UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended

 

June 30, 2016

 

or

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission file number: 000-52444

 

PLASTIC2OIL, INC.

(Exact name of registrant as specified in its charter)

 

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

 

20 Iroquois Street

Niagara Falls, NY 14303

(Address of Principal Executive Offices) (Zip Code)

 

(716)-278-0015

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of August 19, 2016, there were 124,756,158 shares of the Registrant’s common stock, $0.001 par value, outstanding.

 

 

 

     
     

 

PLASTIC2OIL, INC.

Table of Contents

 

PART I Financial Information 4
     
ITEM 1. Financial Statements 4
     
  Condensed Consolidated Balance Sheets – June 30, 2016 (Unaudited) and December 31, 2015 4
     
  Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2016 and 2015 (Unaudited) 5
     
  Condensed Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2016 and 2015 (Unaudited) 6
     
  Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2016 and 2015 (Unaudited) 7
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 8
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
ITEM 3. Quantitative and Qualitative Disclosures about Market Rick 24
     
ITEM 4. Controls and Procedures 25
     
ITEM 5. Other Information 25
     
ITEM 9. Changes in and disagreements with Accountants on accounting and financial disclosures. 25
     
PART II Other Information 26
     
ITEM 1. Legal Proceedings 26
     
ITEM 1A. Risk Factors 26
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
     
ITEM 3. Defaults Upon Senior Securities 26
     
ITEM 4. Mine Safety Disclosures 26
     
ITEM 5. Other Information 26
     
ITEM 6. Exhibits 26
     
SIGNATURES 27

 

  2  
     

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q (“Report”) contains “forward looking statements” within the meaning of applicable securities laws. Such statements include, but are not limited to, statements with respect to management’s beliefs, plans, strategies, objectives, goals and expectations, including expectations about the future financial or operating performance of our Company and its projects, capital expenditures, capital needs, government regulation of the industry, environmental risks, limitations of insurance coverage, and the timing and possible outcome of regulatory matters, including the granting of patents and permits. Words such as “expect”, “anticipate”, “intend”, “attempt”, “may”, “will”, “plan”, “believe”, “seek”, “estimate”, and variations of such words and similar expressions are intended to identify such forward looking statements. These statements are not guarantees of future performance and involve assumptions, risks and uncertainties that are difficult to predict.

 

These statements are based on and were developed using a number of factors and assumptions including, but not limited to: stability in the U.S. and other foreign economies; stability in the availability and pricing of raw materials, energy and supplies; stability in the competitive environment; the continued ability of our Company to access cost effective capital when needed; and no unexpected or unforeseen events occurring that would materially alter the Company’s current plans. All of these assumptions have been derived from information currently available to the Company including information obtained by our Company from third party sources. Although management believes that these assumptions are reasonable, these assumptions may prove to be incorrect in whole or in part. As a result of these and other factors, actual results may differ materially from those expressed, implied or forecasted in such forward looking information, which reflect our Company’s expectations only as of the date hereof.

 

Factors that could cause actual results or outcomes to differ materially from the results expressed, implied or forecasted by the forward-looking statements include risks associated with general business, economic, competitive, political and social uncertainties; risks associated with changes in project parameters as plans continue to be refined; risks associated with failure of plant, equipment or processes to operate as anticipated; risks associated with accidents or labor disputes; risks associated in delays in obtaining governmental approvals or financing, or in the completion of development or construction activities; risks associated with financial leverage and the availability of capital; risks associated with the price of commodities and the inability of our Company to control commodity prices; risks associated with the regulatory environment within which our Company operates; risks associated with litigation including the availability of insurance; and risks posed by competition. These and other factors that could cause actual results or outcomes to differ materially from the results expressed, implied or forecasted by the forward looking statements are discussed in more detail in the section entitled “Risk Factors” in Part II, Item 1A of this Report and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 2 of this Report.

