business.

Our future success is dependent on being able to attract and retain qualified management and personnel.

We will require additional expertise in specific areas applicable to our P2O business and will require the addition of new personnel, and the development of additional expertise by existing personnel. The inability to attract talented personnel with appropriate skills or to develop the necessary expertise could impair our ability to develop and grow our business.

The loss of any key members of our management team or the failure to attract or retain qualified management and personnel who possess the requisite expertise for the conduct of our business could prevent us from further developing our businesses according to our current strategy.  We may be unable to attract or retain qualified personnel in the future due to the intense competition for qualified personnel amongst technology-based businesses, or due to the unavailability of personnel with the qualifications or experience necessary for our business. Competition for business, financial, technical and other personnel from numerous companies and academic and other research institutions may limit our ability to attract and retain such personnel on acceptable terms. If we are unable to attract and retain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that will adversely affect our ability to meet the demands of our industrial partners and customers in a timely fashion or to support continued development of our P2O business.

Competitors and potential competitors who have greater resources and experience than we do may develop processors and technologies that make ours obsolete or may use their greater resources to gain market share at our expense.

Our P2O business has elements of both a recycling business and a fuel sales business. The recycling and energy sectors are characterized by rapid technological change. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Our P2O business faces mild competition in the plastics-to-energy market, including competition from Envion, Polymer Energy, LLC, and Agilyx, who have each developed alternative methods for obtaining and generating fuel from plastics.

Our P2O business faces competition in acquiring feedstock, mainly because there are other technologies and processes that are being developed and/or commercialized to offer recycling solutions for plastic. Additionally, there is significant competition from businesses in the energy sector that sell fuel, including both traditional producers and alternative fuel producers.  Companies in the fuel sales industry may be able to exert economies of scale in the fuels market to limit the success of our fuel sales business.  We believe that our business is more appealing in both the recycling sector and the fuel sector due to its green aspect.  Technological developments by any form of competition could result in our processors and technologies becoming obsolete.

In addition, various governments have recently announced a number of spending programs focused on the development of clean technologies, including alternatives to petroleum-based fuels and the reduction of carbon emissions. Such spending programs could lead to increased funding for our competitors or a rapid increase in the number of competitors within these markets.

Our limited resources relative to many of our competitors may cause us to fail to anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competiveness and market share, adversely affect our results of operations and financial position and prevent us from obtaining or maintaining profitability.

The effectiveness of our business model may be limited by the availability or potential cost of plastic feedstock sources.

Our P2O business model depends on the availability of waste plastic obtained at relatively low cost to be used as a feedstock to produce our end fuel products. If the availability of feedstock decreases, or if we are required to pay substantially more than is reasonable to become profitable for feedstock, this could reduce our fuel production and/or potentially reduce our profit margins if we are forced to use alternative, more costly measures to procure feedstock. It is possible that an adequate supply of feedstock may not be available to our P2O processors to meet daily processing capacity. This could have a materially adverse effect on our financial condition and operating results.

Our P2O financial results will also be dependent on the operating costs of our processors, including costs for feedstock and the prices at which we are able to sell our end products. Volatility in both the pricing of feedstock as well as the market price for fuels could have an impact on this relationship. General economic, market, and regulatory factors may influence the availability and potential cost of waste plastic. These factors include the availability and abundance of waste plastic, government policies and subsidies with respect to waste management and international trade and global supply and demand. The significance and relative impact of these factors on the availability of plastic is difficult to predict.

We will, for the very near future, depend on one production facility for revenues related to our business. Therefore, any operational disruption could result in a reduction of our fuel production volumes.

A significant portion of our anticipated revenue for fiscal 2014 will be derived from the sale of fuel that we produce at our Niagara Falls, NY Facility, as well as from Processor sales. We will incur additional expenses to increase production at that facility and any failure to produce fuel at anticipated volumes and costs would adversely affect our revenues, free cash flow and potential ability to build other planned production facilities.  Such failure would adversely affect our business, financial condition and results of operations.

 

15

---

 

 

Unforeseen manufacturing issues or processor downtime could have significant adverse impact on our business.

Our business and strategic growth plans rely on assumptions of processor uptime reaching certain levels in which ample fuel can be produced to meet the needs of our customers and provide us with adequate operating cash flow to cover our cost of operating.  Unforeseen manufacturing issues with the processors or unscheduled downtime due to mechanical failure, low quality feedstock, severe weather conditions or unexpected issues with the processors could have a material adverse impact on our fuel production and operating results. In addition, manufacturing and/ or fabrication delays with respect to additional processors could cause our revenues and fuel production to be lower than anticipated.

We may have difficulties gaining market acceptance and successfully marketing our fuel to our customers.

A key component of our business strategy is to market our fuel as a viable high quality fuel to wholesalers and industrial end users. If we fail to successfully market our fuel or the targeted customers do not accept it, our business, financial condition and results of operations will be materially adversely affected.

To gain market acceptance and successfully market our fuel, we must effectively demonstrate the advantages of using P2O fuel over other fuels, including conventional fossil fuels, biofuels and other alternative fuels and blended fuels. We must show that P2O fuel is a direct replacement for fossil fuels. We must also overcome marketing and lobbying efforts by producers of other fuels, many of whom have greater resources than we do. If the markets for our fuel do not develop as we currently anticipate, or if we are unable to penetrate these markets successfully, our revenue and revenue growth rate could be materially and adversely affected.

Pre-existing contractual commitments and skepticism of new production methods for fuels may hinder market acceptance of our fuel.

Adverse public opinions concerning the alternative fuel industry in general could harm our business.

The plastic-to-fuel industry is new, and general public acceptance of this method of recycling and fuel generation is uncertain.  Public acceptance of P2O fuel as a reliable, high-quality alternative to traditionally refined petroleum fuels may be limited or slower than anticipated due to several factors, including:

●	public perception issues associated with the fact that P2O fuel is produced from waste plastics;
●	public perception that the use of P2O fuel will require excessive burner, boiler or engine modifications;
●	actual or perceived problems with P2O fuel quality or performance; and
●	to the extent that P2O fuel is used in transportation applications, concern that using P2O fuel will void engine warranties.

Such public perceptions or concerns, whether substantiated or not, may adversely affect the demand for our fuels, which in turn could decrease our sales, harm our business and adversely affect our financial condition.

A decline in the price of petroleum products may reduce demand for our P2O fuels and may otherwise adversely affect our business.

We anticipate that our fuels will be marketed as alternatives to their corresponding conventional petroleum product counterparts, such as heating oil, diesel fuel and naphtha. If the prices of these products fall, we may be unable to produce products that are cost-effective alternatives to conventional petroleum products.  Declining oil prices, or the perception of a future decline in oil prices, may adversely affect the prices we can obtain from our potential customers or prevent potential customers from entering into agreements with us to buy our products.  During sustained periods of lower oil prices, we may be unable to sell some of our fuel products, which could materially and adversely affect our operating results.

In addition, recent discoveries and drilling of shale gas deposits has caused a general decrease in natural gas prices which could cause commercial and industrial fuel users to switch from using petroleum-based products to natural gas to power their equipment, machinery and operations.  In such case, demand for our fuel products may decline.  Any decline in demand for petroleum-based products could materially and adversely affect our results from operation.

Our operations are subject to various regulations, and failure to obtain necessary renewed permits, licenses or other approvals, or failure to comply with such regulations, could harm our business, results of operations and financial condition.

We are, and may become subject to, various federal, state, provincial, local and foreign laws, regulations and approval requirements in the United States, Canada and other jurisdictions, including those relating to the discharge of materials or pollutants into the air, water and ground, the generation, storage, handling, use, transportation and disposal of waste materials, and the health and safety of our employees.

The Company currently possesses an Air Permit and Solid Waste Permit for up to three processors at the Niagara Falls, NY facility.  Failure to maintain these permits on terms and conditions acceptable to and achievable by us, or at all, could affect the commercial viability of the Niagara Falls, NY facility, which could have a material adverse effect on our business, financial condition and results of operations.

 

16

---

 

 

As we implement our growth strategy, our planned P2O business will require additional permits, licenses or other approvals from various governmental authorities. Our ability to obtain, amend, comply with, sustain or renew such permits, licenses or other approvals on acceptable, commercially viable terms may change, as could the regulations and policies of applicable governmental authorities. Our inability to obtain, amend, comply with, sustain or renew such permits, licenses or other approvals may have a material adverse effect on our business, financial condition and results of operations.

 

Any fuels developed using our P2O process will be required to meet applicable government regulations and standards. Any failure to meet these standards and/or future regulations and standards could prevent or delay the commercialization or sale of any fuels developed using our P2O process or subject us to fines and other penalties.

All phases of designing, constructing and operating fuel production facilities present environmental risks and hazards. Among other things, environmental legislation provides for restrictions and prohibitions on spills and discharges, as well as emissions of various substances produced in association with fuel operations. Legislation also requires that sites be operated, maintained, abandoned and reclaimed in such a way that would satisfy applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner that may result in stricter standards and enforcement, larger fines, penalties and liability, as well as potentially increased capital expenditures and operating costs. The discharge of pollutants into the air, soil or water may give rise to liabilities to governments and third parties, and may require us to incur costs to remedy such discharge.

There is no assurance that our operations will comply with environmental or occupational, safety and health regulations in any applicable jurisdiction. Failure to comply with applicable laws, regulations and approval requirements could subject us to civil and criminal penalties, require us to forfeit property rights, and may affect the value of our assets or our ability to conduct our business. We may also be required to take corrective actions, including, but not limited to, installing additional equipment, which could require us to make substantial capital expenditures. These penalties could have a material adverse effect on our business, financial condition and results of operations.

We may be unable to produce our fuel products in accordance with governmental specifications.

Even if we produce P2O fuel at our targeted volumes and yields, we may be unable to produce fuel that meets future governmental regulations.  If we fail to meet these specific regulations customers may not purchase our fuel or, to the extent we have an agreement in place for the supply of fuel, the customer may seek an alternate supply of fuel or terminate the agreement completely. A failure to successfully meet these specifications could decrease demand for our fuel, leading to reduced sales and operating results.

Our dependence on contract manufacturers for processor components exposes our business to supply risks.

We have limited internal capacity to manufacture our processor components. As a result, we are heavily dependent upon the performance and capacity of third party manufacturers for the manufacturing of many of the key components of our processors, including kilns and distillation towers as well as certain other key components that require specialized machining and fabrication.

We are working to establish long-term supply contracts with contract manufacturers and are evaluating whether to invest in our own manufacturing capabilities. However, we cannot guarantee that we will be able to enter into long-term supply contracts on commercially reasonable terms, or at all, or to acquire, develop or contract for internal manufacturing capabilities. Any resources we expend on acquiring or building internal manufacturing capabilities could be at the expense of other potentially more profitable opportunities.

We currently have only patent-pending protection for our P2O process and processor.

We have sought patent protection of our intellectual property by filing for international patents via the Patent Cooperation Treaty, however, as yet, none have been granted. We also rely on trade secrets to provide protection for our proprietary catalyst. We currently have patent pending status for our P2O process and processor. However, a lack of patent protection could have a material adverse effect on our ability to gain a competitive advantage for our P2O processors, since it is possible that our competitors may be able to duplicate our P2O process for their own purposes. This may have a material adverse effect on our results of operations, including on our ability to enter into industrial partnership arrangements or other agreements relating to our P2O processors.

We rely in part on trade secrets to protect some of our intellectual property, and our failure to obtain or maintain trade secret protection could adversely affect our competitive position.

We rely on trade secrets to protect some of our intellectual property, such as our proprietary catalyst. However, trade secrets are difficult to maintain and protect.  We have taken measures to protect our trade secrets and proprietary information, but there is no guarantee that these measures will be effective. We require new employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. Nevertheless, our proprietary information may be disclosed, or these agreements may be unenforceable or difficult and costly to enforce. If any of the above risks materialize, our failure to obtain or maintain trade secret protection could adversely affect our competitive position.

 

17

---

 

 

Collaborations with third parties have required us to share some confidential information, including with employees of these third parties. Our strategy for the development of our business may require us to share additional confidential information with our industrial partners and other third parties. While we use reasonable efforts to protect our trade secrets, third parties, or our industrial partners’ employees, consultants, contractors and/or other advisors may unintentionally or willfully disclose proprietary information to competitors. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain.  In addition, foreign courts are sometimes less willing than domestic courts to protect trade secrets. If our competitors develop equivalent knowledge, methods and know-how, we may not be able to assert our trade secrets against them. Without trade secret protection, it is possible that our competitors may be able to duplicate our process for their own purposes. This may have a material adverse effect on our results of operations, including on our ability to enter into industrial partnership arrangements or other agreements relating to our process and processors.

Our quarterly operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of investors or research analysts, which could cause our share price to decline.

Our financial condition and operating results have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the various risk factors described elsewhere in this report. Due to these various risk factors, and others, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.

During the ordinary course of business, we may become subject to lawsuits or indemnity claims, which could materially and adversely affect our business and results of operations.

From time to time, we may in the ordinary course of business be named as a defendant in lawsuits, claims and other legal proceedings. Plaintiffs in these actions may seek, among other things, compensation for alleged personal injury, worker’s compensation, and damages for employment discrimination or breach of contract, property damages and injunctive or declaratory relief. In the event that such actions or indemnities are ultimately resolved unfavorably at amounts exceeding our accrued liability, or at material amounts, the outcome could materially and adversely affect our reputation, business and results of operations. In addition, payments of significant amounts, even if reserved, could adversely affect our liquidity position.

We are responsible for the indemnification of our officers and directors.

Our by-laws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against costs and expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. Consequently, we may be required to expend substantial funds to satisfy these indemnity obligations.  We currently hold directors’ and officers’ liability insurance policies for the benefit of our directors and officers, although our insurance coverage may not be sufficient in some cases, including the liability we may face in connection with pending actions. See “Legal Proceedings.” Furthermore, our insurance carriers may seek to deny coverage in some cases, in which case we may have to fund the indemnification amounts owed to such directors and officers ourselves.

We may have difficulty in attracting and retaining management and outside independent members to our Board of Directors as a result of their concerns relating to their increased personal exposure to lawsuits and stockholder claims by virtue of holding these positions in a publicly held company.

The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and stockholder claims, as well as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws imposing additional duties, obligations and liabilities on management and directors.  Due to these perceived risks, directors and management are also becoming increasingly concerned with the availability of directors’ and officers’ liability insurance to pay on a timely basis the costs incurred in defending such claims.   Although we currently maintain directors’ and officers’ liability insurance, our coverage has limits and has recently become more expensive. If we are unable to continue or provide directors’ and officers’ liability insurance at affordable rates or at all, it may become increasingly more difficult to attract and retain qualified outside directors to serve on our Board of Directors.

Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.

Our independent registered public accounting firm, in its audit opinion issued in connection with our consolidated balance sheets as of December 31, 2013 and 2012 and our consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2013 and 2012, has expressed substantial doubt about our ability to continue as a going concern given our net losses, accumulated deficit and negative cash flows. The accompanying consolidated financial statements were prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business, and accordingly do not contain any adjustments which may result due to the outcome of this uncertainty.

 

18

---

 

Risks Relating to Ownership of Securities of the Company

Investors may lose their entire investment in our securities.

Investing in our securities is speculative and the price of our securities has been and may continue to be volatile.  Only investors who are experienced in high risk investments and who can afford to lose their entire investment should consider an investment in our securities.

Shares of our common stock are quoted and trade on the OTCQB Market, which may have an unfavorable impact on our stock price and liquidity.

Shares of our common stock are quoted and traded on the OTCQB Market.  Trading in shares quoted on the OTCQB is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with a company’s operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to our operating performance.  Moreover, the OTCQB is not a stock exchange and is a significantly more limited market than the New York Stock Exchange, NASDAQ or other stock exchanges. Stockholders may have difficulty buying and/ or selling their shares. The quotation of our shares on the OTCQB may result in a less liquid market available for existing and potential stockholders to trade our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.

Our common stock is subject to price volatility unrelated to our operations.

The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve planned growth, quarterly operating results of other companies in the same or similar industries, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, stock markets may be subject to price and volume fluctuations. This volatility could have a significant effect on the market price of our common stock for reasons unrelated to our operating performance.

Our common stock may be classified as a “penny stock” as that term is generally defined in the United States Securities Exchange Act of 1934 to mean equity securities with a price of less than $5.00. As such, our common stock would be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.

We may be subject to the penny stock rules adopted by the SEC that require brokers to provide extensive disclosure to its customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which in all likelihood would make it difficult for investors to buy or sell shares.

Rule 3a51-1 of the United States Securities Exchange Act of 1934 establishes the definition of a “penny stock” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. This classification would severely and adversely affect any market liquidity for our common stock.

For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased.  In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth the basis on which the broker or dealer has made the suitability determination and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commission payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell our common stock, which may affect the ability of stockholders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our common stock, if and when such shares become listed on a stock exchange. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common stock. Our common stock could be subject to such penny stock rules for the foreseeable future and our stockholders could find it difficult to sell their common stock.

 

19

---

 

 

Listing our stock on markets other than the OTCQB could be costly for us.

 

Our common stock is currently quoted and traded on the OTCQB Market. In the future, we may file an application to be listed on a stock exchange in the United States or elsewhere. Unlike the OTCQB, a stock exchange has corporate governance and other listing standards, which we will have to meet. Such standards and regulations may restrict our capital raising or other activities by requiring stockholder approval for certain issuances of stock, for certain acquisitions, and for the adoption of stock option or stock purchase plans. Applying for and obtaining any such listing on a stock exchange, and complying with the requirements of such stock exchange, would require us to incur significant expenses.

Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant corporate decisions and depress our share price.

 

We do not anticipate paying cash dividends, and accordingly, stockholders must rely on share appreciation for any return on their investment.

Since inception, we have not paid dividends on our common stock and we do not anticipate paying cash dividends in the near future. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders. Investors seeking cash dividends should consider not investing in our common stock.

 

We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as related rules implemented by the SEC, the Public Company Accounting Oversight Board (“PCAOB”) and the OTCQB impose various requirements on public companies. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities, such as maintaining director and officer liability insurance, more time-consuming and costly.

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404(a) of the Sarbanes-Oxley Act. Our compliance with Section 404(a) will require that we incur substantial accounting expense and expend significant management time on compliance-related issues. If we are not able to comply with the requirements of Section 404 in a timely manner, our stock price could decline, and we could face sanctions, delisting or investigations, or other material adverse effects on our business, reputation, results of operations, financial condition or liquidity.

Shares of common stock eligible for sale in the public market may adversely affect the market price of our common stock.

Sales of substantial amounts of our common stock by stockholders in the public market, or even the potential for such sales, may adversely affect the market price of our common stock and could impair our ability to raise capital through selling equity securities. As of the date of this filing, approximately 67.0 million of the 94.7 million shares of common stock currently outstanding were freely transferable without restriction or further registration under the securities laws, unless held by "affiliates" of our company, as that term is defined under the securities laws. We also have outstanding, approximately 15.4 million shares of restricted stock, as that term is defined in Rule 144 under the securities laws that are eligible for sale in the public market, subject to compliance with the requirements of Rule 144.  Additionally, upon conversion of the Series B Preferred Stock, an additional 16.1 million shares will become outstanding and freely transferable.

 

 

20

---

 

 

Holders of our outstanding shares of Series B Convertible Preferred Stock have a liquidation preference senior to that of the holders of our common stock.

Our board of directors authorized and filed the Certificate of Designation of Series B Convertible Preferred Stock, as amended (the “Series B Designation”), pursuant to which we issued 2,300,000 shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”) in a private placement.  Pursuant to the Series B Designation, in the event of the liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock shall be entitled to receive out of assets of the Company available for distribution to stockholders of the Company, prior and in preference to any distribution to the holders of any other capital stock of the Company, an amount per share of Series B Preferred Stock equal to $3.50 per share, the original purchase price of such shares of Series B Preferred Stock.  Therefore, upon a liquidation, dissolution or winding up of the Company, if there are insufficient assets available for distribution to first satisfy the liquidation preference on the Series B Preferred Stock, the holders of common stock will not be entitled to any of such proceeds. As of June 3, 2014 there were 2,204,100 shares of Series B Convertible Preferred Stock outstanding.

Techniques employed by manipulative short sellers may drive down the market price of our common stock.

Short selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale.  As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short.  While traditionally these disclosed shorts were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall Street firms and independent research analysts.  These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base.  Issuers who have limited trading volumes and are susceptible to higher volatility levels than large-cap stocks, can be particularly vulnerable to such short seller attacks.      These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the Securities and Exchange Commission in Regulation and, accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, fabrications of facts.  In light of the limited risks involved in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed short sellers will continue to issue such reports.

While we intend to strongly defend our public filings against any such short seller attack, oftentimes we are constrained, either by principles of freedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller.  Investors should be aware that in light of the relative freedom to operate that such persons enjoy, should we be targeted for such an attack, our common stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by market participants.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

Not Applicable

ITEM 2.

PROPERTIES

 

The following is a summary of our properties. We believe that these facilities are sufficient to support our research and development, operational, processing and administrative needs under our current operating plan.

1.           Corporate Office and Niagara Falls, NY facility

Our Niagara Falls, NY facility currently has two operating buildings, a 10,000 square foot building that currently houses two commercial-scale P2O processors and a 7,200 square foot building that houses one commercial-scale processor of our P2O business and other fabrication equipment and parts relevant to the process.   This facility serves as the center of our research and development operations and our corporate and administrative offices and is situated on eight acres of land which we own and have no mortgage debt outstanding. We believe that this site is adequate to accommodate further expansion of our operations in the foreseeable future.

2.           Recycling Facility

We lease approximately 18,000 square feet of commercial space on nine acres in Thorold, Ontario, in which we operated our discontinued waste plastics and cardboard recycling facility.  This location is located approximately 15 miles from the Niagara Falls, NY facility.  The lease expires on December 31, 2030. In the fourth quarter of 2013, the Company determined that it would no longer operate the facility and shut down all operations. The assets and operations related to the recycling facility have been reclassified as discontinued operations for all periods presented. (Note 19)

 

21

---

 

 

3.           Fuel Blending Facility

We own approximately six acres of land in Thorold, Ontario, where we operate our fuel blending facility with a 250,000 gallon capacity.  When active, the fuel-blending facility gives us the capability to store, blend, analyze and self-certify the fuels produced from the P2O process. The facility is not currently in use. We own the property and have no mortgage debt outstanding in relation to this facility.

4.         Thorold , Ontario Office Building

We own approximately 21,000 square feet in Thorold, Ontario, consisting of 5,000 square feet of office space and 16,000 square feet of warehousing and storage space which serves as storage for the Company as well as offsite IT operations.  This property is encumbered by a mortgage securing approximately $280,000 of debt.

ITEM 3.

LEGAL PROCEEDINGS

Contingencies 1, SEC civil action; SEC civil action, Shareholders derivative lawsuit

In August 2010, a former employee filed a complaint against the Company’s subsidiary alleging wrongful dismissal and seeking compensatory damages.  The Company denied the validity of the contract which was signed by the former employee as employee and president of the subsidiary. The Company entered into negotiations with the former employee to trade-off some of the benefits of the alleged employment agreement in return for repayment of debts to the Company incurred by the former employee while in the employment of the Company’s subsidiary.  The debt in the amount of $346,386 was written off.  Prior to December 31, 2011, the former employee settled the dispute with the Company and agreed to repay $250,813 to the Company.  The employee owns shares of the Company and will sell and use the proceeds to make the repayments.  The Company recognizes these receipts as recoveries when realized.  As of December 31, 2013, the Company has received $118,250 of repayments. This is a cumulative amount from 2012 and 2013.  These recoveries of bad debt are included in selling, general and administrative expenses.

As previously reported, on July 28, 2011, certain of the Company’s stockholders filed a class action lawsuit against the Company and Messrs. Bordynuik and Baldwin on behalf of purchasers of its securities.  In an amended complaint filed on July 10, 2012, these stockholders sought to represent such purchasers during the period from August 28, 2009 through January 4, 2012. The original and amended complaints in that case, filed in federal court in Nevada, allege that the defendants made false or misleading statements, or both, and failed to disclose material adverse facts about the Company’s business, operations and prospects in press releases and filings made with the SEC. Specifically, the lawsuit alleges that the defendants made false or misleading statements or failed to disclose material information, or a combination thereof regarding: (1) that certain media credits (“Media Credits”) were substantially overvalued; (2) that the Company improperly accounted for acquisitions; (3) that, as such, the Company's financial results were not prepared in accordance with Generally Accepted Accounting Principles; and (4) that the Company lacked adequate internal and financial controls.  During the quarter ended June 30, 2012, a lead plaintiff was appointed in the case and an amended complaint was filed. The defendants’ answer to the amended complaint was filed during the fourth quarter of 2012.

On August 8, 2013, JBI, Inc., (the “Company”) entered a stipulation agreement (the “Stipulation Agreement”) in potential settlement of the previously reported class action lawsuit filed by certain stockholders of the Company against the Company and Messrs. Bordynuik and Baldwin (both former officers of the Company) on behalf of a settlement class consisting of purchasers of the Company’s common stock during the period from August 28, 2009 through January 4, 2012 (the “Proposed Class Period”).  Under the Stipulation Agreement, the Company would agree to issue shares of its common stock that will comprise a settlement fund.  The number of shares to be issued will be dependent on the price per share of the Company’s common stock during a period preceding the date of the Court’s entry of final judgment in the case (the “Judgment Date”).  If the price of the Company’s common stock is less than $0.50 per share based upon the average closing price for the 90 trading days preceding the Judgment Date, the Company would issue 3 million shares of its common stock. If the price of the Company’s common stock is between $0.50 and $0.70 per share, based upon the same 90-day average closing price, the Company would issue 2.5 million shares of its common stock.  If the price of the Company’s common stock is more than $0.70 per share based upon the same 90-day average closing price the Company will issue 1.75 million shares of its common stock.  The shares will not be distributed to class members in kind.  At any time after final approval by the Court, class counsel would have the option to sell all or any portion of such shares for the benefit of class members, subject to certain volume limitations.  Plaintiff’s counsel’s attorneys’ fees, subject to Court approval, would be paid out of the settlement fund.  The Company would also pay settlement-related costs up to a maximum of $200,000.  The plaintiffs and each of the class members who purchased the Company’s common stock during the Proposed Class Period and alleged they were damaged would be deemed to have fully released all claims against the Company and other defendants upon entry of judgment.  On September 10, 2013, that agreement was submitted to the Court, and class counsel moved for entry of an order granting preliminary approval of the settlement, including the mailing of a settlement notice that will include, among other things, the general terms of the settlement, proposed plan of allocation, and terms of plaintiff’s counsel’s fee application.  On April 1, 2014, the Court issued an Order denying that motion.   The Company is currently reviewing what steps should be taken in light of this Court Order. The Company cannot predict the outcome of the class action litigation at this time.

 

22

---

 

On April 25, 2013, plaintiffs ASPTO LLC, Plastic2Oil of Clearwater 1 LLC, and ES Resources LLC filed suit against the Company in the Circuit Court of Pinellas County, Florida, alleging breaches of certain contracts and seeking unspecified damages.  The Company thereafter removed the case to the United States District Court for the Middle District of Florida, and filed a motion to dismiss certain counts of the Complaint.  On November 12, 2013, the Court issued an Order transferring the case to the United States District Court for the District of Massachusetts.   The Company cannot predict the outcome of this matter at this time.

 

On August 9, 2013, a purported shareholder derivative suit was filed in the United States District Court for the District of Massachusetts against John Bordynuik, former Chief Executive Officer of the Company and a former member of the Company’s Board of Directors, and Ronald C. Baldwin, former Chief Financial Officer of the Company.  The Complaint was filed by Erwin Grampp, allegedly acting on behalf of the Company, and it names the Company as a nominal defendant.  This is the second purported shareholder derivative suit that Mr. Grampp has filed in which the Company has been named as a nominal defendant.  As previously reported, the first such suit by Mr. Grampp was dismissed by the court.  This recent Complaint (“Grampp II”) alleges, inter alia, that defendants Bordynuik and Baldwin breached fiduciary duties owed to the Company by causing the Company to erroneously book certain media credits in 2009.  Grampp II alleges that this conduct resulted in two lawsuits against the Company, one an action brought by the Securities and Exchange Commission (“SEC Action”) and the other a purported class action by Ellisa Pancoe and Howard Howell (“Class Action”).  Grampp II alleges that the Company has settled the SEC Action, and that the Company is in the process of settling the Class Action, but that the Company has been damaged as a result of these two lawsuits.  Grampp II seeks to recover damages on behalf of the Company from defendants Bordynuik and Baldwin in an unspecified amount.  It also seeks unspecified equitable relief, and costs and attorneys’ fees incurred in the action.  On October 11, 2013, defendants Bordynuik and Baldwin filed a motion to dismiss this action.  That motion is pending and the Court has not ruled upon it.  Pursuant to the Company’s By-Laws, the Company has an obligation to indemnify defendants Bordynuik and Baldwin to the fullest extent permitted by Nevada law.

 

On August 20, 2013, plaintiff Stephen Seneca filed suit against the Company and John Bordynuik, former Chief Executive Officer of the Company and a former member of its Board of Directors, alleging claims against the Company for fraud, negligence, civil conspiracy, and breach of contract, as well as a breach of Section 678.4011, Florida Statutes.  The claims allege wrongdoing by the Company in connection with a Unit Purchase and Exchange Agreement dated September 30, 2009, and certain shares of the Company’s stock issued pursuant thereto.  On September 17, 2013, plaintiff caused a Summons to be issued on the Complaint, and on September 26, 2013, plaintiff caused the Complaint to be served on the Company.  Plaintiff seeks damages “in excess of one million dollars.”  On October 31, 2013, the Company and Mr. Bordynuik filed a motion to dismiss this Complaint.    On May 14, 2014, the Court issued an Order granting the motion in part.  The Court dismissed one of the claims made against the Company, and struck another from the Complaint. The primary claim as described above is still active. The Company cannot predict the outcome of this matter at this time.

 

At December 31, 2013, the Company is involved in litigation and claims in addition to the above mentioned legal claims, which arise from time to time in the normal course of business.  In the opinion of management, based upon the information and facts known to them, any liability that may arise from such contingencies would not have a material adverse effect on the consolidated financial statements of the Company.

ITEM 4.

(REMOVED AND RESERVED)

 

 

23

---

 

PART II

 

ITEM 5.

MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is quoted for trading on the OTCQB under symbol “JBII”. The following table sets forth, for each of the quarterly periods indicated, the high and low bid prices of our common stock. The prices reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do not necessarily reflect actual transactions.

 

Quarter		High				Low
2012:
First Quarter		$	2.33			$	0.86
Second Quarter			1.40				0.91
Third Quarter			1.41				0.78
Fourth Quarter			0.97				0.64
2013:
First Quarter		$	1.49			$	0.61
Second Quarter			0.75				0.29
Third Quarter			0.50				0.32
Fourth Quarter			0.38				0.09

Holders

 

The last sales price of our common stock as reported by the OTC Market on June 2, 2014 was $0.15 per share.

 

On June 3, 2014, there were 475 holders of record.

 

As of June 3, 2014, we had issued and outstanding (i) 96,292,243 shares of common stock, $0.001 par value per share and (ii) 1,967,207 shares of Series B Convertible Preferred Stock, $0.001 par value per share, which shares are convertible into common stock at a conversion ratio of seven shares of common stock for each share of Series B Convertible.

 

Dividend Policy

 

We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of the Board of Directors and will be dependent upon then existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that the Board of Directors considers relevant.

Recent Sales of Unregistered Securities

 

Our sales of unregistered securities have been previously reported in our reports on Forms 8-K and 10-Q filed with the SEC.

 

24

---

 

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth certain information as of December 31, 2013 with respect to equity compensation plans under which the Company’s common Stock may be issued.

Plan Name

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans

Equity compensation plans approved by security holders

JBI, Inc. 2012 Long-Term Incentive Plan

6,806,000

1.21

3,194,000

Equity Compensation Plans not Approved by Stockholders

N/A

N/A

N/A

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

 

ITEM 6.

SELECTED FINANCIAL DATA

 

Not Applicable

 

 

25

---

 

 

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following management’s discussion and analysis (the “ MD&A ”) of the results of operations of the Company should be read in conjunction with the consolidated financial statements of the Company, together with the accompanying notes, as well as other financial information included elsewhere in this Report. This discussion contains forward-looking statements that involve certain risks and uncertainties, and that reflect estimates and assumptions. See the section titled, “Cautionary Statement Regarding Forward-Looking Statements ” for more information on forward-looking statements.  Our actual results may differ materially from those indicated in forward-looking statements. Factors that could cause our actual results to differ materially from our forward-looking statements are described in "Risk Factors" Part I Item 1A, and elsewhere in this Report.

 

Business Overview

 

For financial reporting purposes, we operate in two business segments, (i) our P2O® solution business, which manufactures and sells the fuel produced through our two operating P2O processors and (ii) data storage and recovery (the “Data Business”).  Previously, we operated a recycling facility for waste paper fiber processing, a chemical processing and cleaning business, known as Pak-It, and a retail and wholesale distribution business, known as Javaco, Inc.  As of December 31, 2013, we had exited all of these businesses and their results in all periods presented are classified as discontinued operations (Note 19).

 

Our P2O business has begun the transition from research and development to a commercial production business. We anticipate that this segment will account for substantially all of our revenues in 2014 and beyond.  Historically, however, our revenues have been derived primarily from our other segments and products, including those noted above as discontinued operations.

Plastic2Oil Business

Our P2O processors have evolved to be modular solutions with the completion of processor #3 in 2013. We use third party contract manufacturers fo r the manufacture of many of the key modular components of our processors, including the kilns and distillation towers as well as certain other key components that require specialized machining and fabrication.

Our P2O business is a proprietary process that converts waste plastic into fuel through a series of chemical reactions.  We began developing this process in 2009 and began very limited production in late 2010 following our receipt of a consent order from the New York State Department of Environmental Conservation (“NYSDEC”) allowing us to commercially operate our first large-scale P2O processor located at our Niagara Falls, New York facility.  Currently, as of the filing of this report, we have three operational processors and two additional processors in the process of assembly.  Our processors are capable of producing Naphtha, Fuel Oil No. 2 and Fuel Oil No. 6.  Our P2O process also produces two by-products, an off-gas similar to natural gas and a petcoke carbon residue.  We sell our fuel products to fuel wholesalers and directly to commercial and industrial end-users. We primarily use our off-gas product in our processing operations to fuel the burners in our P2O processors.

 

As we move from research and development to commercial production, we plan to grow from both expansion of current production capabilities and through expansion of new locations and processors.

 

26

---

 

 

2013 Update

During 2013, we processed approximately 2 million pounds (954 tons) of waste plastic into fuel, as compared to approximately 1.7 million pounds (845 tons) of waste plastic. This represented an increase of 12% of plastic processed year over year.  In 2013, we produced approximately 345,000 gallons of fuel, as compared to approximately 317,000 gallons of fuel in 2012, an increase of 9% year over year.

During 2013 prior to shutting down production in December, we were able to bring our third processor online in July. This processor, which was designed based on the significant testing and data obtained from operating Processors #1 and #2 showed significant improvements in the processing abilities over its predecessor.   During the second half of the year, Processor #3 was in operation, however, we experienced more than anticipated downtime.  The downtime was driven by some of the following items:

●	Organizational Structure – Our previous staffing model did not allow for enough comprehensive evaluation of the processors’ performance and we have decided that the addition of a chemical engineer to the operating team should allow for continuous optimal performance of the processor, as this addition will be able to supplement the knowledge of the current teams in ensuring proper performance;
●	Hardware optimization– As our processor and technology are still continuing to evolve, we continue to need to tweak the processor and the components in order to ensure that we are getting the optimal performance from all of the components of the processor.  From time to time, when we identify components that do not perform as we had planned, we are required to shut the processor down to replace the part, potentially perform additional testing on that specific piece of equipment and ultimately replace the component with a better version of the component to increase productivity. In several instances, we have designed technology that is unique to our process to reduce component costs. After the technology is tested, we seek vendors who can implement our technology into their device. The final result has been a device manufactured by a vendor at a fraction of the cost an “off the shelf” general-purpose device;

We are continuously striving to maximize the uptime of the processor and minimize the downtime by any of the aforementioned causes.  Our management team in continuously evaluating the operating time of each processor and all decisions we make with regard to the timing of and operation of the processor are directed at the long term view of operating the processor in a safe and efficient manner while maximizing our revenues.

We had to shut down its production in the fourth quarter of2013. Management estimates bringing the facility back into full production will require the expenditure of between $175,000 and $200,000. The plant is presently testing and evaluating the feedstock from potential purchasers of processors. At June 3, 2014, we lacked the working capital or access to bank credit to restore full production. The 2013 shut downs was driven by the following items.

 

●	Unseasonably cold temperatures in the winter of 2013/2014 . The temperature in winter 2013 was far below what we had ever operated through, with some periods sustaining below zero Fahrenheit temperatures. This low temperature caused many local issues with off-the-shelf diesel freezing and gelling. Our Fuel Oil #6 meets ASTM D396 fuel standards which include a pour point (or freezing point) of -6 C pour point (21° F). The temperature often dropped below 5°F and at some periods below 0°F. These unseasonably cold temperatures and high winds froze our fuel and in some places our new water lines. We experimented with pour point depressants used in diesel for artic temperatures. After testing and verifying compatibility and functionality, we secured a good pour point depressant that will allow our fuel to flow at temperatures down to -30°C or -22°F. Subsequently to the weather damage and condenser failure (see below), we idled our processors in late December 2013. We also temporarily reduced our operation and fabrication work force in January 2014. We repaired temperature damage from the 2013/2014 winter in the spring of 2014. We replaced the new condensers on Processor #3 with condensers that have historically never failed in the process.   We are adding equipment to our facility support systems to inject additives for lubricity and pour point to meet off road diesel use. The additives we tested performed well in off-road diesel equipment and the pour depressant is tested to work in extremely cold temperatures.
●	The failure of new condensers installed throughout the plant of 2013/2014 . We use a device called a condenser to cool hot liquids or heat cold liquids. Numerous condensers are located throughout a processor and plant. Our legacy condensers were performing well over the past few years however there were different sizes and manufacturers used. This posed lead time problems and higher costs when sourcing parts for future sales. In the spring of 2013, we standardized, acquired and installed new condensers for cooling to standardize all condensers across the factory. We also designed, procured, and installed central plant support systems for our processors including: centralized water chilling and storage, centralized gas compression for collect, compress and distribute off-gas generated by processors, centralized hot oil system for cooling high temperature fluids, and developed a site control system to monitor all of the auxiliary plant support systems.  In late December 2013, the new condensers installed across the plant and in the processors began to fail. Over a six week period, all the new condensers failed in operation. Upon reviewing the failure in the condenser, we found the stitch welding used to manufacture them was defective. Management believes we have developed a comprehensive front-line QC procedure to ensure plastic is not littered tools, steel or bad fillers. All new vendor equipment must be tested on our R&D system, Processor#1, before deploying on other processors. This will mitigate the risk of poor quality components from being sources or installed without significant testing.

 

 

27

---

 

 

●	Bad heat transfer fluid (HTF). In 2013, the Company was permitted to run used heat transfer liquid HTF, such as used oils, in the process. This involved a significant learning curve to develop testing protocols to determine if the liquid being received is in fact used heat transfer liquid. The permit and procedures describe numerous tests that must be conducted to ensure the HTF does not contain hazardous chemicals. Some unscrupulous suppliers will attempt and sell or deliver emulsions or other liquid products that look like HTF but are in fact not. After 2 months of operating HTF from a variety of sources, management was able to develop testing methods to determine if the HTF was in fact 100% HTF.
●	Other causes of significant downtime issues in 2013.

 

o

Bad material in waste Plastic. The Company has developed a comprehensive front-line QC procedure to ensure plastic is not littered tools, steel or bad fillers.

 

o

Water & snow in waste plastic. The Company has developed a comprehensive front-line testing procedure to stop large amounts of water from being fed into the process.

 

o

Emergency Shutdowns. Several emergency plant shutdowns for plant evacuations due to other local adjacent factories having serious fires or emergency releases. The Company installed a plant evacuation system and developed a better protocol to halt the processor when having to evacuate the site due to external factors.

 

o

Installation of new facility subsystems for Processors #1,#2 & #3 to eliminate downtime from old systems.

 

o

Installation of Processor #3 which is now operational.

 

o

Routine maintenance & shutdown.

Feedstock Procurement

 

Historically, we operated under the premise that we would be able to obtain significant quantities of waste plastic at little or no cost to us, as we offered companies a more cost-effective disposal method for this waste stream.  During the year, as we processed increasing amounts of waste plastic, we made the determination that in order to obtain the most optimal feedstock on a consistent basis, we would be required to purchase this feedstock.  We continue to receive free plastic from time to time, however, we have concluded that these sources are not able to provide us with the amount of feedstock required to consistently feed the processors at the optimum feedrates.

Data Recovery & Migration Business

 

The Data Recovery & Migration Business is not as capital intensive as our P2O business, but is time consuming with regard to the allocation of the time of John Bordynuik, our founder and current Chief of Technology. His time is needed to interpret and read tape data and make necessary adjustments to the programming of the tape-reading equipment in order to accurately read the data. Revenues for this segment will vary based on our ability to read the tape data timely and the availability of Mr. Bordynuik to dedicate portions of his time to reading and interpreting the data from our customers’ media in the event that certain updates or changes to the programming are needed.  During 2013, we were able to complete certain orders for tape reading and recognize revenue related to this service.  Due to the aforementioned time constraints of the Data Business, we are unable to routinely complete orders for tape reading services and recognize revenue for the work and revenue from this business will be limited and not predictable.

 

Listing on the OTCQB

 

As at June 3, 2014, we had 96,292,243 shares of Common Stock issued and outstanding. Our common stock is currently trading on the OTCQB marketplace in the United States of America under the stock ticker symbol “JBII.”  On June 2,, 2014, the last trading day prior to the date of this filing, the closing price of the common stock on the OTCQB was $0.15.

 

Sources of Revenues and Expenses

 

Revenues

 

We currently derive revenues from two defined business segments: (1) P2O, through the sale of Fuel Oil No 2, Naphtha and Fuel Oil # 6 as well as from the sale of processed waste paper fiber; and (2) Data Business, through the reading and interpretation of magnetic tape data.  We derived revenue from the sale of processed waste paper fiber during the year; however, the results of operations of the recycle center have been classified as discontinued in the statement of operations.  We did not derive any revenue from the operations of Javaco and Pak-It during the year; however, the results of operations Javaco and Pak-It for all prior years presented have been classified as discontinued in the statement of operations.

 

28

---

 

Cost of Sales

 

Costs of Sales for P2O consist of the following:

●	feedstock procurement costs;
●	overhead incurred at our Niagara Falls Facility related to the operation of the processors; and
●	freight costs incurred in shipping of plastics and fuels.

Costs of sales for our Data Business mainly consist of direct labor costs incurred in reading and interpreting the tape data as well as costs for transferring the tape data to storage media.

 

The costs of sales for the Recycling Center, Javaco and Pak-It have been classified as discontinued operations in the statement of operations.

 

Operating Expenses

 

Operating expenses consist primarily of the following:

●	personnel-related costs including employee payroll, payroll taxes, stock based compensation and insurance;
●	plant and processor related costs including repairs and maintenance, processing and welding consumables, safety equipment and related costs;
●	professional fees including legal fees, accounting fees including audit and tax professional costs, certain public company required fees, consulting fees and other professional and administrative costs;
●	insurance costs consisting of pollution, workers compensation, general liability, and directors and officers insurance policies;
●	compliance related costs including environmental consulting fees, stack test and other related testing costs and permitting costs;
●	depreciation expense related to our property plant and equipment; and
●	Impairment expense related to our property, plant and equipment.

 

Other Income (Expense)

 

In 2013, other income (expense) of ($119,580) consisted mainly of the amortization of debt discount, loss on disposal of assets and offset by miscellaneous receipts of payments from scrap metal. In 2012, other income (expense) of $303,170 consisted mainly of the mark-to-market adjustment recorded related to the price protection clause included in our January 2012 private placement of shares of our common stock.

Results of Operations – Year ended December 31, 2013 compared to Year ended December 31, 2012

 

Revenue

Revenue is primarily derived from our P2O business through the sale of our fuels and processed waste paper fiber.  Additionally, we supplement this revenue with revenue from our Data Business through reading and interpreting magnetic tape media.  The following table shows a breakdown of our revenues from these sources.

Revenue		Year ended December 31, 2013				Year ended December 31, 2012				% Change
P2O Revenue
Fuels		$	599,413			$	609,553				(1.7	)
Total P2O Revenue			599,413				609,553				(1.7	)
Data Business			93,712				70,381				33.1
TOTAL REVENUE		$	693,125			$	679,934				1.9

 

29

---

 

 

Our fuel revenue comprised approximately 86% and 90% of our total revenue for the years ended December 31, 2013 and December 31, 2012, respectively.  Fuel revenues are based on either a set pricing structure with our customers or the prevailing market rate for the specific type of fuel being sold.  Our fuels are sold under both long term sale contracts with specified pricing or through the issuance of purchase orders by our customers.  Generally, we are able to obtain a higher price per gallon for our Fuel Oil No. 2 as compared to Fuel Oil No. 6, and a significantly lower pricing for our Naphtha.  The decrease in fuel revenue in 2013 as compared to 2012 was mainly due to unexpected processor downtime caused by the testing and initial operations of Processor #3 in 2013, which took away from Processor #2, but also caused lower production due to testing different types of combinations of HTF and Plastic into Processors #3 and #2. In 2012, Processor #2 ran for half of the year, and accomplished the conversion of HTF into finished goods with relatively short testing times. This led to a higher amount of production primarily driven by the increased fuel production in the third quarter of 2013 from both Processors #2 and #3 being online. Also, in the fourth quarter of 2013, there were several operational issues that led to the machines being shutdown to clean the pipes and facility systems for prolonged periods of time. We shut down its production in late in the fourth quarter of 2013 due to severe cold weather causing damage that require substantial working capital for general repairs and replacement of damaged condensers. These processors are currently idle and management estimates the processors will remain idle until the third quarter of 2014.

 

The following tables provide a comparison of production and sales of our three specific fuels for the years ended December 31, 2013 and 2012.

 

		Gallons Produced (Year ended December 31,)												Gallons Sold (Year ended December 31,)
Fuel Type		2013				2012				% Change				2013				2012				% Change
Fuel Oil No. 6			45,122				121,847				(63.0	)			45,190				126,636				(64.3	)
Fuel Oil No. 2			199,523				105,859				88.5				168,480				108,098				55.9
Naphtha			93,168				89,518				4.1				88,338				89,518				(1.3	)
TOTAL			337,813				317,224				6.5				302,008				324,252				(6.9	)

Revenues from the Data Business were driven by the completion of open and outstanding purchase orders

Cost of Goods Sold & Total Gross Profit

Our costs of goods sold consist of feedstock procurement and pre-processing costs, overhead incurred at our Niagara Falls, NY facility as well as the freight associated with the shipments of our plastics and fuels.    Our feedstock procurement strategy is geared towards obtaining significant amounts of high quality feedstock at the lowest pricing available.  The following tables are a breakdown of the costs of goods sold and Total Gross Profit:

 

Cost of Goods Sold		Year ended December 31, 2013				Year ended December 31, 2012				% Change
P2O COGS
Fuels		$	690,488				707,293				(2.4	)
Total P2O COGS			690,488			$	707,293				(2.4	)
Data Business			61,072				52,097				17.2
TOTAL COGS		$	751,560			$	759,390				(1.0	)

 

30

---

 

Total Gross Profit
 

Gross Profit		Year ended December 31, 2013				Gross Profit % - Year ended December 31, 2013				Year ended December 31, 2012				Gross Profit % - Year ended December 31, 2012
P2O
Fuels		$	(91,075	)			(15.2	)		$	(97,740	)			(16.0	)
Total P2O Gross Loss			(91,075	)			(15.2	)			(97,740	)			(16.0	)
Data Business Gross Profit			32,640				34.8				18,284				26.0
TOTAL GROSS LOSS			(58,435	)			(8.4	)			(79,456	)			(11.7	)

 

P2O Cost of goods sold decreased 2.4% in 2013 as compared to 2012 mainly due to the decrease in volumes of fuel sold, unabsorbed overhead expenses due to downtime, and lower cost of transportation of material feedstock. The cost of goods sold related to the Data Business relate to the direct labor incurred in the reading and interpreting of the magnetic tape data.

For the years ended December 31, 2013 and 2012, we recorded a total gross loss of $58,435 and $79,456, respectively.

The gross loss related to our fuel sales for year ended December 31, 2013 was negatively impacted by our decision to secure higher grade feedstock in addition to increased costs to transport the feedstock to our Niagara Falls facility, as compared to the same period of 2012. Upon the closure of RRON, we identified a number of significant sources of optimal feedstock which can be delivered directly to our Niagara Falls plant, without the need for pre-processing. The Company is receiving this product at a lower price than the cost of the plastic that needed significant pre-processing. Once our processors resume operations and we continue to receive this product and turn our inventory, we expect these costs to decrease in the future periods. The gross profit for the years ended December 31, 2013 and 2012 were $32,640 and $18,284, respectively, for the Data Business. This was mainly due to the limited capital needed to read the magnetic tapes and minimal staffing that we maintain to perform these functions.

 

Operating Expenses

 

We incurred operating expenses of $11,034,787 during the year ended December 31, 2013, compared to $12,917,485 for the year ended December 31, 2012. This decrease is mainly driven by a decrease in operating spending, and second half reduced headcount including reduction in leadership coupled with a decrease in stock compensation expense and offset by an impairment charge for Processor #1. A breakdown of the components of operating expenses for the fiscal years ended December 31, 2013 and December 31, 2012, are as follows:

 

Operating Expenses		Fiscal Year Ended December 31, 2013 ($)				Fiscal Year Ended December 31, 2012 ($)
Selling, General and Administrative expenses			8,415,210				11,646,690
Depreciation & Accretion			1,031,077				633,382
Research & Development			465,671				445,947
Impairment Loss			1,122,829				191,466
Total Operating Expenses			11,034,787				12,917,485

 

Non-Operating Expenses

 

Interest Expenses

 

For the year ended December 31, 2013, we incurred net interest expense of $119,580 as compared to $2,331 for the year ended December 31, 2012.

 

31

---

 

Gain on Fair Value Measurement of Equity Derivative Liability

For the year ended December 31, 2012, we recorded a gain of $305,798 on the fair value measurement of the price protection clause contained in the private placement of our common stock that occurred in January 2012.   This gain was based on the difference between the closing price of our common stock on the valuation date (January 6, 2012) when we closed the private placement and the closing price of our common stock when the price protection clause was triggered (June 7, 2012) and subsequently paid to the requisite investors. There was no such clause in any private placement and, thus, no similar amount was recorded in the year ended December 31, 2013.