 

Some of the forward-looking statements may be considered to be financial outlooks for purposes of applicable securities legislation including, but not limited to, statements concerning capital expenditures. These financial outlooks are presented to allow the Company to benchmark the results of our Company’s Plastic2Oil business. These financial outlooks may not be appropriate for other purposes and readers should not assume they will be achieved.

 

Our Company does not intend to, and the Company disclaims any obligation to, update any forward-looking statements (including any financial outlooks), whether written or oral, or whether as a result of new information, future events or otherwise, except as required by law.

 

Unless otherwise noted, references in this Report to “P2O” the “Company,” “we,” “our” or “us” means Plastic2Oil, Inc., a Nevada corporation.

 

  3  
     

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PLASTIC2OIL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    As of
June 30, 2016
    As of
December 31, 2015
 
    (Unaudited)        
ASSETS                
CURRENT ASSETS                
Cash and cash equivalents   $ 3,294     $ 18,488  
Restricted cash (Note 2 )     100,372       100,322  
Accounts receivable, net of allowance of $24,274 and $22,994, respectively.     -       3,345  
Prepaid expenses and other current assets     67,733       11,698  
TOTAL CURRENT ASSETS     171,399       133,853  
                 
PROPERTY, PLANT AND EQUIPMENT, NET (Note 3)     3,436,713       3,775,527  
                 
Deposits (Note 2)     1,476,126       1,484,438  
                 
TOTAL ASSETS   $ 5,084,238     $ 5,393,818  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES                
Accounts payable   $ 1,881,429     $ 1,858,666  
Accrued expenses     2,148,732       2,062,480  
Demand promissory note – related party (Note 4)     2,208,590       1,593,291  
Mortgages payable and capital leases     245,470       262,673  
TOTAL CURRENT LIABILITIES     6,484,221       5,777,110  
                 
LONG-TERM LIABILITIES                
Asset retirement obligations (Note 2)     41,616       41,000  
Secured promissory notes – related party (Note 4)     4,883,424       4,493,941  
TOTAL LONG-TERM LIABILITIES     4,925,040       4,534,941  
                 
TOTAL LIABILITIES     11,409,261       10,312,051  
                 
Commitments and contingencies ( Note 6)                
                 
STOCKHOLDERS’ DEFICIT                
Common stock, par $0.001; 250,000,000 authorized, 124,756,158 shares issued and outstanding     124,756       124,756  
Additional paid in capital     66,969,154       66,969,154  
Accumulated other comprehensive income     107,924       231,954  
Accumulated deficit     (73,526,857 )     (72,244,097 )
TOTAL STOCKHOLDERS’ DEFICIT     (6,325,023 )     (4,918,233 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 5,084,238     $ 5,393,818  

 

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

 

  4  
     

 

PLASTIC2OIL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
                         
SALES                                
P2O   $ -     $ -     $ -     $ -  
Other     -       10,397       -       10,397  
TOTAL SALES     -       10,397       -       10,397  
                                 
COST OF SALES                                
P2O     -       -       -       -  
Other     -       4,054       -       4,054  
TOTAL COST OF SALES     -       4,054       -       4,054  
                                 
GROSS PROFIT     -       6,343       -       6,343  
                                 
OPERATING EXPENSES                                
Selling general and administrative expenses                                
Professional Fees     21,676       253,705       67,044       347,896  
Compensation     131,252       220,852       270,008       441,415  
Other     55,958       382,657       145,185       566,953  
Depreciation of property, plant and equipment and accretion of long-term liability     216,664       216,877       436,298       432,474  
Research and development expenses     -       -       -       1,653  
TOTAL OPERATING EXPENSES     425,550       1,074,091       918,535       1,790,391  
                                 
LOSS FROM OPERATIONS     (425,550 )     (1,067,748 )     (918,535 )     (1,784,048 )
                                 
OTHER INCOME (EXPENSES)                                
Interest expense, net     (187,601 )     (150,238 )     (364,191 )     (293,293 )
Other income (expense), net     (59 )     4,705       (34 )     (458 )
TOTAL OTHER INCOME (EXPENSES)     (187,660 )     (145,533 )     (364,225 )     (293,751 )
                                 
LOSS BEFORE INCOME TAXES     (613,210 )     (1,213,281 )     (1,282,760 )     (2,077,799 )
                                 
Provision for Income taxes     -       -       -       -  
                                 
Net loss from continuing operations     (613,210 )     (1,213,281 )     (1,282,760 )     (2,077,799 )
Net loss from discontinued operations (Note 12)     -       (21,521 )     -       (17,414 )
                                 
NET LOSS   $ (613,210 )   $ (1,234,802 )   $ (1,282,760 )   $ (2,095,213 )
                                 
Loss per share                                
Basic and diluted - from continuing operations   $ (0.00 )   $ (0.01 )   $ (0.01 )   $ (0.02 )
Basic and diluted - from discontinued operations     **       **       **       **  
Total basic and diluted loss per share   $ (0.00 )   $ (0.01 )   $ (0.01 )   $ (0.02 )
                                 
Weighted average number of shares outstanding                                
                                 
Basic and diluted (Note 2)     124,756,158       121,226,927       124,756,158       117,132,113  

 

** Less than $.01

 

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

 

  5  
     

 

PLASTIC2OIL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

    For the Three months Ended
June 30,
    For the Six months Ended
June 30,
 
    2016     2015     2016     2015  
                         
NET LOSS   $ (613,210 )   $ (1,234,802 )   $ (1,282,760 )   $ (2,095,213 )
                                 
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX                                
Foreign currency items     255       (3,915 )     124,030       111,410  
COMPREHENSIVE LOSS   $ (612,955 )   $ (1,238,717 )   $ (1,158,730 )   $ (1,983,803 )

 

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

 

  6  
     

 

PLASTIC2OIL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30,

(Unaudited)

 

    2016     2015  
             
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss from continuing operations   $ (1,282,760 )   $ (2,077,799 )
Net loss from discontinued operations     -       (17,414 )
NET LOSS     (1,282,760 )     (2,095,213 )
Items not affecting cash:                
Depreciation of property plant and equipment     339,430       335,519  
Accretion of long-term liability     96,868       96,868  
Accrued interest expense     345,110       270,238  
Stock issued for Services     -       264,913  
Stock issuance in reduction of accounts payable             19,200  
Other     -       87  
Working capital changes:                
Accounts receivable     3,345       (8,520 )
Prepaid expenses     (47,723 )     (68,138 )
Accounts payable     3,128       (28,561 )
Accrued expenses     86,228       181,274  
Changes attributable to discontinued operations     -       (35,920 )
NET CASH USED IN OPERATING ACTIVITIES     (456,374 )     (1,068,253 )
                 
CASH FLOW FROM INVESTMENT ACTIVITIES                
Increase in restricted cash     (25 )     (50 )
NET CASH USED IN INVESTING ACTIVITIES     (25 )     (50 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Stock issuance proceeds, net     -       25,000  
Proceeds from short-term loans – related party     472,237       949,409  
Repayment of Mortgages and Capital Leases     (31,032 )     (36,854 )
NET CASH PROVIDED BY FINANCING ACTIVITIES     441,205       937,555  
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS     (15,194 )     (130,748 )
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     18,488       179,652  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 3,294     $ 48,904  
Supplemental disclosure of cash flow information                
Cash paid for income taxes   $ -     $ -  
Cash paid for interest   $ 9,034     $ 13,979  
                 
Schedule of non-cash Investing and Financing activities                
Accounts payable settled with stock   $ -     $ 30,003  

 

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

 

  7  
     

 

PLASTIC2OIL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – ORGANIZATION AND GOING CONCERN

 

Plastic2Oil, Inc. (the “Company” or “P2O”) 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, transforming waste plastics to oil and other fuel products During 2014, the Company changed its name to Plastic2Oil, Inc. (“P2O”). P2O is a combination of proprietary technologies and processes developed by P2O which convert waste plastics into fuel. P2O currently, as of the date of this filing, has two processors at its Niagara Falls, NY facility (the “Niagara Falls Facility”). Both processors are currently idle since December 2013. Our P2O business has begun the transition from research and development to a commercial manufacturing and production business. We plan to grow mainly from sale of processors.