 

Income Tax Expenses

 

For the years ended December 31, 2013, and 2012, we had no federal taxable income due to net losses and recorded a deferred tax asset and a valuation allowance to the extent that those assets are attributable to net operating losses. We recognized the valuation allowance because we are unsure as to the ability to use these assets in the near future due to continued operating losses.

For the years ended December 31, 2013 and 2012, we incurred $Nil current income tax and future income tax expenses from continuing operations.

 

Net Loss

 

We incurred a net loss of $13,234,265 in the year ended December 31, 2013 as compared to a net loss of $13,322,205 in the year ended December 31, 2012.  These losses consisted of losses from continuing operations of $11,206,806 and $12,693,771 for the years ended December 31, 2013 and 2012, respectively, and losses from discontinued operations of $2,027,459 and $628,435 for the years ended December 31, 2013 and 2012, respectively.   The decrease in net loss for the year ended December 31, 2013, was driven mainly by the losses on discontinued operations from Niagara recycling center, Pak-It and Javaco in 2011, coupled with the reductions in operating expenses we realized in the current year, as discussed previously.

 

Liquidity and Capital Resources

 

At December 31, 2013, we had a cash balance approximately $204,000.  Our principal sources of liquidity in 2013 were the proceeds of the sale of secured promissory notes to our Chairman and CEO, the proceeds from the sale of shares of our common stock in private placements and cash generated from our P2O operations. As discussed earlier in this MD&A, our processors are currently idle and, thus, we are not producing fuel or generating fuel sales.  Our current cash levels are not sufficient to enable us to make the required repairs to our processors or to execute our business strategy as described in this Report. As a result, we intend to seek additional capital through the sale of our equity and debt securities and other financing methods to enable us to make the repairs.  Management currently anticipates that the processors will remain idle until at least the third quarter of 2014.  Due to the many factors and uncertainties involved in capital markets transactions, there can be no assurance that we will raise sufficient capital to allow us to resume operations in 2014, or at all.  In the interim, we anticipate that our level of operations will continue to be nominal.

Our limited capital resources and recurring losses from operations raise substantial doubt about our ability to continue as a going concern and may adversely affect our ability to raise additional capital. The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the year ended December 31, 2013 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.  The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

The following table provides a comparative summary of our cash flows for the fiscal years ended December 31, 2013 and 2012.

		Fiscal Year Ended December 31, 2013  ($)				Fiscal Year Ended December 31, 2012  ($)
Cash Flow from Operating Activities
Net Loss from Continuing Operations			(11,206,806	)			(12,693,771	)
Net Loss from Discontinued Operations			(2,027,459	)			(628,434	)
Net Loss			(13,234,265	)			(13,322,205	)
Net Cash Used in Operating Activities			(7,607,520	)			(10,054,621	)
Cash Flows from Investing Activities
Net Cash Used in Investing Activities			(3,227,003	)			(4,043,386	)
Cash Flows from Financing Activities
Net Cash Provided by Financing Activities			7,072,752				15,552,258
Cash and Cash Equivalents at Beginning of Year			3,965,720				2,511,469
Cash and Cash Equivalents at End of Year			203,949				3,965,720

 

 

32

---

 

Cash Flow from Operations

 

Cash used in operations was $7,607,520, and $10,054,621, for the years ended December 31, 2013 and 2012, respectively.  This was mainly due to our increased cash requirements to fund the continued growth of our Plastic2Oil business.

Cash Flow from Investing Activities

 

Cash used in investing was $3,227,003 and $4,043,386 for the years ended December 31, 2013 and 2012, respectively.  This was mainly attributable to our significant investment in property, plant and equipment in the expansion of our business.

 

Cash Flow from Financing Activities

 

Cash flow from financing activities was $7,072,752, and $15,552,258, for the years ended December 31, 2013, and 2012, respectively.  These amounts were mainly driven by the proceeds received from the issuance of common and preferred stock, slightly offset by the repayment of short term notes and loans.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements other than operating leases, as discussed in Note 10.

 

Transactions with Related Parties

In August 29, 2013, the Company entered into a Subscription Agreement with Mr. Richard Heddle, the Company’s Chief Executive Officer and a member of the Company’s board of directors a $1 million principal amount 12% Secured Promissory Note, together with a five-year warrant to purchase up to one million shares of the Company’s common stock at an exercise price of $0.54 per share. The gross proceeds to the Company were $1 million. In September 30, 2013, the Company entered into second Purchase Agreement with Mr. Heddle, a second note ( a $2 million principal amount Note), together with a Warrant to purchase up to two million shares of the Company’s common stock at an exercise price of $0.54 per share. The gross proceeds to the Company were $2 million. The Notes bear interest of 12% per annum compounded annually and interest are payable upon maturity.  The Notes mature on August 31, 2018 and September 30, 2018, respectively. Repayment of the Notes is secured by a security interest in substantially all of the assets of the Company and its subsidiaries.

In February 2012, a member of the Board of Directors entered into a short-term loan agreement with us in the amount of $75,000 (see Notes 15 to our consolidated financial statements included in this report).  This amount was repaid in cash during the third quarter of 2012.

In May 2012, a member of the Board of Directors entered into a short-term loan agreement with us in the amount of $30,000 (see Notes 15 to our consolidated financial statements included in this report).  This note was repaid in cash during the second quarter of 2012.

Plastic2Oil Marine, Inc., one of the Company’s subsidiaries, which is currently not operating, entered into a consulting service contract during 2010 with a company owned by the current CEO. The contract provides the related company with a share of the operating income earned from Plastic2Oil technology installed on marine vessels which are owned by the related company. The contract provides a minimum future payment equal to fifty percent of the operating income generated from the operations of two of the most profitable marine vessel processors and 10% from all other marine vessel processors. At December 31, 2013 there were no currently installed marine vessel processors as per the terms of the contract.

Critical Accounting Policies

Basis of Consolidation

 

The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, JBI (Canada) Inc., JBI CDE Inc., JBI Re One Inc., and JBI Re #1 Inc., Plastic2Oil of NY #1, Plastic2Oil Marine Inc. and Plastic2Oil Land Inc.  The results of Javaco and Pak-It are consolidated and classified as discontinued operations for all periods presented.  All of our intercompany transactions and balances have been eliminated on consolidation.  Amounts in the consolidated financial statements are expressed in U.S. dollars.

 

Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates include amounts for impairment of intangible assets, share based compensation, asset retirement obligations, inventory obsolescence, accrued liabilities and accounts receivable exposures.

 

Inventories

 

Inventories, which consist primarily of plastics, costs to process the plastic and processed fuel are stated at the lower of cost or market.  We use an average costing method in determining cost.  Inventories are periodically reviewed for use and obsolescence, and adjusted as necessary.  As of December 31, 2013 and 2012, reserve for obsolescence was $326,526 and $56,623, respectively.

 

33

---

 

Property Plant and Equipment

 

Property, Plant and Equipment are recorded at cost.  Depreciation is provided using the straight-line method over the estimated useful lives of the various classes of assets as follows:

Leasehold improvements	lesser of useful life or term of the lease
Machinery and office equipment	3-15 years
Furniture and fixtures	7 years
Office and industrial buildings	25 years

 

Gains and losses on depreciable assets retired or sold are recognized in the statement of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred and expenditures that increase the value or useful life of the asset are capitalized.

 

Construction in Process

 

The Company capitalizes customized equipment built to be used in the future day to day operations at cost. Once complete and available for use, the cost for accounting purposes is transferred to property, plant and equipment, where normal depreciation rates are applied.

 

Impairment of Long-Lived Assets

The Company reviews for impairment of long-lived assets on an asset by asset basis. Impairment is recognized on properties held for use when the expected undiscounted cash flows for a property are less than its carrying amount at which time the property is written-down to fair value. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. The sale or disposal of a “component of an entity” is treated as discontinued operations. The operating properties sold by the Company typically meet the definition of a component of an entity and as such the revenues and expenses associated with sold properties are reclassified to discontinued operations for all periods presented (Note 19).

As of December 31, 2013 and 2012, we had recorded impairment losses on property, plant and equipment of $1,122,829 and $191,466, respectively.  The charges in 2013 relates to the Processor #1which is being set up for non-fuel production as well as on its research & Development testing. The charges in 2012 related to the impairment of the reactor on our first processor and also related to tape reading equipment.

 

Asset Retirement Obligations

The fair value of the estimated asset retirement obligations is recognized in the consolidated balance sheets when identified and a reasonable estimate of fair value can be made. The asset retirement cost, equal to the estimated fair value of the asset retirement obligation, is capitalized as part of the cost of the related long-lived asset. The asset retirement costs are depreciated over the asset’s estimated useful life and are included in depreciation and accretion expense on the consolidated statements of income. Increases in the asset retirement obligation resulting from the passage of time are recorded as accretion of asset retirement obligation in the consolidated statements of operations. Actual expenditures incurred are charged against the accumulated obligation.  As at December 31, 2013, the Company has concluded that there is an asset retirement obligation associated with its assets and, accordingly, a provision for retirement obligation has been recorded of $30,306 and $29,423 for the years ended December 31, 2013 and 2012, respectively.  This liability is included in other long-term liabilities.

 

Environmental Contingencies

We record environmental liabilities at their undiscounted amounts on our consolidated balance sheets as other current or long-term liabilities when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. These costs may be discounted to reflect the time value of money if the timing of the cash payments is fixed or reliably determinable and extends beyond a current period. Estimates of our liabilities are based on currently available facts, existing technology and presently enacted laws and regulations, taking into consideration the likely effects of other societal and economic factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by the Environmental Protection Agency (EPA) or other organizations. Our estimates are subject to revision in future periods based on actual costs or new circumstances. We capitalize costs that benefit future periods and we recognize a current period charge in operation and maintenance expense when clean-up efforts do not benefit future periods.

 

We evaluate any amounts paid directly or reimbursed by government sponsored programs and potential recoveries or reimbursements of remediation costs from third parties including insurance coverage separately from our liability. Recovery is evaluated based on the creditworthiness or solvency of the third party, among other factors. When recovery is assured, we record and report an asset separately from the associated liability on our balance sheet. No amounts for recovery have been accrued to date.

 

34

---

 

Leases

The Company has entered into various leases for buildings and equipment. At the inception of a lease, the Company evaluates whether it is operating or capital in nature.  Operating leases are recorded as expense in the appropriate periods of the lease.  Capital leases are classified as property, plant and equipment and the related depreciation is recorded on the assets.  Also, the debt related to the capital lease is included in the Company’s short- and long-term debt obligations, in accordance with the lease agreement.

Lease inducements are recognized for periods of reduced rent or for larger than usual rent escalations over the term of the lease. The benefit of a rent free period and the cost of future rent escalations are recognized on a straight-line basis over the term of the lease.

 

Revenue Recognition

 

The Company recognizes revenue when it is realized or realizable and collection is reasonably assured.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

P2O sales are recognized when the customers take possession of the fuel since at that stage the customer has completed all prior testing necessary for their acceptance of the fuel. At the time of possession they have arranged for transportation to pick it up and the sales price has either been set in contract or negotiated prior to the time of pick up. The Company negotiates the pricing of the fuel based on the quality of the product and the type of fuel being sold (i.e. Naphtha, Fuel Oil No.6 or Fuel Oil No. 2).

 

Research and Development

 

The Company is engaged in research and development activities. Research and development costs are charged as operating expense of the Company as incurred. For the years ended December 31, 2013, and 2012, the Company expensed $465,671, and $445,945, respectively, towards research and development costs.  Components of the processors that are fabricated or purchased with research and development plans and then used on the processor in production are capitalized into the cost of the processor and depreciated over the remaining life of the processor.

Foreign Currency Translation

 

The consolidated financial statements have been translated into U.S. dollars in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830. All monetary items have been translated using the exchange rates in effect at the balance sheet date. All non-monetary items have been translated using the historical exchange rates at the time of transactions. Income statement amounts have been translated using the average exchange rate for the year. Foreign exchange gains and losses are included in the consolidated statements of operations.

 

Income Taxes

 

The Company utilizes the asset and liability method to measure and record deferred income tax assets and liabilities. Deferred tax assets and liabilities reflect the future income tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company adopted the accounting standards associated with uncertain tax positions as of January 1, 2007. The adoption of this standard did not have a material impact on the Company’s consolidated statements of operations or financial position. Upon adoption, the Company had no unrecognized tax benefits. Furthermore, the Company had no unrecognized tax benefits at December 31, 2013 and 2012. The Company files tax returns in the U.S. federal and state jurisdictions as well as a foreign country.  The years ending December 31, 2008 through December 31, 2012 are open tax years for IRS review.

 

Segment Reporting

We operate in two reportable segments. ASC 280-10, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for the way that public business enterprises report information about operating segments in their annual consolidated financial statements. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our operating segments include plastic-to-oil conversion (Plastic2Oil business), which includes our fuel sales as well as sales of waste paper fiber and Data Recovery and Migration, our magnetic tape reading segment. Our Chief Operating Decision Maker is the Company’s Chief Executive Officer.

 

35

---

 

 

Concentrations and Credit Risk

 

The Company maintains cash balances, at times, with financial institutions in excess of amounts insured by the Canada Deposit Insurance Corporation and the U.S. Federal Deposit Insurance Corporation.  Management monitors the soundness of these institutions and has not experienced any collection losses with these financial institutions.

During the years ended December 31, 2013 and 2012, 81.0%, and 58.0%, respectively, of total net revenues were generated from four and three customers.   As of December 31, 2013, and 2012 three accounted for 77.0%, and 76.0% of accounts receivable.

During the years ended December 31, 2013, and 2012, 26.4%, and 25.5%, of total net purchases were made from four vendors.  As of December 31, 2013 and 2012, four, and three, respectively, accounted for 27.9%, and 36.6% respectively, of accounts payable.

Fair Value of Financial Instruments

 

Fair value is defined under FASB ASC Topic 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for an asset or liability in an orderly transaction between participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.  The levels are as follows:

●	Level 1 - Quoted prices in active markets for identical assets or liabilities
●	Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities
●	Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, notes payable, mortgage payable and short-term loans approximate fair value because of the short-term nature of these items. Per ASC Topic 820 framework these are considered Level 2 inputs where estimates are unobservable by market participants outside of the Company and must be estimated using assumptions developed by the Company.

Going Concern

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. We have experienced negative cash flows from operations since inception, have a history of net losses from continuing operations of $11,206,806 and $12,693,771 for the year ended December 31, 2013 and December 31, 2012 respectively, and have an accumulated deficit of $61,118,267 at December 31, 2013. These factors raise substantial doubt about our ability to continue to operate in the normal course of business. We have funded our activities to date almost exclusively from equity financings. See “Risk Factors—Risks Related to Our Business”.

Financial Instruments and Other Instruments

 

We do not have any outstanding financial instruments and/or other instruments.

 

Disclosure of Outstanding Securities

 

As of June 3, 2014, we had 96,292,243 shares of common stock issued and outstanding, and 1,967,207 Series B Preferred Shares issued and outstanding.   The Series B Preferred Stock is convertible at the rate of one (1) share of Series B Preferred Stock to seven (7) shares of common stock at any time between the date of issuance and 18 months from the issuance date.  These shares have participation rights and voting rights equal to the number of shares of common stock into which they convert.  Additionally, these shares have a liquidation preference over all other classes of stock.  During the years ended December 31, 2013 and 2012, we had 1,000,000 shares of Series A Preferred Stock issued and outstanding, all of which were held by the Company’s founder and current Chief of Technology.  These shares had no participation rights; however, they carried super voting rights in which each share of Series A Preferred Stock had one hundred times the voting rights of a share of common stock.  On May 30, 2014, all of the issued and outstanding shares of Series A Preferred Stock were cancelled and, on June 3, 2014, a Certificate of Withdrawal relating to the Series A Preferred Stock was filed with the Secretary of State of Nevada.

 

In conjunction with the Company’s January 2012 private placement, the Company issued 1,997,500 warrants to purchase shares of the Company’s common stock at the price of $2.00 per share as at December 31, 2013. 143,500 of these warrants are still outstanding and expired on February 26, 2014.

In conjunction with the Company’s 2012 Long Term Incentive Plan, options to purchase 5,240,000 shares of common stock with the exercise price of $1.50, and 2,060,000 shares of common stock with the exercise price of $0.38 have been issued, of which 6,806,000 options are outstanding at December 31, 2013. 2,895,334 shares are vested and 3,190,666 shares vest in annual tranches as follows, during, 2014 (1,305,334), 2015 (1,305,332), 2016 (650,000) and 2017 (650,000).

 

36

---

 

 

In conjunction with the Company’s August 29, 2013 private placement, the Company sold a $1,000,000 principal amount of 12% Promissory Note, together with a five-year warrant to purchase up to one million shares of the company’s common stock at an exercisable price of $0.54 per share. The gross proceeds to the Company were $1 million.

In conjunction with the Company’s September 30, 2013 private placement, the Company sold a $2,000,000 principal amount of 12% Promissory Note, together with a five-year warrant to purchase up to two million shares of the company’s common stock at an exercisable price of $0.54 per share. The gross proceeds to the Company were $2 million.

On February 19, 2014 (the Company entered into Subscription Agreements with three investors in connection with a private placement of shares of the Company’s common stock and warrants to purchase shares of common stock. The Company agreed to sell and issue to the Purchasers an aggregate of 2.4 million shares of its common stock and Warrants to purchase up to an additional 2.4 million shares of its common stock. The closings occurred between February 19 and 24, 2014. The purchase price per share was $0.05 and the gross proceeds to the Company were $120,000. The Warrants have a three year term, and an initial exercise price of $0.10 per share of common stock.

On March 26, 2014 the Company entered into Subscription Agreements with eleven investors in connection with a private placement of shares of the Company’s common stock and warrants to purchase shares of common stock. The Company agreed to sell and issue to the Purchasers an aggregate of 3.2 million shares of its common stock and Warrants to purchase up to an additional 3.2 million shares of its common stock. The closings occurred between March 17 and 28, 2014. The purchase price per share was $0.05 and the gross proceeds to the Company were $320,000. The Warrants have a three year term, and an initial exercise price of $0.10 per share of common stock.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosures About Market Risk

We may be exposed to changes in financial market conditions in the normal course of business. Market risk generally represents the risk that losses may occur as a result of movements in interest rates and equity prices. We currently do not use financial instruments in the normal course of business that are subject to changes in financial market conditions.

 

Currency Fluctuations and Foreign Currency Risk

 

We mainly operate in the United States and Canada.  Due to the relative stability of the Canadian Dollar in comparison to the U.S. Dollar, we have not experienced foreign currency risk, however, should this stability change, we could be exposed to such risk.

 

Interest Rate Risk

 

We do not feel that we are subject to significant interest rate risk. We deposit surplus funds with banks earning daily interest at fixed rates and we do not invest in any instruments for trading purposes. Additionally, all of our outstanding debt instruments (our mortgage and capital leases) carry fixed rates of interests. We are exposed to opportunity risk should interest rates decrease.  The amount of interest bearing short-term debt outstanding as of December 31, 2013 and 2012 was $23,618 and $23,068, respectively.

 

Credit Risk

 

Financial instruments which potentially expose us to concentrations of credit risk consist principally of operating demand deposit accounts and accounts receivable. Our policy is to place our operating demand deposit accounts with high credit quality financial institutions that are insured by the FDIC, however, account balances may at times exceed insured limits. We extend limited credit to our customers based upon their creditworthiness and establish an allowance for doubtful accounts based upon the credit risk of specific customers, historical trends and other pertinent information.

We maintain cash balances, at times, with financial institutions in excess of amounts insured by the Canada Deposit Insurance Corporation and the U.S. Federal Deposit Insurance Corporation. Management monitors the soundness of these institutions and has not experienced any collection losses with these financial institutions.

 

During the years ended December 31, 2013, and 2012, 81.0%, and 58.0%, of total net revenues were generated from four customers.

 

During the years ended December 31, 2013, and 2012, 26.4%, and 25.5%, of total net purchases were made from four vendors.  As of December 31, 2013, and 2012, four, and three vendors, respectively, accounted for 27.9%, and 36.6% respectively, of accounts payable.

 

Inflation Risk

 

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.

 

 

37

---

 

 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index

 

Report of Independent Registered Public Accounting Firm – MNP LLP	F-1
Report of Independent Registered Public Accounting Firm – MSCM LLP	F-2
Consolidated Balance Sheets – December 31, 2013,	F-3
Consolidated Statements of Operations – December 31, 2013, and 2012	F-4
Consolidated Statement of Changes in Stockholders Equity - December 31, 2013 and 2012,	F-5
Consolidated Statements of Cash Flows - December 31, 2013 and 2012,	F-8
Notes to Consolidated Financial Statements	F-10

 

38

---

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of JBI, Inc.

 

We have audited the accompanying consolidated balance sheet of JBI, Inc. (the “Company”) as of December 31, 2013, and the related consolidated statements of operations, changes in shareholders’ equity (deficit) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JBI, Inc. as of December 31, 2013 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1, the Company has experienced negative cash flows from operations since inception and has accumulated a significant deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ MNP LLP

MNP LLP

 

Toronto, Canada

 

June 3, 2014

 

ACCOUNTING › CONSULTING › TAX 701 EVANS AVENUE, 8TH FLOOR, TORONTO ON, M9C 1A3 P: 416.626.6000  F: 416.626.8650  MNP.ca

 

 

F-1

---

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

JBI, Inc.

We have audited the accompanying consolidated balance sheet of JBI, Inc. (the “Company”) as of December 31, 2012 and the related consolidated statements of operations, changes in shareholders’ equity (deficit) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JBI, Inc. as of December 31, 2012 and the results of its operations and its cash flows for the year then ended  in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1, the Company has experienced negative cash flows from operations since inception and has accumulated a significant deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2013 expressed an adverse opinion thereon.

 

/s/ MSCM LLP

 

MSCM LLP

 

Toronto, Canada

 

March 15, 2013

701 Evans Avenue, 8th Floor, Toronto ON M9C 1A3, Canada T (416) 626-6000 F (416) 626-8650 MSCM.CA

 

 

F-2

---

 

 

JBI, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31, 2013 and 2012

 

		2013				2012
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	203,949			$	3,965,720
Cash held in attorney trust (Note 2)			12,637				184,789
Restricted cash (Note 2)			100,122				100,022
Accounts receivable, net of allowance of $91,710 (2012 - $57,991)			80,814				240,139
Inventories (Note 4)			147,120				240,096
Short-term notes receivable (Note 6)			-				487,722
Prepaid expenses and other current assets			76,305				419,849
TOTAL CURRENT ASSETS			620,947				5,638,337
			-
PROPERTY, PLANT AND EQUIPMENT, NET (Note 5)			7,184,008				6,886,059
Deposits (Note 2)			1,484,453				839,005
TOTAL ASSETS		$	9,289,408			$	13,363,401
CURRENT LIABILITIES
Accounts payable		$	1,510,611			$	1,608,575
Accrued expenses			851,532				1,081,100
Customer advances			26,120				26,120
Accrued lease obligation – current (Note 10 and 19)			83,466				-
Long-Term Debt, mortgage payable and capital leases – current (Note 9)			23,618				23,068
TOTAL CURRENT LIABILITIES			2,495,347				2,738,863
LONG-TERM LIABILITIES
Asset retirement obligations (Note 2)			30,306				29,423
Accrued lease obligation (Note 10 and 19)			383,388				-
Long-Term Debt, mortgage payable and capital leases (Note 9)			2,532,079				314,716
TOTAL LIABILITIES			5,441,120				3,083,002
Commitments and Contingencies (Note 10)
Subsequent Events (Note 22)
STOCKHOLDERS' EQUITY (Notes 11 and 22)
Preferred stock, Series B, par $0.001; 2,300,000 shares authorized, convertible into 16,100,000 shares of Common Stock, 2,204,100 shares issued and outstanding (2012 – Nil)			7,648,690				-
Preferred stock, Series B, beneficial conversion feature (“BCF”) discount			(1,713,123	)			-
Preferred Stock Series B Subscribed			-				1,531,814
Common stock, par $0.001; 150,000,000 authorized, 90,692,243 shares issued and outstanding (2012 – 89,855,816)			90,692				89,857
Common Stock Warrants			1,056,970				2,037,450
Common stock subscribed, nil shares at cost in 2013; (2012 – 85,415)			-				60,818
Preferred stock, Series A, par $0.001; 1,000,000 authorized, 1,000,000 shares issued and outstanding (2012 – 1,000,000)			1,000				1,000
Additional paid in capital			57,882,326				54,443,462
Accumulated deficit			(61,118,267	)			(47,884,002	)
TOTAL STOCKHOLDERS' EQUITY			3,848,288				10,280,399
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	9,289,408			$	13,363,401

The accompanying notes are an integral part of the consolidated financial statements.