 

Currently, we do not have sufficient cash to operate our business which has forced us to suspend our operations until such time as we receive a capital infusion or cash advances on the sale of our processors.

 

Going Concern

 

These unaudited condensed 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 $1,282,760, and $2,077, 799, for the six months ended June 30, 2016, and 2015, respectively, and has a working capital deficit of $6,312,823 and an accumulated deficit of $73,526,857 at June 30, 2016. 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 and loans from related parties.

 

The Company will continue to require substantial funds to continue the expansion of its P2O business to achieve commercial productions, and to resume 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 condensed 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.

 

  8  
     

 

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES

 

Basis of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Plastic2Oil of NY#1 Inc., Plastic2Oil (Canada) Inc., JBI CDE Inc., Plastic2Oil Re One Inc., JBI Re #1 Inc., Plastic2Oil Marine Inc., Javaco, and Pak-it. 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 condensed consolidated; however, as mentioned their operations are classified as discontinued operations (see Note 12).

 

Interim Disclosure

 

These condensed consolidated financial statements are presented in considerably less detail than complete financial statements that are intended to present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. For this reason, they should be read in conjunction with the entity’s most recent complete financial statements included in its annual report for the year ended December 31, 2015 on Form 10-K filed with the SEC on March 31, 2016 that include all the disclosures required by generally accepted accounting principles.

 

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, accounts receivable exposures and valuation of options and warrants.

 

Restricted Cash

 

As of June 30, 2016 and December 31, 2015, the Company had $100,372 and $100,322, respectively, of restricted cash, which is used to secure a line of credit that secures a performance bond on behalf of the Company. The performance bond is required by the State of New York for fuel distributors in perpetuity.

 

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 as of June 30, 2016 and December 31, 2015 was $24,274 and $22,994, respectively.

 

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 -30 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.

 

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 (see Note 12).

 

  9  
     

 

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. As of the date of the creation of the asset retirement obligation in the amount of $57,530, 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 in the consolidated statements of operations. Increases in the asset retirement obligation resulting from the passage of time are recorded as accretion of asset retirement obligations in the condensed consolidated statements of operations. Actual expenditures incurred are charged against the accumulated obligation. As of June 30, 2016 and December 31, 2015, the carrying value of the asset retirement obligations was $41,616 and $41,000, respectively. These costs include disposal of plastic and other non-hazardous waste, site closing labor and testing and sampling of the site upon closure.

 

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.

 

Deposits

 

Deposits represent utility services deposit and 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 $1,476,126 and $1,484,438 as of June 30, 2016 and December 31, 2015, 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 (see Note 5).

 

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 processor sales are recognized when the customer take possession of the processors since Title to the Goods and the risk of loss transfers from P2O to Customer upon delivery. P2O fuel 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).

 

Advertising costs

 

The Company expenses advertising costs as incurred. Advertising costs were $0 and $1,868 for the six months ended June 30, 2016 and 2015, respectively. These expenses are included in selling, general and administrative expenses – other, in the condensed 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 six months ended June 30, 2016 and 2015, the Company expensed $0 and $1,653, 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.

 

  10  
     

 

Foreign Currency Translation

 

The condensed 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. Resulting differences are immaterial to the financial statements as a whole. Foreign exchange losses of $99 and gain of $4,712 are included as general and administrative expenses in the condensed consolidated statements of operations for the six months ended June 30, 2016 and 2015, respectively.