 

 

F-3

---

 

 

JBI, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,

		2013				2012
SALES
P20		$	599,413			$	609,553
Data Business			93,712				70,381
			693,125				679,934
COST OF SALES
P20			690,488				707,293
Data Business			61,072				52,097
			751,560				759,390
GROSS LOSS			(58,435	)			(79,456	)
OPERATING EXPENSES
Selling, general and administrative expenses			8,415,210				11,646,690
Depreciation of property, plant and equipment			980,377				633,382
Accretion of long-term liability			50,700				-
Research and development expenses			465,671				445,947
Impairment loss – property, plant and equipment			1,122,829				191,466
TOTAL OPERATING EXPENSE			11,034,787				12,917,485
LOSS FROM CONTINUING OPERATIONS			(11,093,222	)			(12,996,941	)
OTHER INCOME (EXPENSE)
Interest expense, net			(119,580	)			(2,331	)
Gain on mark-to-market adjustment of equity derivative liability			-				305,798
Other income, net			23,765				(297	)
			(95,815	)			303,170
Disposal of assets			(17,769	)			-
LOSS BEFORE INCOME TAXES			(11,206,806	)			(12,693,771	)
INCOME TAXES (Note 8)			-				-
NET LOSS FROM CONTINUING OPERATIONS			(11,206,806	)			(12,693,771	)
NET LOSS FROM DISCONTINUED OPERATIONS (Note 19)			(2,027,459	)			(628,434	)
NET LOSS		$	(13,234,265	)		$	(13,322,205	)
Basic and diluted net loss per share from continuing operations (Note 20)		$	(0.12	)		$	(0.15	)
Basic and diluted net loss per share from discontinued operations (Note 20)			(0.02	)			(0.01	)
Total basic and diluted net loss per share (Note 20)		$	(0.14	)		$	(0.16	)
Weighted average number of common shares outstanding – basic and diluted			90,194,085				82,052,247

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-4

---

 

 

JBI, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

Years Ended December 31, 2013 and 2012

 

		Common Stock $0.001 Par Value								Common Stock Subscribed								Common Stock Warrants								Preferred Stock – Series A $0.001 Par Value								Preferred Stock Subscribed								Additional Paid in				Accumulated				Total Stockholders’
		Shares				Amount				Shares				Amount				Warrants				Amount			Shares				Amount				Shares				Amount				Capital				Deficit				Equity
BALANCE, DECEMBER 31, 2011			68,615,379			$	68,616				811,538			$	839,062				-			$	-				1,000,000			$	1,000				-				-			$	35,748,538			$	(34,545,604	)		$	2,111,612
Common stock issued for services in the prior year, ranging from $0.60 to $2.38 per share			731,538				732				(731,538	)			(799,062	)			-				-				-				-				-				-				798,330				-				-
Common stock issued for purchase of equipment in the prior year			80,000				80				(80,000	)			(40,000	)			-				-				-				-				-				-				39,920				-				-
Common stock issued in connection with private placement, $1.00 per unit			3,421,000				3,421				-				-				1,710,500				1,744,710				-				-				-				-				458,414				-				2,206,545
Common stock issued as an advisory fee in connection with the private placement			287,000				287				-								287,000				292,740				-				-				-				-				(293,027	)							-
Common stock issued for repayment of loan, $1.00 per share			200,000				200				-				-				-				-				-				-				-				-				199,800				-				200,000
Common stock issued for services, ranging from $0.60 to $1.48 per share			1,328,425				1,328				-				-				-				-				-				-				-				-				1,409,599				-				1,410,927
Common stock issued for equipment, $1.48 per share			30,786				31				-				-				-				-				-				-				-				-				35,089				-				35,120
Common stock issued in relation to the private placement in January 2012, relating to the price protection clause (Note 11)			880,250				880				-				-				-				-				-				-				-				-				907,778				-				908,658
Common stock issued as an advisory fee in relation to the private placement in January 2012, relating to the price protection clause (Note 11)			71,750				72				-				-				-				-				-				-				-				-				(72	)			-				-
Common stock issued in connection with private placement, $0.80 per share (net of advisory fee of $657 and legal and offering costs of $135,169)			14,153,750				14,154				-				-				-				-				-				-				-				-				11,189,912				-				11,204,066

 

F-5

---

 

 

JBI, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

Years Ended December 31, 2013, and 2012

 

		Common Stock $0.001 Par Value								Common Stock Subscribed								Common Stock Warrants								Preferred Stock – Series A $0.001 Par Value								Preferred Stock Subscribed								Additional Paid in				Accumulated				Total Stockholders’
		Shares				Amount				Shares				Amount				Warrants				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Equity
Common stock issued as an advisory fee in connection with the May private placement			657,188			$	657				-			$	-				-			$	-				-			$	-				-			$	-			$	(657	)		$	-			$	-
Common stock returned and retired previously issued as an advisory fee in connection with the May private placement			(601,250	)			(601	)			-				-				-				-				-				-				-				-				601				-				-
Common stock subscribed for services ranging from $0.70 to $0.73 per share			-				-				85,415				60,818				-				-				-				-				-				-				-				-				60,818
Preferred Stock – Series B subscribed (net of issuance costs of $29,361)			-				-				-				-				-				-				-				-				1,146,444				3,983,192				-				-				3,983,192
Preferred Stock – Series B – Beneficial Conversion Feature			-				-				-				-				-				-				-				-								(2,467,571	)			2,467,571				-				-
Preferred stock – Series B – Deemed Dividend			-				-				-				-				-				-				-				-				-				16,193				-				(16,193	)			-
Stock compensation expense related to granting of stock options			-				-				-				-				-				-				-				-				-				-				1,481 , 666				-				1,481,666
Net loss			-				-				-				-				-				-				-				-				-				-				-				(13 ,322,205	)			(13,322,205	)
BALANCE, DECEMBER 31, 2012			89,855,816			$	89,857				85,415			$	60,818				1,997,500			$	2,037,450				1,000,000			$	1,000				1,146,444			$	1,531,814			$	54,443,462			$	(47,884,002	)		$	10,280,399

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-6

---

 

 

JBI, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

Years Ended December 31, 2013, and 2012

 

		Common Stock $0.001 Par Value								Common Stock Subscribed								Common Stock Warrants								Preferred Stock – Series A $0.001 Par Value								Preferred Stock – Series B $0.001 Par Value								Preferred Stock Series B – Beneficial Conversion				Preferred Stock Subscribed								Additional Paid in				Accumulated				Total Stockholders’
		Shares				Amount				Shares				Amount				Warrants				Amount				Shares				Amount				Shares				Amount				Feature				Shares				Amount				Capital				Deficit				Equity
BALANCE – DECEMBER 31, 2012			89,855,816			$	89,857				85,415			$	60,818				1,997,500			$	2,037,450				1,000,000			$	1,000				-			$	-			$	-				1,146,444			$	1,531,814			$	54,443,462			$	(47,884,002	)		$	10,280,399
Common stock issued for services, subscribed in the prior year, $0.73 per share			34,247				34				(34,247	)			(25,000	)			-				-				-				-				-				-				-				-				-				24,966				-				-
Preferred Stock –Series B, issued during 2013 (net of issue costs)			-				-				-				-				-				-				-				-				1,146,444				3,983,192				(2,451,378	)			(1,146,444	)			(1,531,814	)			-				-				-
Preferred Stock – Series B – issued during 2013 (net of issue costs)			-				-				-				-				-				-				-				-				1,153,556				3,998,292				(2,817,628	)			-				-				2,817,628				-				3,998,292
Common stock issued for services, subscribed in the prior year, $0.70 per share			51,168				51				(51,168	)			(35,818	)			-				-				-				-				-				-				-				-				-				35,767				-				-
Common stock issued for services, $0.46 per share			11,911				10				-				-				-				-				-				-				-				-				-				-				-				5,470				-				5,480
Preferred Stock - Series B, converted to Common Stock in Q3			520,800				521				-				-				-				-				-				-				(74,400	)			(258,184	)			-				-				-				257,663				-				-
Common stock issued for services, $0.51 per share			7,801				8				-				-				-				-				-				-				-				-				-				-				-				3,974				-				3,982
Common stock subscribed for services, valued at $0.40 per share			-				-				60,000				24,000				-				-				-				-				-				-				-				-				-				-				-				24,000
Series B preferred stock converted to common stock subscribed.			-				-				150,500				74,610				-				-				-				-				(21,500	)			(74,610	)			-				-				-				-				-				-
Common Stock Warrants to purchase shares of Common Stock for $0.54 per share			-				-				-				-				3,000,000				910,600				-				-				-				-				-				-				-				-				-				910,600
Reclass of expired warrants during			-				-				-				-				(1,854,000	)			(1,891,080	)			-				-				-				-				-				-				-				1,891,080				-				-
Preferred stock – Series B – Deemed Dividend			-				-				-				-				-				-				-				-				-				-				3,555,883				-				-				(3,555,883	)							-
Stock compensation expense related to granting of stock options.			-				-				-				-				-				-				-				-				-				-				-				-				-				1,859,799				-				1,859,799
Common stock issued for services, $0.40 per share			60,000				60				(60,000	)			(24,000	)			-				-				-								-				-				-				-				-				23,940				-				-
Common stock issued as an advisory fee in connection with the private placement			150,500				151				(150,500	)			(74,610	)			-				-				-								-				-				-				-				-				74,460				-				-
Net loss			-				-				-				-				-				-				-				-				-				-				-				-				-				-				(13,234,265	)			(13,234,265	)
BALANCES - DECEMBER 31, 2013		90,692,243				$	90,692				-			$	-			3,143,500				$	1,056,970			1,000,000				$	1,000			2, 204,100				$	7,648,690			$	(1,713,123	)			-			$	-			$	57,882,326			$	(61,118,267	)		$	3,848,288

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-7

---

 

JBI, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2013, and 2012

 

		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from Continuing Operations		$	(11,206,806	)		$	(12,693,771	)
Net loss from Discontinued Operations			(2,027,459	)			(628,434	)
NET LOSS			(13,234,265	)			(13,322,205	)
Items not affecting cash:
Depreciation of property, plant and equipment			979,268				633,382
Accretion of long-term liability			50,700				-
Impairment loss - property, plant and equipment			1,122,829				191,466
Provision for uncollectible accounts			-				(33,089	)
Provision for inventory obsolescence			-				56,623
Gain on mark-to-market adjustment of derivative equity liability			-				(305,798	)
Other income			(11,269	)			(24,279	)
Stock issued for services			1,967,869				1,471,745
Non-cash stock-based compensation			-				1,481,666
Recovery of uncollectible account			12,000				-
Accrued interest expense			100,000				-
Non-cash items impacting Discontinued operations			1,664,440				14,464
Working capital changes:
Accounts receivable			147,325				12,946
Cash held in attorney trust			172,152				(184,789	)
Inventories			(176,927	)			(188,037	)
Prepaid expenses			343,544				(95,971	)
Assets held for sale			-				604,766
Accounts payable			(584,436	)			(798,806	)
Accrued expenses			(160,750	)			277,827
Other liabilities			-				(99,062	)
Changes attributable to discontinued operations			-				(5,590	)
NET CASH USED IN OPERATING ACTIVITIES			(7,607,520	)			(10,054,621	)
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment additions			(2,581,555	)			(3,119,998	)
Decrease in deposits for property, plant and equipment			(645,448	)			(807,108	)
(Increase) in restricted cash			-				(100,022	)
Payments on capital lease			-				(16,258	)
NET CASH USED IN INVESTING ACTIVITIES			(3,227,003	)			(4,043,386	)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

F-8

---

 

JBI, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

Years Ended December 31, 2013, and 2012

 

		2013				2012
CASH FLOWS FROM FINANCING ACTIVITIES
Stock issuance proceeds, net			74,460				11,699,066
Proceeds from short-term loans			-				75,000
Repayment of short-term loans			-				(105,000	)
Repayment of stockholder advances			-				(100,000	)
Proceeds from Preferred Stock – Series B subscriptions			-				3,983,192
Proceeds from Preferred Stock – Series B issuance			3,998,292				-
Proceeds from long-term notes payable			3,000,000				-
NET CASH PROVIDED BY FINANCING ACTIVITIES			7,072,752				15,552,258
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(3,761,771	)			1,454,251
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			3,965,720				2,511,469
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	203,949			$	3,965,720

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-9

---

 

 

JBI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

NOTE 1 – ORGANIZATION AND GOING CONCERN

JBI, Inc. (the “Company” or “JBI”) was originally incorporated as 310 Holdings, Inc. (“310”) in the State of Nevada on April 20, 2006.  310 had no significant activity from inception through 2009.  In April 2009, John Bordynuik purchased 63% of the issued and outstanding shares of 310.  During 2009, the Company changed its name to JBI, Inc. and began operations of its main business operation, Plastic2Oil (“P2O”).  Plastic2Oil is a combination of proprietary technologies and processes developed by JBI which convert waste plastics into fuel.  JBI currently, as of the date of this filing, operates two processors at its Niagara Falls, NY, facility (the “Niagara Falls Facility”).

On August 24, 2009, the Company acquired Javaco, Inc. (“Javaco”), a distributor of electronic components, including home theater and audio video products.  In July 2012, the Company closed Javaco and sold substantially all of the inventory and fixed assets of Javaco.  The operations of Javaco have been classified as discontinued operations for the years presented (Note 19).

On September 30, 2009, the Company acquired Pak-It, LLC (“Pak-It”), and the operator of a bulk chemical processing, mixing, and packaging facility.  It also has developed and patented a delivery system that packages condensed cleaners in small water-soluble packages.  In February 2012, the Company sold substantially all of the assets of Pak-It and as a result, the operations of Pak-It have been classified as discontinued operations for the years presented (Note 19).

Going Concern

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), which contemplates continuation of the Company as a going concern which assumes the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has experienced negative cash flows from operations since inception, has net losses from continuing operations of $11,206,806, and $12,693,771, for the years ended December 31, 2013, and 2012, respectively, and has an accumulated deficit of $61,118,267 at December 31, 2013. These factors raise substantial doubt about the Company’s ability to continue as a going concern and to operate in the normal course of business. The Company has funded its activities to date almost exclusively from equity financings. 

The Company will continue to require substantial funds to continue the expansion of its P2O business to achieve significant commercial productions, and to significantly increase sales and marketing efforts. Management’s plans in order to meet its operating cash flow requirements include financing activities such as private placements of its common stock, issuances of debt and convertible debt instruments.

 

While the Company believes that it will be successful in obtaining the necessary financing to fund its operations, meet regulatory requirements and achieve commercial production goals, there are no assurances that such additional funding will be achieved and that it will succeed in its future operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue in existence. 

 

 

F-10

---

 

 

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Plastic2Oil of NY#1, JBI (Canada) Inc., John Bordynuik, Inc., JBI CDE Inc., JBI Re One Inc., JBI Re#1 Inc., Plastic2Oil Marine Inc., Javaco, Pak-it and Plastic2Oil Land Inc. All intercompany transactions and balances have been eliminated on consolidation.  Amounts in the consolidated financial statements are expressed in US dollars. Pak-It and Javaco have also been consolidated; however, as mentioned their operations are classified as discontinued operations (Note 19).

 

Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates include amounts for impairment of long-lived assets, share based compensation, asset retirement obligations, inventory obsolescence, accrued liabilities and accounts receivable exposures.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

 

Restricted Cash

 

As of December 31, 2013, the Company had $100,122 (2012 – $100,022) of restricted cash, which is used to secure a line of credit that secures a performance bond on behalf of the Company.

 

Cash Held in Attorney Trust

The amount held in trust represents retainer payments the Company have made to law firms which were being held on our behalf for the payment of future services.

Accounts Receivable

 

Accounts receivable represent unsecured obligations due from customers under terms requesting payments upon receipt of invoice up to ninety days, depending on the customer.  Accounts receivable are non-interest bearing and are stated at the amounts billed to the customer net of an allowance for uncollectible accounts. Customer balances with invoices over 90 days old are considered delinquent. Payments of accounts receivable are applied to the specific invoices identified on the customer remittance, or if unspecified, are applied to the earliest unpaid invoice. 

 

The allowance for uncollectible accounts reflects management’s best estimate of amounts that may not be collected based on an analysis of the age of receivables and the credit standing of individual customers. The allowance for uncollectible accounts for the years ended December 31, 2013 and 2012 was $91,710 and $57,991, respectively. 

 

Inventories

 

Inventories, which consist primarily of plastics, costs to process the plastic and processed fuel are stated at the lower of cost or market. We use an average costing method in determining cost. Inventories are periodically reviewed for use and obsolescence, and adjusted as necessary.  

Property, Plant and Equipment

 

Property, plant and equipment are recorded at cost.  Depreciation is provided using the straight-line method over the estimated useful lives of the various classes of assets, and capital leased assets are given useful lives coinciding with the asset classification they are classified as.  These lives are as follows:

 

Leasehold improvements	lesser of useful life or term of the lease
Machinery and office equipment	3-15 years
Furniture and fixtures	7 years
Office and industrial buildings	25 years

 

Gains and losses on depreciable assets retired or sold are recognized in the statements of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred and expenditures that increase the value or useful life of the asset are capitalized.

 

F-11

---

 

 

Construction in Process

 

The Company capitalizes customized equipment built to be used in the future day to day operations at cost. Once complete and available for use, the cost for accounting purposes is transferred to property, plant and equipment, where normal depreciation rates are applied.

 

Impairment of Long-Lived Assets

The Company reviews for impairment of long-lived assets on an asset by asset basis. Impairment is recognized on properties held for use when the expected undiscounted cash flows for a property are less than its carrying amount at which time the property is written-down to fair value. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. The sale or disposal of a “component of an entity” is treated as discontinued operations. The operating properties sold by the Company typically meet the definition of a component of an entity and as such the revenues and expenses associated with sold properties are reclassified to discontinued operations for all periods presented (Note 19).

As of December 31, 2013 and 2012, the Company had recorded impairment losses on property, plant and equipment of $1,122,829 and $191,466 respectively, in accordance to ASC 360-10-50-2 where an impairment loss will be recognized only if the carrying amount of the long-lived assets are not recoverable and exceeds its fair value.

 

Asset Retirement Obligations

The fair value of the estimated asset retirement obligation is recognized in the consolidated balance sheets when identified and a reasonable estimate of fair value can be made. The asset retirement cost, equal to the estimated fair value of the asset retirement obligation, is capitalized as part of the cost of the related long-lived asset. The balance of the asset retirement obligation is determined through an assessment made by the Company’s engineers of the total costs expected to be incurred by the Company when closing a facility.  The total estimated cost is then discounted using the current market rates to determine the present value of the asset as of the date of this valuation of the asset retirement obligation.  As of the date of the creation of the asset retirement obligation, the Company determined the present value of the obligation using a discount rate equal to 2.96%.  The present value of the asset retirement obligation is then capitalized on the consolidated balance sheets and is depreciated over the asset’s estimated useful life and is included in depreciation and accretion expense on the consolidated statements of operations. Increases in the asset retirement obligation resulting from the passage of time are recorded as accretion of asset retirement obligation in the consolidated statements of operations. Actual expenditures incurred are charged against the accumulated obligation.  As at December 31, 2013 and December 31, 2012, the Company recorded asset retirement obligations of $30,306 and $29,423, respectively.  These costs include disposal of plastic and other non-hazardous waste, site closing labor and testing and sampling of the site upon closure. This liability is included in other long-term liabilities.

 

Environmental Contingencies

The Company records environmental liabilities at their undiscounted amounts on our balance sheets as other current or long-term liabilities when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. These costs may be discounted to reflect the time value of money if the timing of the cash payments is fixed or reliably determinable and extends beyond a current period. Estimates of our liabilities are based on currently available facts, existing technology and presently enacted laws and regulations, taking into consideration the likely effects of other societal and economic factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by the Environmental Protection Agency (EPA) or other organizations. Our estimates are subject to revision in future periods based on actual costs or new circumstances. We capitalize costs that benefit future periods and we recognize a current period charge in operation and maintenance expense when clean-up efforts do not benefit future periods.

 

We evaluate any amounts paid directly or reimbursed by government sponsored programs and potential recoveries or reimbursements of remediation costs from third parties including insurance coverage separately from our liability. Recovery is evaluated based on the creditworthiness or solvency of the third party, among other factors. When recovery is assured, we record and report an asset separately from the associated liability on our balance sheets. No amounts for recovery have been accrued to date.

 

F-12

---

 

 

Deposits

Deposits represent payments made to vendors for fabrication of key pieces of property, plant and equipment that have been made in accordance with the Company’s agreements to purchase such equipment.  Payments are made to these vendors as progress is made on the fabrication of the equipment, with final payments made when the equipment is delivered.  Until we have possession of the equipment, all payments made to these vendors are classified as deposits on assets.  Deposits were $1,484,453 and $839,005 for the years ended December 31, 2013 and 2012, respectively.

 

Leases

The Company has entered into various leases for buildings and equipment. At the inception of a lease, the Company evaluates whether it is operating or capital in nature.  Operating leases are recorded as expense in the appropriate periods of the lease.  Capital leases are classified as property, plant and equipment and the related depreciation is recorded on the assets.  Also, the debt related to the capital lease is included in the Company’s short- and long-term debt obligations, in accordance with the lease agreement (Note 9).

Lease inducements are recognized for periods of reduced rent or for larger than usual rent escalations over the term of the lease. The benefit of a rent free period and the cost of future rent escalations are recognized on a straight-line basis over the term of the lease.

 

Revenue Recognition

 

The Company recognizes revenue when it is realized or realizable and collection is reasonably assured.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

P2O sales are recognized when the customers take possession of the fuel since at that stage the customer has completed all prior testing necessary for their acceptance of the fuel. At the time of possession they have arranged for transportation to pick it up and the sales price has either been set in their purchase contract or negotiated prior to the time of pick up through the issuance of a purchase order. The Company negotiates the pricing of the fuel based on the quality of the product and the type of fuel being sold (i.e. Naphtha, Fuel Oil No. 6 or Fuel Oil No. 2).

 

Shipping and Handling Costs

 

The Company’s shipping and handling costs of $155,451, and $48,213 for the years ended December 31, 2013, and 2012, respectively, are included in cost of goods sold for the years presented. Shipping and handling costs are capitalized to inventory and expensed to cost of sales when the related inventory is sold for the years presented. 

Advertising costs

The Company expenses advertising costs as incurred. Advertising costs were $11,585, and $27,380 for the years ended December 31, 2013, and 2012, respectively. These expenses are included in selling, general and administrative expenses in the consolidated statements of operations.

Research and Development

 

The Company is engaged in research and development activities. Research and development costs are charged as operating expense of the Company as incurred. For the years ended December 31, 2013, and 2012 the Company expensed $465,671, and $445,947, respectively, towards research and development costs. Components of the processors that are fabricated or purchased with research and development plans and then used on the processor in production are capitalized into the cost of the processor and depreciated over the remaining life of the processor.

 

Foreign Currency Translation

 

The consolidated financial statements have been translated into U.S. dollars in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830. All monetary items have been translated using the exchange rates in effect at the balance sheet date. All non-monetary items have been translated using the historical exchange rates at the time of transactions. Income statement amounts have been translated using the average exchange rate for the year. Foreign exchange losses of $11,145, and $47,332 are included as general and administrative expenses in the consolidated statements of operations for the years ended December 31, 2013, and 2012, respectively.

 

F-13

---

 

 

Income Taxes

The Company utilizes the asset and liability method to measure and record deferred income tax assets and liabilities. Deferred tax assets and liabilities reflect the future income tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company adopted the accounting standards associated with uncertain tax positions as of January 1, 2007. The adoption of this standard did not have a material impact on the Company’s consolidated statements of operations or financial position. Upon adoption, the Company had no unrecognized tax benefits. Furthermore, the Company had no unrecognized tax benefits at December 31, 2013, and 2012. The Company files tax returns in the U.S federal and state jurisdictions as well as a foreign country.  The years ended December 31, 2009 through December 31, 2013 are open tax years for IRS review.

Loss Per Share

The financial statements include basic and diluted per share information. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.  Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period. Common stock equivalents are excluded from the computation of diluted loss per share when their effect is anti-dilutive.

Segment Reporting

The Company operates in two reportable segments. ASC 280-10, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for the way that public business enterprises report information about operating segments in their annual consolidated financial statements. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our operating segments include plastic to oil conversion (Plastic2Oil), which includes our fuel sales as well as sales of waste paper fiber and Data Recovery and Migration, our magnetic tape reading segment. Our Chief Operating Decision Maker is the Company’s Chief Executive Officer.

Concentrations and Credit Risk

Financial instruments which potentially expose the Company to concentrations of credit risk consist principally of operating demand deposit accounts and accounts receivable. The Company’s policy is to place our operating demand deposit accounts with high credit quality financial institutions that are insured by the FDIC, however, account balances may at times exceed insured limits. The Company extends limited credit to its customers based upon their creditworthiness and establishes an allowance for doubtful accounts based upon the credit risk of specific customers, historical trends and other pertinent information. The Company also routinely makes an assessment of the collectability of the short-term note receivable and determines its exposure for non-performance based on the specific holder and other pertinent information.

Fair Value of Financial Instruments

Fair value is defined under FASB ASC Topic 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for an asset or liability in an orderly transaction between participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.  The levels are as follows:

 

●	Level 1 -    Quoted prices in active markets for identical assets or liabilities;

 

●

Level 2 -    Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities; and

 

●	Level 3 -    Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, long-term debt and mortgage payable approximate fair value because of the short-term nature of these items. Per ASC Topic 820 framework these are considered Level 2 inputs where estimates are unobservable by market participants outside of the Company and must be estimated using assumptions developed by the Company.

 

F-14

---

 

NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

Changes in Accounting Policies Including Initial Adoption

There are no recently adopted accounting pronouncements that impact the Company’s consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"). ASU 2014-08 limits the requirement to report discontinued operations to disposals of components of an entity that represents strategic shifts that have (or will have) a major effect on an entity's operations and financial results. The amendments also require expanded disclosures concerning discontinued operations and disclosures of certain financial results attributable to a disposal of a significant components of an entity that does not qualify for discontinued operations reporting. The amendments in this ASU are effective prospectively for reporting periods beginning on or after December 15, 2014, with early adoption permitted. The impact on our Financial Statements of adopting ASU 2014-08 is being assessed by management.

 

On May 28, 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. The impact on our Financial Statements of adopting ASU 2014-09 is being assessed by management.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

NOTE 4 - INVENTORIES

 

Inventories at December 31 consist of the following:

		2013				2012
Raw materials		$	392,147			$	222,642
Finished goods			81,499				74,077
Obsolescence reserve			(326,526	)			(56,623	)
Total inventories		$	147,120			$	240,096

As of December 31, 2013 and 2012, inventory includes $27,651 and $53,312 respectively, of general and administrative costs.

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

 

2013		Cost				Accumulated Depreciation				Net Book Value
Leasehold improvements		$	260,271			$	(5,251)			$	255,020
Machinery and office equipment			5,728,587				(1,509,954)				4,218,633
Furniture and fixtures			24,918				(15,619)				9,299
Land			273,118				-				273,118
Asset retirement obligation			27,745				(3,329)				24,416
Office and industrial buildings			1,418,663				(118,213)				1,300,450
Equipment under capital lease			108,316				(32,567)				75,749
Construction in process			1,027,323				-				1,027,323
		$	8,868,941			$	(1,684,933)			$	7,184,008

 

2012		Cost				Accumulated Depreciation				Net Book Value
Leasehold improvements		$	59,271			$	(11,787	)		$	47,484
Machinery and office equipment			4,782,323				(1,187,768	)			3,594,555
Furniture and fixtures			24,918				(12,306	)			12,612
Land			273,118				-				273,118
Asset retirement obligation			27,745				(2,220	)			25,525
Office and industrial buildings			1,126,522				(65,593	)			1,060,929
Equipment under capital lease			108,317				(17,094	)			91,223
Construction in process			1,780,613				-				1,780,613
		$	8,182,827			$	(1,296,768	)		$	6,886,059

 

 

F-15

---

 

 

At December 31, 2013 and 2012 machinery and equipment with a cost of $108,317 and $108,317, respectively and accumulated amortization of $32,567 and $17,094 respectively were under capital lease.  During the years ended December 31, 2013, and 2012, the Company recognized $15,473, and $11,388, respectively, of depreciation expense related to these assets under capital lease.

As of December 31, 2013 and 2012, the Company had recorded impairment losses on property, plant and equipment of $1,122,829 in accordance to ASC 360-10-50-2 where an impairment loss will be recognized only if the carrying amount of the long-lived assets are not recoverable and exceeds its fair value. The 2013 charges relate to (i) the impairment of the Processor#1 for $931,363 as it takes on a more dedicated role in research & development activities and forgoes revenue generation activities; and (ii) the impairment of capitalized cost of $191,466 related to a discontinued business venture (Note 19).

As of December 31, 2012, the Company had recorded impairment losses on property, plant and equipment of $191,466. The charges in the year ended December 31, 2012 related to the impairment of tape reading equipment in the Data Business for $36,500 and the determination that the reactor on Processor#1 was no longer suitable for use due to the heavy demands placed on it during research and development testing, totaling $154,966.

During the third quarter of 2013, the Company announced to the employees of its recycling facility in Thorold, Ontario its plan to close operations at the facility. The recycling facility for accounting purposes qualified as an operating segment and was reported as Discontinued Operations. The recycling facility operations primarily consisted of accepting, separating and processing mixed paper and cardboard for sale to paper mills and various grades of plastic waste for processing into fuel products at the Company’s Niagara Falls, New York facility. The plan to close the facility was a result of the Company’s continued effort to focus on its P2O operations, as well as the decision to obtain processor-ready feedstock without further need for pre-processing. As a result, the Company performed an analysis on several vertical balers and shredder and shredder components for impairment by comparing carrying values to their undiscounted future cash flows, and concluded that the recording of impairment through discontinued operations was necessary. As a result, $173,681 was recorded as a loss on discontinued operations and is related to accelerated depreciation on the RRON assets to reduce the book value to zero. (Note 19).

NOTE 6 – SHORT-TERM NOTE RECEIVABLE

Upon consummation of the sale of Pak-It, the Company entered into a long-term note receivable (the “Note”) with the buyer of Pak-It in the amount of $500,000.  The Note was recorded as of the date of closing at the fair value determined by discounting the face value of the Note using 7%, based on factors considered by the Company at the time of recording the Note.  Interest income is amortized into the value of the Note during the life of the Note and is recognized as interest income throughout the term of the Note, which was due on July 1, 2013.  Interest income recognized on the Note for the years ended December 31, 2013 and 2012 was $12,278 and $20,464, respectively. On September 30, 2013 the amount was deemed uncollectible and written-off to bad debts (Notes 19 and 21).

NOTE 7 –  LETTER OF CREDIT

		2013				2012
$100,000 Letter of Credit, secured by restricted cash on deposit.		$	-			$	-

 

During 2012, the Company entered into a letter of credit with one of its financial institutions to secure a performance bond required by a governmental agency for the sale of fuel.  This letter of credit is fully secured by restricted cash (Note 2) held by this institution and was not utilized at any point during the year ended December 31, 2013.  

 

F-16

---

 

 

NOTE 8 - INCOME TAXES

 

		2013				2012
Statutory tax rate:
U.S.			34	%			34	%
Foreign			26.50	%			26.50	%
Loss from operations before recovery of income taxes:
U.S.		$	(10,819,127	)		$	(11,307,856	)
Foreign			(387,679	)			(1,385,915	)
		$	(11,206,806	)		$	(12,693,771	)
Expected income tax recovery		$	(3,781,238	)		$	(4,211,939	)
Permanent differences			(9,418	)			(269,029	)
Other			-				83,693
Tax rate changes and other adjustments			(713,238	)			356,105
Increase in valuation allowance			4,503,894				4,041,170
Income tax recovery from continuing operations		$	-			$	-
The Company’s income tax recovery is allocated as follows:
Current tax expense		$	-			$	-
Deferred tax expense			-				-
		$	-			$	-

The Company’s deferred tax assets and liabilities as at December 31, 2013 and 2012 are as follows:

 

Deferred Tax Assets		2013				2012
Non-capital losses		$	13,930,292			$	10,227,927
Reserve – Contingency			173,475				167,949
Property, plant and equipment			112,588				1,158
Accounts receivable			197,247				19,353
Accrued expenses			514				13,984
Bad debt recovery			8,874				-
Fees and Payroll in Stocks and Options			208,736				-
Impairment Reserve			275,729				-
Other			297				1,381
			14,907,752				10,431,752
Deferred Tax Liabilities
Property, plant and equipment		$	(410,693	)		$	(438,587	)
Less: Valuation allowance			(14,497,059	)			(9,993,165	)
		$	-			$	-

 

F-17

---

 

 

The Company’s non-capital income tax losses expire as follows:
U.S.	2029		$	526,411
	2030			6,080,091
	2031			9,240,965
	2032			10,853,750
	2033			10,436,738
			$	37,137,955
Foreign	2030		$	1,224,680
	2031			1,818,894
	2032			1,284,807
	2033			607,349
			$	4,935,730

The Company calculates its income tax expense by estimating the annual effective tax rate and applying that rate to the year-to-date ordinary income (loss) at the end of the period.  The Company records a tax valuation allowance when it is more likely than not that it will not be able to recover the value of its deferred tax assets.  For the years ended December 31, 2013 and 2012, the Company calculated its estimated annualized effective tax rate at 0% and 0%, respectively, for both the United States and Canada.  The Company had no income tax expense on its $11,206,806 and $12,693,771 loss from continuing operations and $2,027,459 and $628,434 loss from discontinued operations for the years ended December 31, 2013 and 2012, respectively.  

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest accrued on uncertain tax positions as well as interest received from favorable tax settlements within interest expense. The Company recognizes penalties accrued on unrecognized tax benefits within selling, general and administrative expenses. As of December 31, 2013 and 2012, the Company had no uncertain tax positions.

The Company does not anticipate any significant changes to the total amounts of unrecognized tax benefits in the next twelve months. The years ended December 31, 2008 through December 31, 2013 are open tax years.

NOTE 9 – LONG-TERM DEBT, MORTGAGE PAYABLE AND CAPITAL LEASES

 

		December 31, 2013				December 31, 2012
Mortgage in the amount of $280,000 Canadian dollars, bears simple interest at 7% per annum, secured by the land and building, and matures on June 15, 2015.   Principal and interest are due, in their entirety, at maturity.		$	280,700			$	280,700
Equipment capital lease bears interest at 5.0% per annum, secured by the equipment and matures in April 2015, repayable in monthly installments of approximately $360.			5,556				9,485
Equipment capital lease, bears interest at 5.85% per annum, secured by the equipment and matures in November 2015, repayable in monthly installments of approximately $516.			11,201				17,000
Equipment capital lease bears interest at 3.9% per annum, secured by the equipment and matures on May 10, 2015, repayable in monthly installments of approximately $1,194.			18,140				30,599
Secured Promissory Notes (provided by a related party) bearing interest of 12% per annum compounded annually and payable upon maturity in 2018 and secured by a security interest in substantially all of the assets of the Company and its subsidiaries. (Note 15)			2,240,100				-
			2,555,697				337,784
Less: current portion			23,618				23,068
		$	2,532,079			$	314,716

 

 

F-18

---

 

 

Continuity of Secured Promissory Notes		Year ended December 31, 2013				Year ended December 31, 2012
Face value of August 29, 2013 secured note payable		$	1,000,000			$	-
Face value of September 30, 2013 secured note payable			2,000,000				-
Total face value of promissory notes payable			3,000,000				-
Discount on August 29, 2013 secured note payable			(310,200	)			-
Discount on September 30, 2013 secured note payable			(600,400	)			-
Accretion of discount on secured notes payable			50,700				-
Interest on secured notes payable			100,000				-
Carrying value of Secured Promissory Notes		$	2,240,100			$	-

The following annual payments of principal are required over the next five years in respect of these mortgages and capital leases:

 

		Annual  Payments
2014		$	23,618
2015			291,979
2016			-
2017			-
2018			2,240,100
Total repayments		$	2,555,697

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Commitments

Plastic2Oil Marine, Inc., one of the Company’s subsidiaries, which is currently not operating, entered into a consulting service contract during 2010 with a company owned by the current CEO. The contract provides the related company with a share of the operating income earned from Plastic2Oil technology installed on marine vessels which are owned by the related company. The contract provides a minimum future payment equal to fifty percent of the operating income generated from the operations of two of the most profitable marine vessel processors and 10% from all other marine vessel processors. As of December 31, 2013 there are no currently installed marine vessel processors as per the terms of the contract.

As of December 31, 2013, the Company has committed to purchase certain pieces of key machinery from vendors related to the future expansion of our operations.  In addition to the payments made to these vendors classified as deposits on assets, the Company will be required to pay approximately $495,000 upon the delivery of these assets.

The Company leases premises in Thorold, Ontario, which was previously used in the operation JBI (Canada), Inc. doing business as Regional Recycling of Niagara ("RRON"). As at September 30, 2013, the remaining lease term was almost 17 years. During the third quarter of 2013, the Company determined that it would shut down the operations of RRON (Note 19). The employees of RRON were given notice of the shut down in the first week of September, after which point the Company approached the landlord about terminating the lease; however, there was no formal termination as an agreement to terminate the lease was not reached. During September, the Company was assessing its options with the facility, including potential sublease, but determined that a sublease of the facility was not permitted by the lease and officially decided to cease use of the premises as of September 30, 2013. Accordingly, the Company has applied September 30, 2013 as the cease-use-date in recognizing the liability for the contract termination costs. In measuring the liability, the Company calculated all remaining contracted lease payments, being $1,872,650 ($1,926,000 CAD), and performed a present value calculation using a discount rate of 20%. The present value calculation resulted in an accrued lease liability of $505,747, of which $89,269 is due within the next 12 months and has been presented as a current liability.  The total accrued lease liability expense was reduced by $68,818 of the deferred rent liability which was being amortized over the period of the lease.  The total expense included in loss from discontinued operations in the consolidated statements of operations is $398,035 for the year ended December 31, 2013 (Note 19).

All future payments required under various agreements are summarized below:

Fiscal year ending December 31, 2014		$	95,900
2015			95,900
2016			95,900
2017			95,900
2018			101,542
Thereafter			1,303,117
Total		$	1,788,259

 

Total rent expenses recognized under operating leases during the years ended December 31, 2013 and 2012 were $106,580, and $107,651 respectively. 

 

F-19

---

 

 

Contingencies

In August 2010, a former employee filed a complaint against the Company’s subsidiary alleging wrongful dismissal and seeking compensatory damages.  The Company denied the validity of the contract which was signed by the former employee as employee and president of the subsidiary. The Company entered into negotiations with the former employee to trade-off some of the benefits of the alleged employment agreement in return for repayment of debts to the Company incurred by the former employee while in the employment of the Company’s subsidiary.  The debt in the amount of $346,386 was written off.  Prior to December 31, 2011, the former employee settled the dispute with the Company and agreed to repay $250,813 to the Company.  The employee owns shares of the Company and will sell and use the proceeds to make the repayments.  The Company recognizes these receipts as recoveries when realized.  As of December 31, 2013, the Company has received $118,250 of repayments. This is a cumulative amount from 2012 and 2013.  These recoveries of bad debt are included in selling, general and administrative expenses.

As previously reported, on July 28, 2011, certain of the Company’s stockholders filed a class action lawsuit against the Company and Messrs. Bordynuik and Baldwin on behalf of purchasers of its securities.  In an amended complaint filed on July 10, 2012, these stockholders sought to represent such purchasers during the period from August 28, 2009 through January 4, 2012. The original and amended complaints in that case, filed in federal court in Nevada, allege that the defendants made false or misleading statements, or both, and failed to disclose material adverse facts about the Company’s business, operations and prospects in press releases and filings made with the SEC. Specifically, the lawsuit alleges that the defendants made false or misleading statements or failed to disclose material information, or a combination thereof regarding: (1) that certain media credits (“Media Credits”) were substantially overvalued; (2) that the Company improperly accounted for acquisitions; (3) that, as such, the Company's financial results were not prepared in accordance with Generally Accepted Accounting Principles; and (4) that the Company lacked adequate internal and financial controls.  During the quarter ended June 30, 2012, a lead plaintiff was appointed in the case and an amended complaint was filed. The defendants’ answer to the amended complaint was filed during the fourth quarter of 2012.

On August 8, 2013, JBI, Inc., entered a stipulation agreement (the “Stipulation Agreement”) in potential settlement of the previously reported class action lawsuit filed by certain stockholders of the Company against the Company and Messrs. Bordynuik and Baldwin (both former officers of the Company) on behalf of a settlement class consisting of purchasers of the Company’s common stock during the period from August 28, 2009 through January 4, 2012 (the “Proposed Class Period”).  Under the Stipulation Agreement, the Company would agree to issue shares of its common stock that will comprise a settlement fund.  The number of shares to be issued will be dependent on the price per share of the Company’s common stock during a period preceding the date of the Court’s entry of final judgment in the case (the “Judgment Date”).  If the price of the Company’s common stock is less than $0.50 per share based upon the average closing price for the 90 trading days preceding the Judgment Date, the Company would issue 3 million shares of its common stock. If the price of the Company’s common stock is between $0.50 and $0.70 per share, based upon the same 90-day average closing price, the Company would issue 2.5 million shares of its common stock.  If the price of the Company’s common stock is more than $0.70 per share based upon the same 90-day average closing price the Company will issue 1.75 million shares of its common stock.  The shares will not be distributed to class members in kind.  At any time after final approval by the Court, class counsel would have the option to sell all or any portion of such shares for the benefit of class members, subject to certain volume limitations.  Plaintiff’s counsel’s attorneys’ fees, subject to Court approval, would be paid out of the settlement fund.  The Company would also pay settlement-related costs up to a maximum of $200,000.  The plaintiffs and each of the class members who purchased the Company’s common stock during the Proposed Class Period and alleged they were damaged would be deemed to have fully released all claims against the Company and other defendants upon entry of judgment.  On September 10, 2013, that agreement was submitted to the Court, and class counsel moved for entry of an order granting preliminary approval of the settlement, including the mailing of a settlement notice that will include, among other things, the general terms of the settlement, proposed plan of allocation, and terms of plaintiff’s counsel’s fee application.  On April 1, 2014, the Court issued an Order denying that motion.  The Company is currently reviewing what steps should be taken in light of this Court Order. The Company cannot predict the outcome of the class action litigation at this time.

On April 25, 2013, plaintiffs ASPTO LLC, Plastic2Oil of Clearwater 1 LLC, and ES Resources LLC filed suit against the Company in the Circuit Court of Pinellas County, Florida, alleging breaches of certain contracts and seeking unspecified damages.  The Company thereafter removed the case to the United States District Court for the Middle District of Florida, and filed a motion to dismiss certain counts of the Complaint.  On November 12, 2013, the Court issued an Order transferring the case to the United States District Court for the District of Massachusetts.  The Company cannot predict the outcome of this matter at this time.

 

F-20

---

 

On August 9, 2013, a purported shareholder derivative suit was filed in the United States District Court for the District of Massachusetts against John Bordynuik, former Chief Executive Officer of the Company and a former member of the Company’s Board of Directors, and Ronald C. Baldwin, former Chief Financial Officer of the Company.  The Complaint was filed by Erwin Grampp, allegedly acting on behalf of the Company, and it names the Company as a nominal defendant.  This is the second purported shareholder derivative suit that Mr. Grampp has filed in which the Company has been named as a nominal defendant.  As previously reported, the first such suit by Mr. Grampp was dismissed by the court.  This recent Complaint (“Grampp II”) alleges, inter alia, that defendants Bordynuik and Baldwin breached fiduciary duties owed to the Company by causing the Company to erroneously book certain media credits in 2009.  Grampp II alleges that this conduct resulted in two lawsuits against the Company, one an action brought by the Securities and Exchange Commission (“SEC Action”) and the other a purported class action by Ellisa Pancoe and Howard Howell (“Class Action”).  Grampp II alleges that the Company has settled the SEC Action, and that the Company is in the process of settling the Class Action, but that the Company has been damaged as a result of these two lawsuits.  Grampp II seeks to recover damages on behalf of the Company from defendants Bordynuik and Baldwin in an unspecified amount.  It also seeks unspecified equitable relief, and costs and attorneys’ fees incurred in the action.  On October 11, 2013, defendants Bordynuik and Baldwin filed a motion to dismiss this action.  That motion is pending and the Court has not ruled upon it.  Pursuant to the Company’s By-Laws, the Company has an obligation to indemnify defendants Bordynuik and Baldwin to the fullest extent permitted by Nevada law.

On August 20, 2013, plaintiff Stephen Seneca filed suit against the Company and John Bordynuik, former Chief Executive Officer of the Company and a former member of its Board of Directors, alleging claims against the Company for fraud, negligence, civil conspiracy, and breach of contract, as well as a breach of Section 678.4011, Florida Statutes.  The claims allege wrongdoing by the Company in connection with a Unit Purchase and Exchange Agreement dated September 30, 2009, and certain shares of the Company’s stock issued pursuant thereto.  On September 17, 2013, plaintiff caused a Summons to be issued on the Complaint, and on September 26, 2013, plaintiff caused the Complaint to be served on the Company.  Plaintiff seeks damages “in excess of one million dollars.”  On October 31, 2013, the Company and Mr. Bordynuik filed a motion to dismiss this Complaint.    On May 14, 2014, the Court issued an Order granting the motion in part. The Court dismissed one of the claims made against the Company, and struck another from the Complaint.  The Company cannot predict the outcome of this matter at this time.

On August 14, 2013, John Bordynuik, Inc. aka 310 Holdings, Inc. brought suit against the Company in the United States District Court for the District of Nevada, alleging damages for breach of contract, conversion, fraud and fraud in the inducement in connection with an alleged 2009 Asset Purchase Agreement.  In September of 2013 and October of 2013, the Company brought motions to dismiss the complaint and for summary judgment.  Those motions are pending before the Court.  The Company cannot predict the outcome of this matter at this time.

At December 31, 2013, the Company is involved in litigation and claims in addition to the above mentioned legal claims, which arise from time to time in the normal course of business.  In the opinion of management, based upon the information and facts known to them, any liability that may arise from such contingencies would not have a material adverse effect on the consolidated financial statements of the Company. 

NOTE 11 – STOCKHOLDERS’ EQUITY

( a)  Common Stock and Additional Paid in Capital

2013

During the first quarter of 2013, the Company issued 34,247 shares of common stock for services rendered that had previously been subscribed.  These shares were valued at $0.73 per share, on the date of approval by the Board of Directors. The stock paid for services was valued based on the market price on the date of approval, which was more reliably determinable as compared to the services rendered.

During the second quarter of 2013, the Company issued 51,168 shares of common stock for services rendered that had previously been subscribed.  These shares were valued at $0.70 per share, on the date of approval by the Board of Directors. The stock paid for services was valued based on the market price on the date of approval, which was more reliably determinable as compared to the services rendered.

During the second quarter of 2013, the Company issued 11,911 shares of common stock for services rendered.  These shares were valued at $0.46 per share, on the date of approval by the Board of Directors. The stock paid for services was valued based on the market price on the date of approval, which was more reliably determinable as compared to the services rendered.

During the third quarter of 2013, holders of 74,400 shares of Series B Preferred Stock converted their shares into common stock at the stated conversion rate of one share of Series B Preferred Stock to seven shares of common stock. This resulted in the issuance of 520,800 shares of common stock at the effective conversion price of $0.50 per share.

During the third quarter of 2013, the Company issued 7,801 shares of common stock for services rendered.  These shares were valued at $0.51 per share, on the date of approval by the Board of Directors. The stock paid for services was valued based on the market price on the date of approval, which was more reliably determinable as compared to the services rendered.

During the third quarter of 2013, holders of 21,500 shares of Series B Preferred Stock converted their shares into common stock at the stated conversion rate of one share of Series B Preferred Stock for seven shares of common stock. This resulted in 150,500 shares of common stock being subscribed as of September 30, 2013 and issued subsequent to this date.

 

F-21

---

 

During the third quarter of 2013, the Company granted 60,000 shares of common stock for services rendered.  These shares were valued at $0.40 per share, on the date of approval by the Board of Directors and subscribed as of September 30, 2013, and issued on October 3, 2013.  The stock paid for services was valued based on the market price on the grant date, which was more reliably determinable as compared to the services rendered.

In August 29, 2013, the Company entered into a Subscription Agreement with Mr. Richard Heddle, the Company’s Chief Executive Officer and a member of the Company’s Board of Directors a $1 million principal amount 12% Secured Promissory Note, together with a five-year warrant to purchase up to one million shares of the Company’s common stock at an exercise price of $0.54 per share. The gross proceeds to the Company were $1 million. In September 30, 2013, the Company entered into a second Purchase Agreement with Mr. Heddle, a second note (a $2 million principal amount Note), together with a Warrant to purchase up to two million shares of the Company’s common stock at an exercise price of $0.54 per share. The gross proceeds to the Company were $2 million. The Notes bear interest of 12% per annum compounded annually and interest are payable upon maturity.  The Notes mature on August 31, 2018 and September 30, 2018, respectively. Repayment of the Notes is secured by a security interest in substantially all of the assets of the Company and its subsidiaries (Note 9).

 

Warrants

										Weighted
		Warrants				Warrants				Average
Details		Number				Amount				Exercise Price
OUTSTANDING, DECEMBER 31, 2012			1,997,500				2,037,450			$	2.00
Issued (ii)			3,000,000				910,600				0.54
Expired			(1,854,000	)			(1,891,081	)			(2.00	)
OUTSTANDING, December 31, 2013			3,143,500			$	1,056,970			$	0.61

 

(i)     Warrants attributable to January 2012 Private Placement

 

Pursuant to a private placement that took place between December 30, 2011 and January 6, 2012, the Company issued 1,997,500 warrants to purchase shares of common stock for $2.00 to the subscribers of the December 2011/ January 2012 private placements.  The warrants have an eighteen month term from the date of issuance, such issuance dates ranged from January 6, 2012 through August 29, 2012.  As of March 30, 2013, 1,854,000 warrants had expired and their value of $1,891,081 was reclassified as additional paid in capital.  The remaining 143,500 outstanding warrants have expiration of date of February, 26, 2014. As of the date of their issuance, the warrants were determined to have a fair value of $1.02.  The Company determined this valuation through use of a binomial pricing model, the assumptions in valuing these Warrants consisted of:

 

●	Volatility – 163.67%, based on the Company’s Historical Stock Price
●	Probability of Occurrence – 100%, based on the expectation and discussions the Company held with additional investors during and after the consummation of this private placement
●	Risk Free Rate – 2.70%, based on the long-term US Treasury rate

 

(ii)     Warrants attributable to 2013 Secured Debt Financing

 

Pursuant to two separate secured debt issuances on August 29, 2013 and September 30, 2013, the Company issued 1,000,000 and 2,000,000 warrants, respectively to purchase shares of common stock for $0.54 to the holder of the secured debt (Note 10).  The warrants have a five year term from the date of issuance, as such the corresponding expiry dates are August 29, 2018 and September 30, 2018.