 

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 condensed 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 June 30, 2016 and December 31, 2015. 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, 2015 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. For the six months ended June 30, 2016, potential dilutive common stock equivalents consisted 14,350,000 shares underlying common stock warrants and 1,540,000 shares underlying stock options, which were not included in the calculation of the diluted loss per share. For the six months ended June 30, 2015, potential dilutive common stock equivalents 14,350,000 shares underlying common stock warrants, and 2,818,000 shares underlying stock options, which were not included in the calculation of the diluted loss per share.

 

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 processor sales as well as fuel sales 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

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, leases, promissory notes, long-term debt and mortgage payable approximate fair value because of the short-term nature of these items

 

Recently Issued Accounting Pronouncements

 

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.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This update requires an entity to classify deferred tax liabilities and assets as noncurrent within a classified statement of financial position. ASU 2015-17 is effective for annual and interim reporting periods beginning after December 15, 2016. This update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early application is permitted as of the beginning of the interim or annual reporting period. The impact on our Financial Statements of adopting ASU 2014-09 is being assessed by management.

 

  11  
     

 

In July 2015, FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires that an entity measure inventory at the lower of cost and net realizable value. This ASU does not apply to inventory measured using last-in, first-out. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company does not expect the new standard to have a significant impact on its consolidated financial position, results of operations or cash flows.

 

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. 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 3 – PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, Plant and Equipment consist of the following at:

 

As of June 30, 2016   Cost     Accumulated Depreciation     Net Book Value  
                   
Leasehold improvements   $ 218,054     $ (27,725 )   $ 190,329  
Machinery and office equipment     4,189,638       (2,741,401 )     1,448,237  
Furniture and fixtures     16,368       (16,368 )     -  
Land     273,118       -       273,118  
Asset retirement obligation     36,594       (6,325 )     30,269  
Office and industrial buildings     1,433,523       (281,181 )     1,152,342  
Equipment under capital lease     73,757       (50,681 )     23,076  
Construction in process & Spares     371,638       (52,295 )     319,343  
Total   $ 6,612,689     $ (3,175,976 )   $ 3,436,713  

 

December 31, 2015   Cost     Accumulated Depreciation     Net Book Value  
                   
Leasehold improvements   $ 216,854     $ (23,096 )   $ 193,758  
Machinery and office equipment     4,190,838       (2,463,173 )     1,727,665  
Furniture and fixtures     16,368       (16,068 )     300  
Land     273,118       -       273,118  
Asset retirement obligation     36,594       (5,549 )     31,045  
Office and industrial buildings     1,433,523       (249,001 )     1,184,522  
Equipment under capital lease     73,757       (45,412 )     28,345  
Construction in process     197,322       -       197,322  
Spares     174,316       (34,863 )     139,453  
Total   $ 6,612,690     $ (2,837,163 )   $ 3,775,527  

 

For the six months ended June 30, 2016 and 2015, the Company recognized $338,654 and $335,051, respectively of depreciation expense. At June 30, 2016 and December 31, 2015, machinery and equipment with a cost of $73,757 and accumulated amortization of $50,681 and $45,412 respectively, were under capital lease. During the periods ended June 30, 2016 and December 31, 2015, the Company recognized $5,269, and $7,737, respectively, of depreciation expense related to these assets under capital lease.