As of August 29, 2013, the 1,000,000 warrants issued were determined to each have a fair value of $0.3102, totaling a fair value of $310,200.  The Company determined this valuation through use of a binomial pricing model, the assumptions in valuing these Warrants consisted of:

 

●	Volatility – 141.929%, based on the Company’s Historical Stock Price
●	Risk Free Rate – 1.36%, based on the long-term US Treasury rate

As of September 30, 2013, the 2,000,000 warrants issued were determined to each have a fair value of $0.3002, totaling a fair value of $600,400.  The Company determined this valuation through use of a binomial pricing model, the assumptions in valuing these Warrants consisted of:

 

●	Volatility – 141.028%, based on the Company’s Historical Stock Price
●	Risk Free Rate – 1.36%, based on the long-term US Treasury rate

 

F-22

---

 

 

2012

Between December 30, 2011 and January 6, 2012, JBI, Inc. (the “Company”) entered into separate Subscription Agreements (the “Purchase Agreements”) with 13 investors (the “Purchasers”) in connection with a private placement of units consisting of one share of common stock and a warrant (the “Warrants”) to purchase shares of common stock for $2.00.  In addition to the units sold, the Purchasers were provided a price protection clause in which all of the Purchasers would be made whole should the Company consummate another private placement with an offering price of less than $1.00 per share (the “Make Whole Provision”).  This provision was valid for a total offering price of up to $5,000,000, at which time the Purchasers would be made whole and then the Make Whole Provision would be terminated.  On May 15, 2012, the Company consummated a Private Placement which offered shares of common stock at a price of $0.80 per share.  As such, the Make Whole Provision was affected, resulting in the Company issuing an additional 880,250 shares of the Company’s common stock to these investors.  These shares were issued at a market price of $1.13 per share.  This resulted in gains recorded on the Make Whole Provision of $305,798 and $Nil, recorded during the nine and three months ended September 30, 2012, respectively. There was no similar transaction consummated by the Company during the nine and three month periods ended September 30, 2013.

On January 6, 2012, the Company assessed the likelihood of another transaction triggering the Make Whole Provision contained in the Purchase Agreements.  At that time, the Company had begun to discuss options for another private offering to be consummated near the end of the first quarter of 2012.  It was determined that the Company would perform an offering similar to the prior offering in which the Company would offer a share of Common Stock and a Warrant.  Based on the expected value of the Warrants contemplated in this proposed new financing transaction, the Company determined that it was certain that it would trigger the Make Whole Provision and be required to perform under the Make Whole Provision.  As such, a liability was recorded for the fair value of the Equity Derivative Liability in the amount of $1,214,455, based on the 100% probability of the Make Whole Provision being enacted at the market price of the Company’s common stock as of January 6, 2012. The following factors and assumptions were used by the Company in determining the value of the Make Whole Provision on initial measurement.  The Company used the binomial lattice pricing model to determine this valuation, using the following assumptions in the model:

 

●	The market price of the Company’s common stock at January 6, 2012 ($1.42 per share);
●	Shares to be issued upon occurrence – 880,250 shares of Common Stock (based on an offering price of $0.80); and
●	Probability of occurrence – 100%, based on the expectation and discussions the Company held with additional investors during and after the consummation of this private placement.

 

At March 31, 2012, the Company again assessed the likelihood of enacting the Make Whole Provision.  Based on current discussions with a number of investors, the Company determined that again, it was a certainty that this clause would be triggered based on the discussions of a possible private placement under the considerations outlined above.  As such, the Company re-measured the Equity Derivative Liability at the fair value of $1,000,643 based on the market price of the Company’s common stock as of March 31, 2012, which resulted in a gain of $213,812. The following factors and assumptions were used by the Company in the valuation of the Make Whole Provision for the re-measurement:

 

●	The market price of the Company’s common stock at March 31, 2012 ($1.17 per share);
●	Shares to be issued upon occurrence – 880,250 shares of Common Stock (based on an offering price of $0.80); and
●	Probability of occurrence – 100%, based on the expectation and discussions the Company held with additional investors during and after the consummation of this private placement.

 

 

F-23

---

 

 

On January 17, 2012, the Company issued 200,000 shares of common stock as repayment for a loan.  These shares were valued at $1.00 and repaid the full $200,000 loan.

Between January 4, 2012 and March 31, 2012, the Company authorized the issuance of 715,198 shares of common stock to various parties for services rendered during the quarter.  These shares were valued as of the date of approval or the date of the consulting agreement which they were issued pursuant to, and had values ranging from $0.60 to $1.48 per share.  During the second quarter of 2012, the aforementioned 715,198 shares of common stock were issued.

Between January 9, 2012 and February 3, 2012, Company authorized the issuance of 30,786 shares of common stock for the purchase of equipment.  These shares were valued as of the date of the vendor invoice and had values ranging from $1.43 to $1.48 per share.  During the second quarter of 2012, the aforementioned 30,786 shares of common stock were issued.

 

On May 15, 2012, the Company entered into separate Subscription Agreements (the “Purchase Agreements”) with 30 investors (the “Purchasers”) in connection with a private placement to purchase shares of common stock for $0.80 per share.  The Company issued 14,153,750 shares of common stock in this private placement and received gross proceeds from these Purchase Agreements in the amount of $11,343,000.

 

Between June 11, 2012 and June 30, 2012, the Company authorized the issuance of 439,333 shares of common stock to various parties for services rendered during the quarter.  These shares were valued as of the date of approval or the date of the consulting agreement which they were issued pursuant to, and had values ranging from $0.60 to $1.28 per share.  During the third quarter of 2012, a total of 364,333 of these shares were issued.  The remaining 75,000 shares were issued during the fourth quarter of 2012.

On July 6, 2012, the Company authorized the issuance of 657,188 shares of common stock as an advisory fee related to the Company’s financing efforts.  During the third quarter of 2012, the aforementioned shares of common stock were issued at par value.

 

On August 29, 2012, the Company reached an agreement with one of the advisors involved in the May 15, 2012 private placement.  In exchange for the return of the advisor’s 601,250 shares issued in connection with the May private placement, the Company converted the $162,000 short-term loan provided to this advisor into a payment for general services and stock advisory services performed by the advisor on behalf of the Company.  The short-term loan, which had been previously classified as other current assets, was recorded as consulting expense, which is classified as a selling, general and administrative expense for the year ended December 31, 2012.

On September 5, 2012 the Company issued 287,000 shares of common stock and 287,000 warrants, previously subscribed, and to an advisor as payment for services performed in the private placement during December 2011 and January 2012.  In addition, this advisor was entitled to and was issued an additional 71,750 shares of common stock in connection with the Make Whole Provision enacted related to the aforementioned private placement.  

Between September 5, 2012 and September 30, 2012, the Company issued 169,226 shares of common stock to various parties for services rendered during the quarter.  These shares were valued as of the date of approval or the consulting agreement which they were issued pursuant to, and had values ranging from $1.04 to $1.42 per share.  

 

On October 1, 2012, the Company issued 41,399 shares of common stock to various parties for services rendered during the quarter.  These shares were valued as of the date of approval or the date of the consulting agreement which they were issued pursuant to, and had a value of $0.83 per share.   

 

  On December 3, 2012, the Company authorized the issuance of 51,168 shares of common stock to various parties for services rendered during the quarter.  These shares were valued as of the date of approval of the Board of Directors and had a value of $0.70 per share.

On December 12, 2012, the Company authorized the issuance of 34,247 shares of common stock as payment to an outside director for services rendered on the Board of Directors in accordance with the approved payment structure for outside directors of the Company.  These shares were values at $0.73 on the date of Board approval and issued subsequent to December 31, 2012.

 

F-24

---

 

 

Preferred Stock

Series A Preferred Stock

Mr. John Bordynuik, the Company’s founder and current Chief of Technology, holds all outstanding 1,000,000 shares of the Company’s issued and outstanding Series A Preferred Stock.  These shares have no participation rights, however, they carry super voting rights in which each share of Preferred Stock has 100:1 times the voting rights of common stock. Mr. Bordynuik was a party to a letter agreement (the “Letter Agreement”) with certain investors (the “Investors”) in our May 2012 private placement, which Letter Agreement contained certain restrictions on Mr. Bordynuik’s ability to vote his shares of Series A Preferred Stock (Note 21).

Series B Preferred Stock

The Series B Preferred Stock was created pursuant to the Certificate of Designation setting forth the powers, designations, preferences, rights, qualifications, limitations and restrictions of the Series B Convertible Preferred Stock filed with the Secretary of State of the State of Nevada on December 24, 2012 (the “Series B Designation”).  Pursuant to the Series B Designation, the Series B Preferred Stock are convertible at the election of the holder into shares of common stock, par value $0.001 per share, of the Company (“Common Stock”), at the rate of seven (7) shares of Common Stock for each share of Series B Preferred Stock, subject to proportional adjustment for stock splits, combinations, consolidations, stock dividends, stock distributions, recapitalizations, reorganizations, reclassifications and other similar events. Upon any conversion, a holder of shares of Series B Preferred Stock must convert all shares of Series B Preferred Stock then held by such holder. All shares of Series B Preferred Stock that remain outstanding on June 30, 2014 shall be automatically converted into Common Stock.

   

Pursuant to the Series B Designation, in the event of the liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock shall be entitled to receive out of assets of the Company available for distribution to stockholders of the Company, prior and in preference to any distribution to the holders of any other capital stock of the Company, an amount per share of Series B Preferred Stock equal to the original purchase price for such shares of Series B Preferred Stock. The holders of the Series B Preferred Stock will vote together with the Common Stock and not as a separate class, except as otherwise required by law.  Each share of Series B Preferred Stock will have a number of votes equal to the number of shares of Common Stock then issuable upon conversion of such share of Series B Preferred Stock. The approval of the holders of a majority of the Series B Preferred Stock will be required to amend the Certificate of Designation or to alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock in a manner that adversely affects such shares.

The holders of the Series B Preferred Stock shall not be entitled to receive dividends on the Series B Preferred Stock; provided, however, in the event the Board of Directors of the Company (the “Board”) declares and pays a dividend in respect of any Common Stock, then the Board shall declare and pay to the holders of the Series B Preferred Stock in an amount per share of Series B Preferred Stock equal to the number of shares of Common Stock into which the Series B Preferred Stock is convertible on the record date established by the Board or under applicable law for such dividend multiplied by the per share amount declared and paid in respect of each share of Common Stock.

The Series B Preferred Stock was valued using the common shares available upon conversion of all shares of Series B Preferred Stock and the closing market price of the Company’s Common Stock on the date of the execution of the subscription agreements as follows:

 

Date of Closing		Preferred Shares Issued		Closing Market Price
December 27, 2012		860,544		$0.80
December 31, 2012		285,900		$0.83

 

  Based on the excess of the market price of the underlying common stock over the conversion price, the Company recognized a total fair value of the shares of Series B Preferred Stock of $6,480,125.  The Company also recognized a beneficial conversion feature related to the Series B Preferred Shares, to the extent that the conversion feature, based on the proceeds allocated to the Series B Preferred Shares, was in-the-money at the time they were issued. Such beneficial conversion feature amounted to approximately $2,467,571.  Because the Series B Preferred Shares have a stated conversion date and may be converted by the holder at any time, the beneficial conversion feature will be recognized ratably over the eighteen months in which the holders of the Series B Preferred Shares may exercise their conversion option.  Additionally, as the beneficial conversion feature is amortized, a deemed distribution will be recorded for the Series B Preferred Shares.  This is recorded as an increase to accumulated deficit and a reduction of the beneficial conversion feature of the Series B Preferred Stock.  No actual cash is paid out in relation to this transaction.

 

F-25

---

 

 

NOTE 12 – STOCK-BASED COMPENSATION PLANS AND AWARDS

 

The Company’s 2012 Long Term Incentive Plan (the “2012 Plan”) provides for the issuance of stock options, restricted stock units and other stock-based awards to members of management and key employees. The 2012 Plan is administered by the compensation committee of the Board of Directors of the Company, or in the absence of a committee, the full Board of Directors of the Company. The Plan was enacted in July 2012, and prior to this time, no plan and consequently, no stock options or shares of restricted stock were granted under an equity compensation plan.

 

Valuation of Awards

 

The per-share fair value of each stock option with a service period condition was determined on the date of grant using the Black-Scholes option pricing model using the following assumptions:

 

		Year Ended December 31,
		2013				2012
Expected life (in years)			5.0				5.0
Risk-free interest rate			0.10%-1.03	%			0.77%-0.78	%
Expected volatility			154.30%-157.14	%			154.30%-157.14	%
Expected dividend yield			0	%			0	%

 

Stock Options

 

A summary of stock option activity for the year ended December 31, 2013 is as follows:

 

		Options Outstanding Stock Options				Weighted- Average Exercise Price				Aggregate Intrinsic Value (1)
Balance as of December 31, 2012			5,240,000			$	1.50			$	-
Granted			2,060,000				0.38				-
Exercised			-				-
Cancelled			494,000				0.83				-
Balance as of December 31, 2013			6,806,000			$	1.21			$	-
Equity awards available for grant at December 31, 2013			3,194,000

 

Restricted Stock

The fair value of the restricted stock is expensed ratably over the vesting period.  During the years ended December 31, 2013, and 2012, the Company recorded stock-based compensation expense related to restricted stock of approximately $69,000, and $64,500, respectively.

The following table summarizes the activities for the year ended December 31, 2012:

 

		Number of Shares				Weighted- Average Grant-Date Fair Value
Unvested at December 31, 2011			-			$	-
Granted			5,240,000				1.5
Vested			-				-
Canceled			-				-
Unvested at December 31, 2012			-			$	-

For the years ended December 31, 2013, and 2012, the Company recorded compensation expense (included in selling, general and administrative expense) of $1,859,799, and $1,481,666, respectively, related to stock options and restricted stock.  

 

During the year ended December 31, 2013, 2,030,334 options and 138,681 shares of restricted stock vested and no stock options were exercised.  During the year ended December 31, 2012, 765,000 stock options and 38,269 shares of restricted stock vested.

 

(1)	Amounts represent the difference between the exercise price and the fair value of common stock at period end for all in the money options outstanding based on the fair value per share of common stock.  As of December 31, 2013, no options that had been granted were “in the money.”

 

F-26

---

 

 

NOTE 13 – RETIREMENT PLAN

The Company adopted a defined contribution benefit plan (the “Defined Contribution Plan”) for our U.S. employees which complies with section 401(k) of the Internal Revenue Code.  The Company does not currently match any of the employee contributions.  Employees are not required to make contributions into the fund. Total administrative expense under this plan was $3,157, and $1,436 for the years ended December 31, 2013, and 2012 respectively.

NOTE 14 – FAIR VALUE MEASUREMENTS

 

The following table summarizes the valuation of the Company’s financial instruments by the following three categories as of December 31, 2013 and 2012:

 

●	Level 1 -    Quoted prices in active markets for identical assets or liabilities

 

●

Level 2 -    Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities

 

●	Level 3 -    Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities

 

Balance Sheet Classification				December 31, 2013				December 31, 2012
Short term notes receivable		Level 1		$	-			$	-
		Level 2			-				487,722
		Level 3			-				-
				$				$	487,722

We have elected to use the income approach to value the short-term note receivable, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present value amount assuming that participants are motivated, but not compelled, to transact.  Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability (specifically Prime interest rates). Mid-market pricing is used as a practical expedient for fair value measurements. Fair value measurement of the asset must reflect the nonperformance risk of the counterparty. Therefore, the impact of the counterparty’s creditworthiness has also been factored into the fair value measurement and did not have a material impact on the fair value of these derivative instruments.  The counterparty is expected to perform under the contractual terms of the note receivable.  Additionally, during the year ended December 31, 2012, the Company recognized an increase in the carrying value of its short-term note receivable of approximately $20,464 of interest income related to this note, which has been classified as net interest expense in the consolidated statement of operations.

At December 31, 2013 and 2012, the Company had no non-financial assets or liabilities that are measured and recorded at fair value on a recurring basis, and our other financial assets or liabilities generally consist of cash and cash equivalents, cash held in attorney’s trust, restricted cash, accounts receivable, accounts payable, accrued expenses, notes payable, mortgage payable, short-term loans and stock subscriptions payable.  The estimated fair values of our cash and cash equivalents is determined based on quoted prices in active markets for identical assets. The fair value of the other financial assets and liabilities is based on the value that would be received or paid in an orderly transaction between market participants and approximates the carrying value due to their nature and short duration.

 

F-27

---

 

NOTE 15 – RELATED PARTY TRANSACTIONS AND BALANCES

In August 29, 2013, the Company entered into a Subscription Agreement with Mr. Richard Heddle, the Company’s Chief Executive Officer and a member of the Company’s board of directors a $1 million principal amount 12% Secured Promissory Note, together with a five-year warrant to purchase up to one million shares of the Company’s common stock at an exercise price of $0.54 per share. The gross proceeds to the Company were $1 million. In September 30, 2013, the Company entered into second Purchase Agreement with Mr. Heddle, a second note (a $2 million principal amount Note), together with a Warrant to purchase up to two million shares of the Company’s common stock at an exercise price of $0.54 per share. The gross proceeds to the Company were $2 million. The Notes bear interest of 12% per annum compounded annually and interest is payable upon maturity.  The Notes mature on August 31, 2018 and September 30, 2018, respectively. Repayment of the Notes is secured by a security interest in substantially all of the assets of the Company and its subsidiaries.

In February 2012, a member of the Board of Directors entered into a short-term loan agreement with the Company in the amount of $75,000.  This amount was repaid in cash during the year.

 

In May 2012, a member of the Board of Directors entered into a short-term loan agreement with the Company in the amount of $30,000.  This note was repaid in cash during the year.

Plastic2Oil Marine, Inc., one of the Company’s subsidiaries, which is currently not operating, entered into a consulting service contract during 2010 with a company owned by the current CEO. The contract provides the related company with a share of the operating income earned from Plastic2Oil technology installed on marine vessels which are owned by the related company. The contract provides a minimum future payment equal to fifty percent of the operating income generated from the operations of two of the most profitable marine vessel processors and 10% from all other marine vessel processors. At December 31, 2013 there were no currently installed marine vessel processors as per the terms of the contract.

 

NOTE 16 – SEGMENT REPORTING

 

During 2013, the Company had two principal operating segments, Plastic2Oil and the Data Business. These operating segments were determined based on the nature of the products and services offered. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company’s Chief Executive Officer has been identified as the chief operating decision maker, and directs the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.  During 2012, Javaco, historically the Company’s third operating segment, was determined to no longer be in line with the Company’s strategic vision and has been included in discontinued operations for the years presented and, as such, the results of Javaco are not included below.  

 

The Company evaluates performance based on several factors, of which the primary financial measure is net income. The accounting policies of the business segments are the same as those described in “Note 2: Summary of Accounting Policies.” The following tables show the operations of the Company’s reportable segments:

 

		2013
		Data Business				Plastic2Oil				Total
Sales		$	93,712	(1)		$	599,413	(1)		$	693,125
Net Income (Loss)			32,641				(11,239,447	)			(11,206,806	)
Total Assets			18,481				9,270,927	(3)			9,289,408
Accounts Receivable-Net			18,481				62,333				80,814
Inventories			-				147,120				147,120

 

		2012
		Data Business				Plastic2Oil				Total
Sales		$	70,381	(1)		$	609,553	(1)		$	679,934
Net Loss			18,284				(12,712,055	)			(12,693,771	)
Total Assets			70,381	(2) (3)			13,293,020	(3)			13,363,401
Accounts Receivable - Net			70,381				169,758				240,139
Inventories			-				240,096				240,096

 

(1)	All sales from the Data Business were recorded in the United States for the year ended December 31, 2013.  For the year ended December 31, 2013 P2O sales in the United States and Canada were $143,307 and $455,996, respectively.  For the year ended December 31, 2012, P2O sales in the United States and Canada were $119,266 and $490,287, respectively.
(2)	As of March 31, 2012, due to the conclusion that the Company could not substantiate when a significant amount of revenues would be earned from the Data Business, all property, plant and equipment assets related to the Data Business were determined to be impaired and an impairment expense of $36,500 was recorded to write the assets down to $Nil.  All other amounts included in the measure of segment profit or loss related to the Data business are not material.  Other than as noted above, the amounts shown for Operating Expenses and Other Income (Expense) items on the consolidated statements of operations related to the P2O segment.
(3)	All Data Business Assets are located in the United States.  P2O assets include the Company headquarters and various machinery and equipment used at the aforementioned sites and at the Niagara Falls Facility.  As at December 31, 2013, total long-lived assets of $6,515,577 and $668,432 were located in the United States and Canada, respectively. As at December 31, 2012, total long-lived assets of $5,956,508 and $929,551, were located in the United States and Canada, respectively. The mortgage payable of $280,000 and the equipment capital lease maturing on May 10, 2015, both disclosed in Note 9, relate to assets held in Canada.

 

F-28

---

 

 

NOTE 17 – SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

		Fiscal Year Ended December 31, 2013				Fiscal Year Ended December 31, 2012
Common shares issued in exchange for services			165,127				1,471,745
Stock-based compensation			1,891,080				1,481,666
Common shares issued for repayments of loans			-				200,000
Common shares subscribed for services rendered			145,415				60,818
Purchases of property, plant and equipment in accounts payable at year-end			-				413,122
Common shares subscribed in exchange for property, plant and equipment			-				35,120
Cash paid for interest			-				22,819

NOTE 18 – RISK MANAGEMENT

 

Concentration of Credit Risk

 

The Company maintains cash balances, at times, with financial institutions in excess of amounts insured by the Canada Deposit Insurance Corporation and the U.S. Federal Deposit Insurance Corporation.  Management monitors the soundness of these institutions and has not experienced any collection losses with these financial institutions.

 

During the years ended December 31, 2013 and 2012, 81.0%, and 58.0%, respectively, of total net revenues were generated from four customers.   As of December 31, 2013, and 2012 three, and three customers, respectively, accounted for 77.0%, and 76.0% of accounts receivable.  

 

During the years ended December 31, 2013, and 2012, 26.4%, and 25.5%, of total net purchases were made from four vendors.  As of December 31, 2013 and 2012, four, and three suppliers, respectively, accounted for 27.9%, and 36.6% respectively, of accounts payable.  

 

 

F-29

---

 

 

NOTE 19 – DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

Regional Recycling of Niagara

During the third quarter of 2013, the Company determined that due to the significant losses incurred by Regional Recycling of Niagara, and the continuous need to fund their operations through the Company’s Plastic2Oil operations, that it would shut down the operations of the facility.  The decision to do this was based on the following factors:

●	The inventory processed over the prior months at Regional Recycling of Niagara was comingled with contaminated materials that made the significant majority of their inventory worthless without significant additional processing and labor (Note 4);
●	The fixed assets utilized at the facility were old and beginning to become in need of significant repairs, which would have been a significant cost to maintain (Note 5);
●	The pre-processing cost of plastic at Regional Recycling of Niagara was significant and was a hindrance to the Company becoming profitable on a cost per gallon of fuel basis; and
●	The Company leases the JBI Recycling Facility in Thorold, Ontario, Canada with terms remaining of up to 17 years (Note 10).

The results of operations from Regional Recycling of Niagara for the twelve months ended December 31, 2013 and 2012 have been classified as discontinued operations and are as follows:

Condensed Statements of Operations

 

		Year Ended December 31,
		2013				2012
Revenue		$	96,615			$	305,455
Cost of sales			52,377				112,480
Gross profit			44,238				192,976
Operating expenses			1,524,748				704,738
Other expense			5,382				10,102
Loss before income taxes			(1,530,130	)			(521,864	)
Future income tax recovery			-				-
Loss from discontinued operations, net of tax		$	(1,530,130	)		$	(521,864	)

Sale of Pak-It

 

On February 14, 2013, the Company completed the sale of substantially all of the assets of Pak-It, LLC and Dickler Chemical Company, Inc. (collectively “Pak-It”).  The sale had an effective date of January 1, 2012, in which the new owners of Pak-It were responsible for the operations of the entity.  The results of operations from Pak-It for the years presented have been classified as discontinued operations and there were no operations for the year ended December 31, 2012 included in the consolidated financial statements.

 

The Company sold Pak-It for $900,000, in exchange for $400,000 cash at the closing of the sale and entry into a note receivable for $500,000 due on July 1, 2013. In the third quarter of 2013, the Company’s assessed the collectability of the note receivable from the buyer of Pak-It. It was determined that due to the lack of a payment within forty days of the due date that the collectability was not assured and the Company has reserved for the full amount of the note receivable.

 

As of December 31, 2013, there were no remaining assets held for sale related to Pak-It.   

The Company’s statements of operations from discontinued operations related to Pak-it for the years ended December 31, 2013, and 2012 are as follows:

Condensed Statements of Operations of Pak-It

 

		2013				2012
Sales		$	-			$	-
Cost of sales			-				-
Gross profit			-				-
Operating expenses			500,000				-
Impairment loss			-				-
Other income			(10,433)				-
Loss before income taxes			-				-
Future income tax recovery			-				-
Loss from discontinued operations, net of tax		$	(489,567	)		$	-

 

F-30

---

 

 

Closure of Javaco

During the second quarter of 2012, the Company determined that the operations of Javaco no longer coincided with the strategy of the Company and that it would close down Javaco’s operations.  In July 2012, the Company shut down the Javaco operations, including the termination of the five employees of Javaco, the liquidation of the inventory and fixed assets and the termination of the lease for the building.  The results of operations from Javaco for the years ended December 31, 2013, and 2012 have been classified as discontinued operations.  

 

The Company paid approximately $38,000 in severance and lease termination related expenses during the year ended December 31, 2012.  Additionally, the Company liquidated the inventory and fixed assets of Javaco for net proceeds of approximately $180,000. As of December 31, 2012, there were no remaining assets held for sale related to Javaco.

The Company’s statements of operations from discontinued operations related to Javaco for the years ended December 31, 2013, and 2012 are as follows:

 

Condensed Statements of Operations of Javaco

 

		2013				2012
Sales		$	-			$	948,224
Cost of sales			-				780,848
Gross profit			-				167,376
Operating expenses			7,762				321,977
Impairment loss			-				-
Other income			-				48,031
Loss before income taxes			-				(106,570	)
Future income tax recovery			-				-
Loss from discontinued operations, net of tax		$	(7,762)			$	(106,570	)

NOTE 20 – BASIC AND DILUTED NET LOSS PER SHARE

Loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the year.

 

		December 31,				December 31,
		2013				2012
Loss per share from Continuing Operations		$	(0.12	)		$	(0.15	)
Loss per share from Discontinued Operations			(0.02	)			(0.01	)
Total Loss per Share		$	(0.14	)		$	(0.16	)

For the years ended December 31, 2013, and 2012, there are no adjustments necessary to the numerator or denominator in calculating the diluted loss per common, as there are no potentially dilutive instruments. As a result of the net loss for the years ended December 2013, and 2012, the additional shares issuable upon the conversation of the Series B Preferred Stock, potential stock options, warrants granted and shares issued to settle the stock subscription advances, subsequent to year end, would be anti-dilutive and have been excluded from the calculation of basic and diluted loss per share.

 

F-31

---

 

 

NOTE 21 – SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events occurring after the balance sheet date and has identified the following:

Name Change and increase in total number of shares authorized

On May 16, 2014, our board of directors and certain stockholders holding a majority of the voting power of our outstanding common stock and preferred stock approved resolutions authorizing an amendment to our Articles of Incorporation (the “Charter Amendment”) to (i) change our name to “Plastic2Oil, Inc.” and (ii) increase the total number of authorized shares of common stock, par value $0.001 per share, of our Company from 150,000,000 shares to 250,000,000 shares.  The Charter Amendment will not be implemented until at least twenty (20) calendar days after the mailing of a definitive Information Statement to our stockholders.  On May 19, 2014, we filed a preliminary Information Statement with the Securities and Exchange Commission, which will be followed by the filing and mailing of a definitive information statement. We anticipate that the Charter Amendment will be implemented in late June 2014.

 

Private Placement

On February 19, 2014 the Company entered into Subscription Agreements with three investors in connection with a private placement of shares of the Company’s common stock and warrants to purchase shares of common stock. The Company agreed to sell and issue to the Purchasers an aggregate of 2.4 million shares of its common stock and Warrants to purchase up to an additional 2.4 million shares of its common stock. The closings occurred between February 19 and 24, 2014. The purchase price per share was $0.05 and the gross proceeds to the Company were $120,000. The Warrants have a three year term, and an exercise price of $0.10 per share of common stock. Concurrent with these subscriptions the Company entered into a consulting agreement with the investors and a fourth arm’s length party under which the Company would issue 1,500,000 shares upon commencement of the contract, and 1,000,000 shares on each of May 15, 2014, August 15, 2014 and January 15, 2015, respectively, for a total of 4,000,000 shares. Along with each of the forgoing share issuances, the Company will issue a commensurate number of warrants with a three year term and an exercise price of $0.10. The shares and warrants specified by the consulting agreement have not been issued. Additionally, under the terms of the consulting agreement the Company is committed to issue 1,000,000 additional shares if the Company becomes listed on the AMEX division of the New York Stock Exchange or NASDAQ. The consulting agreement also specifies contingent fees of 5% of the gross transaction amount for introducing a merger or acquisition candidate and 3% of fees earned from the introduction of a strategic or business partner.

On March 26, 2014 the Company entered into Subscription Agreements with eleven investors in connection with a private placement of shares of the Company’s common stock and warrants to purchase shares of common stock. The Company agreed to sell and issue to the Purchasers an aggregate of 3.2 million shares of its common stock and Warrants to purchase up to an additional 3.2 million shares of its common stock. The closings occurred between March 17 and 28, 2014. The purchase price per share was $0.10 and the gross proceeds to the Company were $320,000. The Warrants have a three year term, and an exercise price of $0.10 per share of common stock.

Ontario Securities Commission (OSC)

As of December 31, 2013, the Ontario Securities Commission (the “Commission”) had indicated that it intended to bring an administrative proceeding against JBI, and negotiations with respect to the settlement of that matter were underway. A Statement of Allegations dated April 1, 2014 naming JBI was issued by the Commission and Allegations against JBI were subsequently withdrawn by order dated April 4, 2014. At the same time, the OSC entered into a Settlement with John Bordynuik, former CEO and current Chief Technology Officer of the Company, in which Mr. Bordynuik agreed to pay an administrative penalty of CAN$125,000 and to pay CAN$45,000 on account of the Commission’s costs of investigation.  The Company was legally obligated to indemnify Mr. Bordynuik for these amounts, and did so. The matter is now closed.

 

Cancellation of Promissory note

On February 7, 2014, the Company accepted a cash payment of $200,000 in settlement of a $500,000 promissory note dated February 14, 2012 (the “Note”) that was originally issued by Big 3 Packaging LLC (the “Buyer”) in connection with the Company’s sale to Buyer of substantially all of the assets of Pak-It, LLC and Dickler Chemical Laboratories, Inc. on February 14, 2012. In connection with the termination of the Note, the Company and the Buyer executed a mutual general release of claims.

The Note, as described in Note 19, matured on July 1, 2013 but remained unpaid by the Buyer. At this time, the Company fully reserved for the full value of the note and included the amount of $500,000 as a loss contributable to discontinued operations (Note 19). The final termination payment of $200,000 will be recorded as a bad debt recovery and included in income from discontinued operations for the three month period ended March 31, 2014.

 

Series A Preferred Stock

On May 30, 2014, Mr. John Bordynuik, the Company’s founder and current Chief of Technology, returned to the Company for cancellation 1,000,000 shares of the Company’s issued and outstanding Series A Preferred Stock. On June 2, 2014, the company filed an amendment to its Article of Incorporation to terminate the Series A Preferred Stock. Mr. Bordynuik was a party to a letter agreement (the “Letter Agreement”) with certain investors (the “Investors”) in our May 2012 private placement, which Letter Agreement contained certain restrictions on Mr. Bordynuik’s ability to vote his 1 million shares of Series A Preferred Stock. In the second quarter of 2014, the Letter Agreement was terminated upon the receipt of waiver/rescission notices from the requisite number of Investors required under the Letter Agreement’s terms.  On May 30, 2014, all of the issued and outstanding shares of Series A Preferred Stock were cancelled and, on June 3, 2014, a Certificate of Withdrawal relating to the Series A Preferred Stock was filed with the Secretary of State of Nevada.  

 

 

F-32

---

 

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Not applicable.

 

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2013. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of December 31, 2013 our disclosure controls and procedures were ineffective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

We have taken numerous steps to address the underlying causes of the deficiencies in our disclosure controls and procedures, primarily through the development and implementation of policies, improved processes and documented procedures, the retention of third-party experts and contractors, and the hiring of additional accounting personnel with technical accounting and inventory accounting experience. In 2013 we have experienced executive management turnover, accounting personnel layoff resulting in not having sufficient personnel to address the controls and procedures weaknesses.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining effective internal control over our financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is intended to be designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with United States generally accepted accounting principles (U.S. GAAP), including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting as of December 31, 2013. Based on this assessment, management, including our principal executive officer and our principle financial officer, concluded that the Company’s internal controls over financial reporting were ineffective as of December 31, 2013 due to the material weakness discussed below.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management’s report was not subject to attestation by our registered public accounting firm.

Management’s Discussion of Material Weakness

 

A material weakness is a significant deficiency in internal controls that results in more than a remote likelihood that a material misstatement of the financial statements may occur as a result of the deficiency and is important enough to merit attention by those responsible for oversight of a company’s financial reporting. The Company’s material weakness is a result of a lack of policies and procedures, with the associated internal controls, to appropriately address entity level matters. Management concluded that the lack of adherence to the Board of Directors’ policies and more specifically, the Audit Committee Charter, which requires a three member committee with one member qualified as a “financial expert”, caused a failure at the entity level for proper governance over the Company’s financial reporting environment. The Company has been working towards eliminating this material weakness through the search for additional qualified members of our Board of Directors, however, to the extent this deficiency continues to exist, the accuracy and timeliness of financial reporting may be adversely affected.

 

Management acknowledges its responsibility for internal controls over financial reporting and seeks to continually improve these controls. In order to achieve compliance with Section 404 of the Sarbanes Oxley Act (“Section 404”), we are performing the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. We believe our process for documenting, evaluating and monitoring our internal control over financial reporting is consistent with the objectives of Section 404.

Changes in Internal Controls over Financial Reporting

We have taken numerous steps to address the underlying causes of the internal control deficiencies, primarily through the development and implementation of policies, improved processes and documented procedures, the retention of third-party experts and contractors, and the hiring of additional accounting personnel with technical accounting and inventory accounting experience.

 

39

---

 

 

ITEM 9B.

OTHER INFORMATION

Set forth under “Series A Preferred Stock” in Note 21 to our Consolidated Financial Statements included in this Report and incorporated herein by reference is disclosure regarding (i) the termination of a letter agreement between certain investors in the company and the holder of our issued and outstanding Series A Preferred Stock, (ii) the cancellation the issued and outstanding shares of Series A Preferred Stock and (iii) the termination of the Series A Preferred Stock pursuant to a Certificate of Withdrawal.

 

Set forth under “Impairment of Long-Lived Assets” in Note 2 to our Consolidated Financial Statements included in this Report and incorporated herein by reference is disclosure regarding material charges for impairment to certain property, plant and equipment of the company.

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The following table sets forth, as of May 16, 2014, the names and ages of all of our directors and executive officers and all positions and offices held by such individuals.  Each director will hold such office until the next annual meeting of shareholders and until his or her successor has been elected and qualified. 

Name		Age		Position
Richard Heddle		47		President, CEO and Director
Rahoul S Banerjea		63		Chief Financial Officer

 

Certain Biographical Information

 

The following summarizes the occupation and business experience of our officers and directors:

 

Richard Heddle , President, Chief Executive Officer, Director

 

Richard W. Heddle has served as a director and the President and Chief Executive Officer of the Company since August 2013.  Mr. Heddle is an accomplished entrepreneur with over 25 years of executive business experience. Mr. Heddle has owned, operated and grown his namesake company, Heddle Marine Services, since 1987. Heddle Marine Services is currently the largest marine repair firm that operates floating dry docks on the Canadian side of the great lakes. Mr. Heddle has grown his company from a small startup consisting of two individuals to a company that now employs over 60. He is both a Certified Millwright and Hoisting Engineer. Mr. Heddle has significant expertise in logistics, supply chain analytics and managing production. Mr. Heddle brings with him over 25 years of comprehensive experience in fabrication, engineering and machinery.

 

Rahoul S Banerjea, Chief Financial Officer

 

 Rahoul Banerjea has served as Chief Financial Officer of the Company since March 2014. Prior to joining the Company, from 2013 to March 2014, Mr. Banerjea was the principal of Matun Group LLC, a global professional services firm providing interim CFO and project management services, located in Sudbury, Massachusetts.  From 2007 to 2013, Mr. Banerjea was a Partner, New England Practice, at Tatum, a division of Randstad, a national professional services firm providing leadership roles, located in Boston, Massachusetts.  From 2005 to 2007, Mr. Banerjea was Senior Consultant at Accounting Management Solutions, Inc., a regional management services firm, located in Waltham, Massachusetts.  Mr. Banerjea is also the President of the Board of the American School of Madrid Foundation and a member of the Board of the Boston Chapter Financial Executives International.  Mr. Banerjea received his B.S.B.A. from Drexel University and is a Certified Public Accountant.   Mr. Banerjea brings more than 30 years of experience in finance and accounting to the Company’s executive management team.

Family Relationships

 

Plastic2Oil Marine, Inc., one of the Company’s subsidiaries, which is currently not operating, entered into a consulting service contract during 2010 with a company owned by the current CEO. The contract provides the related company with a share of the operating income earned from Plastic2Oil technology installed on marine vessels which are owned by the related company. The contract provides a minimum future payment equal to fifty percent of the operating income generated from the operations of two of the most profitable marine vessel processors and 10% from all other marine vessel processors. At December 31, 2013 there were no currently installed marine vessel processors as per the terms of the contract.

 

40

---

 

 

PART III

 

Involvement in Certain Legal Proceedings

As previously disclosed, the U.S. District Court, District of Massachusetts, approved the settlement of the SEC enforcement action against the Company and John Bordynuik, our former president and chief executive officer and a former director.  The description of the SEC civil action contained in Item 3 of Part I of this Annual Report on Form 10-K is incorporated herein by reference. Mr. Bordynuik stepped down from his officer and director positions with the Company in May 2012 and currently serves as its Chief of Technology.

 

Except as set forth above, to the best of our knowledge, during the past ten years, no director or officer of the Company has been involved in any of the following: (1) any bankruptcy petition filed by or against such person individually, or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

As previously disclosed, the U.S. District Court, District of Massachusetts, approved the settlement of the SEC enforcement action against the Company and John Bordynuik, its former president and chief executive officer and a former director.  The description of the SEC civil action contained in Item 3 of Part I of the Original 10-K is incorporated herein by reference. Mr.  Bordynuik stepped down from his officer and director positions with the Company in May 2012 and currently serves as its Chief of Technology.

 

Except as set forth above, to the best of our knowledge, during the past ten years, no director or officer of the Company has been involved in any of the following: (1) any bankruptcy petition filed by or against such person individually, or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

Adverse Proceedings

 

There exists no material proceeding to which any director or officer is a party adverse to the Company or has a material interest adverse to the Company.

 

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16 of the Exchange Act requires that reports of beneficial ownership of common shares and changes in such ownership be filed with the SEC by Section 16 “reporting persons,” including directors, certain officers, holders of more than 10% of the outstanding common shares and certain trusts of which reporting persons are trustees.  The Company is required to disclose in this Annual Report each reporting person whom we know to have failed to file any required reports under Section 16 on a timely basis during the fiscal year ended December 31, 2013.  To our knowledge, based solely on a review of copies of Forms 3, 4 and 5 filed with the SEC and written representations that no other reports were required, during the fiscal year ended December 31, 2013, our officers, directors and 10% stockholders complied with all Section 16(a) filing requirements applicable to them, except as follows:

 

·	Form 4’s filed on January 8, 2013 by a member of the investor group referenced in the Schedule 13D originally filed with the Securities and Exchange Commission on May 25, 2012 (the “May 2012 Investor Group”), were not timely filed on the following dates:  January 8, 2013, January 28, 2013, February 14, 2013, February 28, 2013, April 15, 2013 and July18, 2013.
·	Form 4 filed by John Wesson on February 13, 2013 was not timely filed;
·	Form 4 filed by Richard Heddle on August 26, 2013 was not timely filed;
·	Form 4 filed by Richard Heddle on October 4, 2013 was not timely filed;
·	Form 3 filed by Philip Bradley on October 10, 2013 was not timely filed; and
·	Form 4 filed by John Bordynuik on June 2, 2014  was not timely filed  reporting the cancellation of options to purchase 650,000 shares of common stock.

Committees of the Board of Directors

 

Due to the fact that the Company currently has just two directors, one of whom is member of executive management and not independent, the Company does not maintain separately designated audit, compensation and nominating and corporate governance committees of the Board. Upon the appointment of additional directors, the Company intends to reconstitute such committees of the Board.

 

 

41

---

 

 

Independence of the Board of Directors

 

The Board is currently composed of two (2) members, one of whom qualifies as an independent director in accordance with the published listing requirements of the NASDAQ Capital Market. The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his or her family members has engaged in various types of business dealings with us. Each of the current directors also serves as an executive officer of the Company, and thus are not independent.

 

Code of Ethics

 

We have adopted a code of ethics that applies to all of our executive officers, directors and employees. Code of ethics codifies the business and ethical principles that govern all aspects of our business. This document will be made available in print, free of charge, to any shareholder requesting a copy in writing from the Company. A copy of our code of ethics was filed with the Form 10-K for the year ended December 31, 2006, filed on March 2, 2007.

ITEM 11.

EXECUTIVE COMPENSATION

  

Summary Compensation Table

 

The following summary compensation table sets forth all compensation awarded to, earned by, or paid to our “named executive officers” during the years ended December 31, 2013 and 2012:

 

SUMMARY COMPENSATION TABLE
Name and Principal Position		Year Ended December 31,		Salary ($)				Bonus ($)				Stock Awards ($) (1)				Option Awards ($) (2)				Non-Equity Incentive Plan Compensation ($)				Nonqualified Deferred Compensation Earnings ($)				All Other Compensation ($)				Total ($)
Richard Heddle President & Chief Executive Officer, Director		2013			-				-				-				-				-				-				-				-
Kevin Rauber President & Chief Executive Officer, Director		2013			191,280	(3)			-				-				-				-				-				-				191,280
		2012			139,421	(4)			-				-				68,513				-				-				-				207,934
Tony Bogolin Former Chief Executive  Officer, Director		2013			298,193	(5)			-				-				-				-				-				-				298,193
		2012			100,000	(6)			-				-				39,748				-				-				-				139,748
Matthew Ingham Former Chief Financial Officer, Director		2013			177,378	(7)			-				-				-				-				-				-				177,378
		2012			141,153	(8)			-				50,000				68,513				-				-				-				259,666
Nicholas Terranova Former Chief Financial Officer		2013			79,294				-				-				16,344				-				-				-				95,638
John Bordynuik Chief of Technology		2013			258,305	(9)			-					-			-				-				-					-			258,305
		2012			261,052	(10)			78,350					-			1,270,171				-				-					-			1,609,573

 

42

---

 

 

Notes:

 

(1)	The amounts reported in this column reflect the fair value on the grant date of the restricted stock awards granted to our named executive officers.  These values are determined by multiplying the number of shares granted by the closing price of our common stock on the trading day of the grant date.  The dollar amounts do not necessarily reflect the dollar amounts of compensation actually realized or that may be realized by our named executive officers.
(2)	The amounts reported in this column reflect the fair value on the grant date of the option awards granted to our named executive officers. These values are determined under the principles used to calculate the grant date fair value of equity awards for purposes of our financial statements. The dollar amounts do not necessarily reflect the dollar amounts of compensation actually realized or that may be realized by our named executive officers.
(3)	Represents Mr. Rauber’s salary from January 1, 2013 through May 2, 2013, the date Mr. Rauber resigned as our Chief Executive Officer.
(4)	Represents Mr. Rauber’s salary from May 15, 2012, the date Mr. Rauber became our Chief Executive Officer, through the end of the fiscal year.
(5)	Represents Mr. Bogolin’s salary from January 1, 2013 through August 14, 2013, the date Mr. Bogolin resigned as our Chef Executive Officer.
(6)	Represents Mr. Bogolin’s salary from June 25, 2012, the date Mr. Bogolin became our Chief Operating Officer, through the end of the fiscal year.
(7)	Represents Mr. Ingham’s salary from January 1, 2013 through August 14, 2013, the date Mr. Ingham resigned as our Chef Financial Officer.
(8)	Represents Mr. Ingham’s salary from January 9, 2012, the date Mr. Ingham became our Chief Financial Officer, through the end of the fiscal year.
(9)	Represents Mr. Bordynuik’s compensation as our Chief of Technology.
(10)	Represents Mr. Bordynuik’s compensation of $102,212 in salary and $78,350 in bonus from January 1, 2012 through May 15, 2012, the date of his resignation as our Chief Executive Officer, as well as compensation of $158,840 in salary and $1,270,171 in stock compensation, from May 16, 2012 through December 31, 2012, when Mr. Bordynuik served as the Company’s Chief of Technology. Mr. Bordynuik also served as our interim Chief Financial Officer from April 9, 2011 through January 9, 2012, the date Mr. Ingham became our Chief Financial Officer.

Outstanding Equity Awards at Fiscal Year-End

The following table provides information on all restricted stock and stock option awards held by our named executive officers as of December 31, 2013. 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
		Option Awards																	Stock Awards
																															Equity
																											Equity				Incentive
																											Incentive				Plan
																											Plan				Awards:
																											Awards:				Market or
										Equity																	Number				Payout
										Incentive									Number				Market				of				Value of
										Plan									of				Value of				Unearned				Unearned
										Awards:									Shares				Shares				Shares,				Shares,
		Number of				Number of				Number of									or Units				or Units				Units or				Units or
		Securities				Securities				Securities									of Stock				of Stock				Other				Other
		Underlying				Underlying				Underlying									That				That				Rights				Rights
		Unexercised				Unexercised				Unexercised				Option					Have				Have				That				That
		Options				Options				Unearned				Exercise			Option		Not				Not				Have Not				Have Not
		(#)				(#)				Options				Price			Expiration		Vested				Vested				Vested				Vested
Name		Exercisable				Unexercisable				(#)				($)			Date		(#)				($)				(#)				($)
Richard Heddle			-				-				-				-		-			-				-				-				-
Kevin Rauber			300,000	(1)			-				-				1.5		-			-				-				-				-
Nicholas Terranova			60,000				-				-				0.32		-			-				-				-				-
Matthew Ingham			300,000	(3)			-				-				1.5		-			-				-				-				-
Tony Bogolin			400,000	(4)			-				-				1.5		-			-				-				-				-
John Bordynuik			1,400,000	(5)			1,950,000	(6)			-				1.50		-			-				-				-				-

 

(1)	Represents options to purchase common stock granted to Mr. Rauber on May 15, 2012.
(2)	Represents options to purchase common stock granted to Mr. Terranova on July 11, 2013.
(3)	Represents options to purchase common stock granted to Mr. Ingham on May 15, 2012.
(4)	Represents options to purchase common stock granted to Mr. Bogolin on June 25, 2012.
(5)	Represents options to purchase common stock granted to Mr. Bordynuik on May 15, 2012, which options vested on May 15, 2012.
(6)	Represents options to purchase common stock granted to Mr. Bordynuik on May 15, 2012, which options vest in equal installments on May 15, 2015, May 15, 2016 and May 15, 2017.

 

 

43

---

 

 

Option Exercises and Stock Vested During the Fiscal Year

 

During the fiscal year ended December 31, 2013, there were no exercises of stock options by, or vesting of shares of restricted stock held by, our named executive officers.

DIRECTOR COMPENSATION

Name		Year		Fees Earned or Paid in Cash ($)				Stock Awards ($)				Option Awards ($)				Non-Equity Incentive Plan Compensation ($)				Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)				All Other Compensation ($)				Total ($)
Richard Heddle		2013			-				-				-				-				-				-				-
Philip Bradley		2013			-				-				-				-				-				-				-
Kevin Rauber (1)		2013			-				-				-				-				-				-				-
Tony Bogolin (1)		2013			-				-				-				-				-				-				-
Matthew Ingham (1)		2013			-				-				-				-				-				-				-
John M Wesson (1)		2013			-				-				-				-				-				-				-

 

(1)	Resigned as a director prior to the end of the fiscal year ended December 31, 2013.

 

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

 

Employment Agreements, Severance and Change In Control Plans

 

The Company’s employment agreements with its executives are intended to comply with Section 409A of the Code.  We currently have not entered into employment agreements with Richard Heddle, our President and Chief Executive Officer, and Mr. Rahoul Banerjea, our Chief Financial Officer.  A summary of the Company’s employment agreement with John Bordynuik, our Chief of Technology, is set forth below.

 

John Bordynuik

Effective May 15, 2012, the Company entered into a five-year employment agreement with John Bordynuik, the Company’s Chief of Technology.  The employment agreement provides that Mr. Bordynuik will receive an annual base salary of $275,000.  Pursuant to the employment agreement, he was granted options to purchase 4,000,000 shares of the Company’s common stock at an exercise price of $1.50 per share, of which 750,000 shares vested immediately and the remainder vest in equal installments over a five year period beginning on the first anniversary of the agreement.  Mr. Bordynuik is entitled to receive an annual performance bonus in an amount derived from the following formula: his base salary multiplied by the Company’s stock price divided by ten.  The maximum cash amount of such bonus is $100,000.  Mr. Bordynuik is also eligible to participate in employee benefit plans generally available to the Company’s management employees.  The agreement also provides for non-disclosure by Mr. Bordynuik of our confidential information and includes covenants by him not to solicit or disrupt our relationship with our customers, vendors, employees or consultants following termination of employment.

 

 

44

---

 

 

The material terms of the compensation and severance agreements with our former Chief Executive Officers and Chief Financial Officers are as follows:

 

Kevin Rauber

 

Effective May 15, 2012, the Company entered into a three-year employment agreement with Kevin Rauber, the Company’s former Chief Executive Officer and President.  The employment agreement provided that Mr. Rauber was entitled to receive an annual base salary of $250,000.  Pursuant to the employment agreement, he was granted options to purchase 500,000 shares of the Company’s common stock at an exercise price of $1.50 per share, which options were to vest in equal installments over a five year period. Mr. Rauber was entitled to receive an annual performance bonus in an amount derived from the following formula: his base salary multiplied by the Company’s stock price divided by ten.  The maximum cash amount of such bonus was $100,000.  Mr. Rauber was also eligible to participate in employee benefit plans generally available to the Company’s management employees.  The agreement also provided for non-disclosure by Mr. Rauber of our confidential information and included covenants by him not to compete with us for a period of two years following termination of employment.

In connection with Mr. Rauber’s resignation from the Company, Mr. Rauber and the Company executed a separation agreement (the "Rauber Separation Agreement") on May 1, 2013. Pursuant to the terms of the Rauber Separation Agreement, Mr. Rauber received payment of the equivalent of four months of his base salary ($83,333) payable in accordance with the Company’s payroll practices and immediate accelerated vesting of options to purchase 200,000 shares of the Company’s common stock.  The exercise period of the vested options will be extended from ninety (90) days to seven years after execution of the Rauber Separation Agreement.  The remaining unvested options held by Mr. Rauber will be forfeited. In addition, Mr. Rauber received continued coverage under the Company's benefit plans or equivalent coverage through July 31, 2013.  The Rauber Separation Agreement also contains a general release of claims and certain non-solicitation, confidentiality and other customary provisions.  The Company’s obligation to pay the amounts described herein is contingent upon Mr. Rauber not revoking the general release within the periods set forth by applicable law.

 

  Tony Bogolin

 

 Effective June 25, 2012, the Company entered into a three-year employment agreement with Tony   Bogolin, the Company’s Chief Operating Officer at such time.  The employment agreement provided that Mr. Bogolin would receive an annual base salary of $200,000.  Pursuant to the employment agreement, he was granted options to purchase 400,000 shares of the Company’s common stock at an exercise price of $1.50 per share, which vest in equal installments over a five year period. Beginning on the first anniversary of the agreement, Mr. Bogolin was entitled to receive an annual performance bonus in an amount derived from the following formula: his base salary multiplied by the Company’s stock price divided by ten.  The maximum cash amount of such bonus is $100,000.  Mr. Bogolin was also eligible to participate in employee benefit plans generally available to the Company’s management employees.  The agreement also provided for non-disclosure by Mr. Bogolin of our confidential information and includes covenants by him not to solicit or disrupt our relationship with our customers, vendors, employees or consultants following termination of employment.

 

            On May 16, 2013, the Company entered into an Amendment to Employment Agreement (the “Amendment”) with Mr. Bogolin who, was appointed to the position of President and Chief Executive Officer of the Company on May 3, 2013.  The purpose of the Amendment was to amend certain terms of the Company’s employment agreement with Mr. Bogolin, dated as of October 18, 2012, to address matters arising from Mr. Bogolin’s new appointment. The Amendment provided that:  (i) Mr. Bogolin would serve as the Company’s President and Chief Executive Officer, (ii) Mr. Bogolin’s base salary was increased to $250,000 per year effective May 3, 2013; (iii) the Company would pay Mr. Bogolin a $50,000 bonus following execution of the Amendment; and (iv) the Company would award Mr. Bogolin additional options to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.55 per share.  The options were subject to a vesting schedule whereby 50,000 option shares would vest on June 25th of each of 2013 and 2014.  

Mr. Bogolin’s employment agreement was terminated as of August 14, 2013 upon his resignation. In connection with Mr. Bogolin’s resignation, Mr. Bogolin and the Company executed a separation agreement (the "Bogolin Separation Agreement") on August 14, 2013. Pursuant to the terms of the Bogolin Separation Agreement, Mr. Bogolin received (i)  payment of $105,966, representing payment of four months and one-half months of his base salary and all unused vacation pay, which amount is payable in three equal monthly installments and (ii) immediate accelerated vesting of his outstanding unvested options to purchase 370,000 shares of the Company’s common stock.  The exercise period of all of his options was extended to seven years after execution of the Bogolin Separation Agreement.  In addition, Mr. Bogolin will receive continued coverage under the Company's benefit plans or equivalent coverage through December 31, 2013.  The Bogolin Separation Agreement also contains a general release of claims and certain non-solicitation, confidentiality and other customary provisions.  The Company’s obligation to pay the amounts described herein is contingent upon Mr. Bogolin not revoking the general release within the periods set forth by applicable law. 

 

 

45

---

 

 

Matthew Ingham

 

Effective May 15, 2012, the Company entered into a three-year employment agreement with Matthew Ingham, the Company’s Chief Financial Officer.  The employment agreement provided that Mr. Ingham would receive an annual base salary of $175,000.  Pursuant to the employment agreement, he was granted options to purchase 300,000 shares of the Company’s common stock at an exercise price of $1.50 per share, which vest in equal installments over a three year period. Beginning on the first anniversary of the agreement, Mr. Ingham was entitled to receive an annual performance bonus in an amount derived from the following formula: his base salary multiplied by the Company’s stock price divided by ten.  The maximum cash amount of such bonus is $100,000.  Mr. Ingham was also eligible to participate in employee benefit plans generally available to the Company’s management employees.  The agreement also provided for non-disclosure by Mr. Ingham of our confidential information and includes covenants by him not to solicit or disrupt our relationship with our customers, vendors, employees or consultants following termination of employment.

 

Mr. Ingham’s employment agreement was terminated as of August 14, 2013 upon his resignation. In connection with Mr. Ingham’s resignation, Mr. Ingham and the Company executed a separation agreement (the "Ingham Separation Agreement") on August 14, 2013. Pursuant to the terms of the Ingham Separation Agreement, Mr. Ingham received (i) payment of $74,176, representing payment of four months and one-half months of his base salary and all unused vacation pay, which amount is payable in three equal monthly installments and (ii) immediate accelerated vesting of his outstanding unvested options to purchase 200,000 shares of the Company’s common stock.  The exercise period of all of his options was extended to seven years after execution of the Separation Agreement.  In addition, Mr. Ingham will receive continued coverage under the Company's benefit plans or equivalent coverage through December 31, 2013.  The Ingham Separation Agreement also contains a general release of claims and certain non-solicitation, confidentiality and other customary provisions.  The Company’s obligation to pay the amounts described herein is contingent upon Mr. Ingham not revoking the general release within the periods set forth by applicable law.  

 

2012 Long-Term Incentive Plan

 

On May 23, 2012, the Board adopted the JBI, Inc. 2012 Long-Term Incentive Plan (the “Plan”).  The plan was subsequently approved by the Company’s stockholders at the Company’s 2012 annual meeting of stockholders.

The purpose of the Plan is to further and promote the interests of the Company, its subsidiaries and its stockholders by enabling the Company and its subsidiaries to attract, retain and motivate employees, directors and consultants or those who will become employees, directors and of the Company and/or its subsidiaries, and to align the interests of those individuals and the Company’s stockholders.  To do this, the Plan offers performance-based incentive awards and equity-based opportunities providing employees, directors and consultants with a proprietary interest in maximizing the growth, profitability and overall success of the Company and/or its subsidiaries.

The maximum number of shares of our common stock as to which awards may be granted under the Plan may not exceed 10,000,000 shares.  In the case of any individual participant, the maximum amount payable in respect of awards subject to performance criteria in any calendar year may not exceed four million shares of common stock.  The limits on the numbers of shares described in this paragraph and the number of shares subject to any award under the Plan are subject to proportional adjustment as determined by the Board, to reflect certain stock changes, such as stock dividends and stock splits (see “Recapitalization Adjustments” below).

If any awards under the Plan expire or terminate unexercised, the shares of common stock allocable to the unexercised or terminated portion of such award shall again be available for award under the Plan.

Administration and Eligibility

The administration, interpretation and operation of the Plan will be vested in the Compensation Committee of the Board if and when one is designated, otherwise the Board itself shall administer the Plan (the Board or the Compensation Committee, if applicable, acting in such capacity, the “Committee”). The Committee may designate persons other than members of the Committee to carry out the day-to-day administration of the Plan.  In addition, the Committee may, in its sole discretion, delegate day-to-day ministerial administration to persons other than members of the Committee, except that the Committee shall not delegate its authority with regard to selection for participation in the Plan and/or the granting of any awards to participants.

Employees, directors and consultants, or those who will become employees, directors and consultants of the Company and/or its subsidiaries are eligible to receive awards under the Plan.  Awards under the Plan are granted by the Committee.  

Awards Under The Plan

Awards under the Plan may consist of stock options, stock appreciation rights (“SARs”), restricted shares or performance unit awards, each of which is described below.  All awards are evidenced by an award agreement between the Company and the individual participant and approved by the Committee.  In the discretion of the Committee, an eligible employee, director or consultant may receive awards from one or more of the categories described below, and more than one award may be granted to an eligible employee, director or consultant.

Stock Options and Stock Appreciation Rights.   A stock option is an award that entitles a participant to purchase shares of common stock at a price fixed at the time the option is granted.  Stock options granted under the Plan may be in the form of incentive stock options (which qualify for special tax treatment) or non-qualified stock options, and may be granted alone or in addition to other awards under the Plan.  Non-qualified stock options may be granted alone or in tandem with SARs.

 

 

46

---

 

 

An SAR entitles a participant to receive, upon exercise, an amount equal to (a) the excess of (i) the fair market value on the exercise date of a share of common stock, over (ii) the fair market value of a share of common stock on the date the SAR was granted, multiplied by (b) the number of shares of common stock for which the SAR has been exercised.

The exercise price and other terms and conditions of stock options and the terms and conditions of SARs will be determined by the Committee at the time of grant, provided, however, that the exercise price per share may not be less than 100 percent of the fair market value of a share of common stock on the date of the grant.  In addition, the term of any incentive stock options granted under the Plan may not exceed ten years.  An option or SAR grant under the Plan does not provide an optionee any rights as a stockholder and such rights will accrue only as to shares actually purchased through the exercise of an option or the settlement of an SAR. If stock options and SARs are granted together in tandem, the exercise of such stock option or the related SAR will result in the cancellation of the related stock option or SAR to the extent of the number of shares in respect of which such option or SAR has been exercised. Stock options and SARs granted under the Plan shall become exercisable at such time as designated by the Committee at the time of grant.

 

In addition, the Committee, in its sole discretion, may provide in any stock option or SAR award agreement that the recipient of the stock option or SAR will be entitled to dividend equivalents with respect to such award.  In such instance, in respect of any such award which is outstanding on a dividend record date for common stock, the participant would be entitled to an amount equal to the amount of cash or stock dividends that would have paid on the shares of common stock covered by such stock option or SAR award had such shares of common stock been outstanding on the dividend record date.

Restricted Share Awards.   Restricted share awards are grants of common stock made to a participant subject to conditions established by the Committee in the relevant award agreement on the date of grant.  The restricted shares only become unrestricted in accordance with the conditions and vesting schedule, if any, provided in the relevant award agreement.  A participant may not sell or otherwise dispose of restricted shares until the conditions imposed by the Committee with respect to such shares have been satisfied.  Restricted share awards under the Plan may be granted alone or in addition to any other awards under the Plan.  Restricted shares which vest will be reissued as unrestricted shares of common stock. Each participant who receives a grant of restricted shares will have the right to receive all dividends and vote or execute proxies for such shares.  Any stock dividends granted with respect to such restricted shares will be treated as additional restricted shares.

 

              Performance Units.   Performance units (with each unit representing a monetary amount designated in advance by the Committee) are awards which may be granted to participants alone or in addition to any other awards under the Plan.  Participants receiving performance unit grants will only earn such units if the Company and/or the participant achieve certain performance goals during a designated performance period.  The Committee will establish such performance goals and may use measures such as total stockholder return, return on equity, net earnings growth, sales or revenue growth, comparison to peer companies, individual or aggregate participant performance or such other measures the Committee deems appropriate.  The participant may forfeit such units in the event the performance goals are not met.  If all or a portion of a performance unit is earned, payment of the designated value thereof will be made in cash, in unrestricted common stock or in restricted shares or in any combination thereof, as provided in the relevant award agreement.

 

Recapitalization Adjustments.   In the event that the Board determines that any dividend or other distribution (whether in the form of cash, common stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of common stock or other securities of the Company, or other corporate transaction or event affects the common stock such that an adjustment is determined by the Board, in its sole discretion, to be necessary or appropriate in order to prevent dilution or enlargement of benefits or potential benefits intended to be made available under the Plan, the Board may, in any manner that it in good faith deems equitable, adjust any or all of (i) the number of shares of common stock or other securities of the Company (or number and kind of other securities or property) with respect to which awards may be granted, (ii) the number of shares of common stock or other securities of the Company (or number and kind of other securities or property) subject to outstanding awards, and (iii) the exercise price with respect to any stock option, or make provision for an immediate cash payment to the holder of an outstanding award in consideration for the cancellation of such award.

 

Mergers.    If the Company enters into or is involved in any merger, reorganization, recapitalization, sale of all or substantially all of the Company’s assets, liquidation, or business combination with any person or entity (a “Merger Event”), the Board may, prior to such Merger Event and effective upon such Merger Event, take any action that it deems appropriate, including, replacing such stock options with substitute stock options and/or SARs in respect of the shares, other securities or other property of the surviving corporation or any affiliate of the surviving corporation on such terms and conditions, as to the number of shares, pricing and otherwise, which shall substantially preserve the value, rights and benefits of any affected stock options or SARs granted hereunder as of the date of the consummation of the Merger Event.  If any Merger Event occurs, the Company has the right, but not the obligation, to cancel each participant's stock options and/or SARs and to pay to each affected participant in connection with the cancellation of such stock options and/or SARs, an amount equal to the excess of the fair market value, as determined by the Board, of the common stock underlying any unexercised stock options or SARs (whether then exercisable or not) over the aggregate exercise price of such unexercised stock options and/or SARs.  Upon receipt by any affected participant of any such substitute stock options, SARs (or payment) as a result of any such Merger Event, such participant’s affected stock options and/or SARs for which such substitute options and/or SARs (or payment) were received shall be thereupon cancelled without the need for obtaining the consent of any such affected participant.

 

Amendment, Suspension or Termination of the Plan

 

Unless earlier terminated by the Board, the Plan will terminate on May 23, 2022.  The Board may amend, suspend or terminate the Plan (or any portion thereof) at any time. However, no amendment may (a) materially adversely affect the rights of any participant under any outstanding award, without the consent of such participant, or (b) make any change that would disqualify the Plan from the benefits provided under Sections 422 and 162(m) of the Internal Revenue Code of 1986 (the “Code”), or (c) increase the number of shares available for awards under the Plan without stockholder approval; provided , however , that the Board and/or Committee  may amend the Plan, without the consent of any participants, in any way it deems appropriate  to satisfy Code Section 409A and any regulations or other authority promulgated thereunder, including any amendment to the Plan to cause certain awards not to be subject to Code Section 409A.

 

 

47

---

 

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Our authorized capital stock consists of 150,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. As of June 3, 2014, we had issued and outstanding:

 

·	96,292,243 shares of Common Stock; and

·	1,967,207 shares of our Series B Convertible Preferred Stock, par value $0.001 per share (“Series B Preferred Stock”).

The following table sets forth certain information regarding the beneficial ownership of our Common Stock as of June 3, 2014 by:

·	each person known by us to be a beneficial owner of more than 5% of our outstanding Common Stock;

·	each of our directors;

·	each of our named executive officers; and

·	all directors and executive officers as a group.

             Our outstanding shares of Series B Preferred Stock are reflected on an as-converted basis with our Common Stock.  The amounts and percentages of Common Stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security.  A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days after, June 3, 2014.  Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest.  Except as indicated by footnote, to our knowledge, the persons named in the table below have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.

 

In the table below, the percentage of ownership of our Common Stock is based on 96,292,243 shares of Common Stock outstanding as of June 3, 2014.   Unless otherwise noted below, the address of the persons listed on the table is c/o JBI, Inc., 20 Iroquois Street, Niagara Falls, New York 14303.

 

		Common Stock Beneficially Owned
Name of Beneficial Owner		Number				Percentage
Executive Officers and Directors
Richard Heddle, Chief Executive Officer and Director			6,000,000	(1)			6.14	%
Rahoul Banerjea, Chief Financial Officer			-				-
Philip J. Bradley , Director			-				-
All named executive officers and directors as a group			6,000,000				6.14	%
5% or More Stockholders

 

---

* Less than 1.0%.

 

(1)	Includes warrants to purchase 3,000,000 shares of Common Stock.

 

48

---

 

Changes in Control

 

We are not aware of any arrangements that may result in a change in control of the Company.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

 

Review, Approval or Ratification of Transactions with Related Persons

 

The Board is responsible for the review, approval or ratification of all “transactions with related persons” as that term refers to transactions required to be disclosed by Item 404 of Regulation S-K promulgated by the SEC.  In reviewing a proposed transaction, the Board must (i) satisfy itself that it has been fully informed as to the related party’s relationship and interest and as to the material facts of the proposed transaction and (ii) consider all of the relevant facts and circumstances available to the Board. After its review, the Board will only approve or ratify transactions that are fair to the Company and not inconsistent with the best interests of the Company and its stockholders.

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

As outlined in the table below, we incurred the following fees for the fiscal years ended December 31, 2013 and 2012, respectively, for professional services rendered by MNP our current independent registered accounting firm for the audit of the Company's annual financial statements and for audit-related services, tax services and all other services, as applicable.

 

Service Provided		Fiscal 2013				Fiscal 2012
Audit Fees
Annual Audit		$	285,523	(1)		$	455,519	(2)
Audit Related Fees
Assurances and Related Sources							17,6440	(3)
Tax Fees
Tax Services							14,060	(4)
All Other Fees
Fees for other services							-
Total Fees			285,523				487,223

(1)	Includes the review of 2013 Quarterly Reports on Form 10-Q by MNP LLP and 2013 audit fees.
(2)	Includes the review of 2012 Quarterly Reports on Form 10-Q by MNP, LLP and 2012 audit fees.
(3)	Includes fees for the review and procedures performed on the Company’s filing of a Registration Statement on Form S-8 in conjunction with the 2012 Long Term Incentive Compensation Plan.
(4)	Fees related to the preparation of an amendment of tax returns for 2009, 2010 and 2011 tax years.

 

The Company has policies and procedures that require the pre-approval of the Board of all fees paid to, and all services performed by, the Company’s independent registered public accounting firm. At the beginning of each year, the Board approves the proposed services, including the nature, type and scope of services contemplated and the related fees, to be rendered by these firms during the year. In addition, pre-approval of the Board is also required for those engagements that may arise during the course of the year that are outside the scope of the initial services and fees initially pre-approved by the Audit Committee.

 

PART IV

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

The exhibits required by this item are listed on the Exhibit Index attached hereto.

 

49

---

 

 

  Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report has been signed on its behalf  by the undersigned, thereunto duly authorized. 

 

	JBI, INC.
Date: June 3, 2014	By:	/s/ Richard Heddle
		Name: Richard Heddle
		Title: President and Chief Executive Officer (Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Richard Heddle		President ,Chief Executive Officer		June 3, 2014
Richard Heddle		(Principal Executive Officer) and Chairman of the Board of Directors
/s/ Rahoul S. Banerjea		Chief Financial Officer		June 3, 2014
Rahoul S. Banerjea		(Principal Financial Officer and Principal Accounting Officer)

 

 

50

---

 

 

EXHIBIT INDEX

 

Exhibit No.		Description
2.1		Asset Purchase Agreement, dated February 10, 2012, by and between JBI, Inc. and Big 3 Packaging LLC (Incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on February 16, 2012).
3.1		Articles of Incorporation of JBI, Inc. (Incorporated by reference to Exhibit 3(a) to our Registration Statement on Form SB-2 filed on December 11, 2006).
3.2		Certificate of Amendment to Articles of Incorporation of JBI, Inc. dated January 10, 2007 (Incorporated herein by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q filed on August 9, 2012).
3.2		Certificate of Amendment to Articles of Incorporation of JBI, Inc. dated October 5, 2009 (Incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on October 6, 2009).
3.4		Certificate of Amendment to Articles of Incorporation of JBI, Inc. dated December 11, 2009 (Incorporated herein by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q filed on August 9, 2012).
3.5		Certificate of Amendment to Articles of Incorporation of JBI, Inc. dated May 11, 2012 (Incorporated herein by reference to Exhibit 3.5 to our Quarterly Report on Form 10-Q filed on August 9, 2012).
3.6		Amended and Restated Bylaws of JBI, Inc. (Incorporated herein by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on December 31, 2012).
3.7		Certificate of Designation of Series A Super Voting Preferred Stock of JBI, Inc. dated December 1, 2009 (Incorporated herein by reference to Exhibit 3.3 to our Quarterly Report on Form 10-Q filed on August 9, 2012).
3.8		Amendment to Certificate of Designation of Series A Super Voting Preferred Stock of JBI, Inc. dated May 10, 2012 (Incorporated herein by reference to Exhibit 3.4 to our Quarterly Report on 10-Q filed on August 9, 2012).
3.9		Certificate of Correction to Certificate of Designation of Series A Super Preferred Voting Stock of JBI, Inc. dated May 14, 2012 (Incorporated herein by reference to Exhibit 3.6 to our Quarterly Report on Form 10-Q filed on August 9, 2012).

 

 

51

---

 

 

Exhibit No.		Description
3.10		Certificate of Designation of Series B Convertible Preferred Stock of JBI, Inc. dated December 24, 2012 (Incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on December 31, 2012).
3.11		Certificate of Amendment to Certificate of Designation of Series B Convertible Preferred Stock of JBI, Inc. dated January 11, 2013 (Incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on January 17, 2013).
3.12		Certificate of Withdrawal of Certificate of Designation of Series A Preferred Super Voting Stock of JBI, Inc. dated June 2, 2014. (1)
10.1		Master Revenue Sharing Agreement between JBI, Inc. and RockTenn Company dated July 29, 2011 (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 4, 2011) .*
10.2		Supply and Service Agreement between JBI, Inc. and Coco Asphalt Engineering a division of Coco Paving, Inc. dated June 10, 2011 (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 13, 2011).
10.3		Form of Subscription Agreement (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 6, 2012).
10.4		Promissory Note, dated February 14, 2012, by Big 3 Packaging LLC in favor of JBI, Inc. (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 16, 2012).
10.5		Lease, dated December 1, 2011, between JBI, Inc . and Avondale Stores Limited. (Incorporated herein by reference to Exhibit 10.5 to our Annual Report on Form 10-K, filed on March 19, 2012)
10.6		Form of Warrant (Incorporated herein by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on January 6, 2012).
10.7		Form of Subscription Agreement (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 17, 2012).
10.8		Employment Agreement, dated May 15, 2012, by and between JBI, Inc. and John Bordynuik (Incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on May 17, 2012).
10.9		2012 Long-Term Incentive Plan of JBI, Inc. dated as of May 23, 2012 (Incorporated herein by reference to Appendix A of our Definitive Proxy Statement on Schedule 14A filed on June 20, 2012).

 

 

52

---

 

 

Exhibit No.		Description
10.10		Form of Incentive Stock Option Agreement pursuant to the 2012 Long-Term Incentive Plan of JBI, Inc. (Incorporated herein by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on October 19, 2012)
10.11		Amended and Restated Employment Agreement, dated October 18, 2012, by and between the Company and Kevin Rauber (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 19, 2012).
10.12		Amended and Restated Employment Agreement, dated October 18, 2012, by and between the Company and Matthew Ingham (Incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October 19, 2012).
10.13		Amended and Restated Employment Agreement, dated October 18, 2012, by and between the Company and Tony Bogolin (Incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on October 19, 2012).
10.14		Form of Subscription Agreement (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on December 31, 2012).
10.15		Separation Agreement, effective as of May 1, 2013, between the Company and Kevin Rauber (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 3, 2013).
10.16		Amendment to Employment Agreement, dated as of May 16, 2013, between the Company and Tony Bogolin (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 17, 2013).
10.17		Stipulation Agreement, dated August 8, 2013, between the Company, and certain settling parties signatory thereto (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 9, 2013).
10.18		Separation Agreement, dated August 14, 2013, between the Company and Tony Bogolin (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 15, 2013).
10.19		Separation Agreement, dated August 14, 2013, between the Company and Matthew Ingham (Incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on August 15, 2013).
10.20		Subscription Agreement, dated August 29, 2013, between the Company and Richard Heddle (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 30, 2013).

 

 

53

---

 

 

Exhibit No.		Description
10.21		Secured Promissory Note, dated August 29, 2013, issued by the Company in favor of Richard Heddle (Incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on August 30, 2013).
10.22		Warrant, dated August 29, 2013, issued by the Company in favor of Richard Heddle (Incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on August 30, 2013).
10.23		Security Agreement, dated August 29, 2013, between the Company, Plastic2Oil of NY #1, LLC, JBI RE #1, Inc., Christiana Trust and Richard Heddle (Incorporated herein by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on August 30, 2013).
10.24		Form of Subscription Agreement (Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 24, 2014).
10.25		Form of Warrant (Incorporated herein by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on February 24, 2014).
10.26		Joint Venture and Services Agreement between JBI, Inc. and RWH Marine Consulting dated February 12, 2010. (1)
21.1		Subsidiaries of the Registrant. (1)
		JBI RE ONE Inc., an Ontario, Canada corporation.
		Plastic2Oil Land, Inc., a Nevada corporation.
		Plastic2Oil Marine, Inc. a Nevada corporation.
		PAK-IT, LLC a Florida corporation.
		Javaco, Inc., an Ohio corporation.
		Plastic2Oil of NY #1, LLC a New York corporation.
		JBI RE #1, Inc., a New York corporation.
23.1		Consent of MNP LLP (1)
23.2		Consent of MSCM LLP (1)
31.1		Certification of our Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended. (1)

 

 

54

---

 

 

Exhibit No.		Description
31.2		Certification of our Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended. (1)
32.1		Certification of our Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
32.2		Certification of our Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
101.INS		XBRL Instance Document  (2)
101.SCH		XBRL Taxonomy Extension Schema Document  (2)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.  (2)
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.  (2)
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.  (2)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.  (2)

__________________

 

*

Certain Confidential Information contained in this Exhibit was omitted by means of redacting a portion of the text and replacing it with an asterisk. This Exhibit has been filed separately with the Secretary of the Securities and Exchange Commission without the redaction pursuant to a Confidential Treatment Request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

(1)	Filed herewith.

 

(2)	Furnished herewith.

 

 

55 

---

Plastic2Oil (PK) (USOTC:PTOI)
Historical Stock Chart
From Mar 2024 to Apr 2024

Plastic2Oil (PK) (USOTC:PTOI)
Historical Stock Chart
From Apr 2023 to Apr 2024