 

  12  
     

 

NOTE 4 – SECURED PROMISSORY NOTES -RELATED PARTY

 

Related Party notes payable consists of the following at periods ended:

 

    As of
June 30, 2016
    As of
December 31, 2015
 
Secured Demand Promissory Note (provided by a related party) bearing interest of 4% per annum.   $ 1,708,205     $ 1,593,291  
                 
Secured Demand Promissory Note (provided by a related party) bearing interest of 12% per annum.     500,385       -  
                 
Secured Promissory Notes (provided by a related party -$1,000,000 in November 19, 2014) bearing interest of 12% per annum compounded annually, together with a five-year warrant to purchase up to one million shares of the Company’s common stock at an exercise price of $0.12 per share, and payable upon maturity in 2019 and secured by a security interest in substantially all of the assets of the Company and its subsidiaries.     1,173,591       1,100,961  
                 
Secured Promissory Notes (provided by a related party - $1,000,000 in August 29, 2013 and $2,000,000 in September 31, 2014) bearing interest of 12% per annum compounded annually, together with a five-year warrant to purchase up to three million shares of the Company’s common stock at an exercise price of $0.54 per share and payable upon maturity in 2018 and secured by a security interest in substantially all of the assets of the Company and its subsidiaries.     3,709,832       3,392,980  
Total     7,092,013       6,087,232  
Less: current portion     2,208,590       1,593,291  
Secured promissory notes – related party   $ 4,883,423     $ 4,493,941  

 

Continuity of Secured Promissory Notes – Related Party   As of
June 30, 2016
    As of
December 31, 2015
 
Face value of November 19, 2014 secured note payable   $ 1,000,000     $ 1,000,000  
Face value of August 29, 2013 secured note payable     1,000,000       1,000,000  
Face value of September 30, 2013 secured note payable     2,000,000       2,000,000  
Total face value of promissory notes payable     4,000,000       4,000,000  

Discount on November 19, 2014 secured notes payable (1,000,000 warrants)

    (58,082 )     (58,082 )
Discount on August 29, 2013 secured note payable (1,000,000 warrants)     (310,200 )     (310,200 )
Discount on September 30, 2013 secured note payable (2,000,000 warrants)     (600,400 )     (600,400 )
Accretion of discount on secured notes payable ($4,000,000 secured note payable)     527,875       431,007  
Interest on secured notes payable($4,000,000 secured note payable)     1,324,230       1,031,616  
Carrying value of Secured Promissory Notes   $ 4,883,423     $ 4,493,941  

 

The following annual payments of principal and interest are required over the next five years in respect to these related party notes payable:

 

Years Ending June 30,   Annual Payments  
2017   $ 2,208,590  
2018     -  
2019     3,709,832  
2020     1,173,591  
2021     -  
Total   $ 7,092,013  

 

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NOTE 5 – MORTGAGES PAYABLE AND CAPITAL LEASES

 

The Mortgages Payable and Capital Leases consists of the following at periods ending:

 

    As of
June 30, 2016
    As of
December 31, 2015
 
Mortgage in the amount of $280,000 Canadian dollars, bears simple interest at 7% per annum, secured by the land and building, and matured on June 15, 2015. Principal and interest were due, in their entirety, at maturity. In consideration for 10,000 shares, the maturity was extended from June 15, 2015 to December 15, 2015 and subsequently to June 15, 2016 by the Mortgage holder. The Company is in discussion with Mortgage holder in extending to December 15, 2016, but nothing has been formalized, and the mortgage is currently in default.   $ 215,320     $ 201,880  
                 
Equipment capital lease, bears interest at 5.85% per annum, secured by the equipment and matured in November 2015, repayable in monthly installments of approximately $516.     -       1,032  
                 
Equipment capital lease bears interest at 3.9% per annum, secured by the equipment and matures on May 10, 2016, Principal and interest were due, in their entirety, at maturity. The maturity was extended from May 10, 2015 to May 10, 2016 by the Lessor. The Company is in discussion with Lessor in extending to May 10, 2017, but nothing has been formalized, and the capital lease in currently in default.     20,150       19,761  
                 
Mortgage in the amount of $110,000, bears no interest, secured by the land and building, and matures in November 2016.     10,000       40,000  
                 
Total     245,470       262,673  
Less: current portion     245,470       262,673  
Mortgages payable and capital leases   $ -     $ -  

 

The remaining mortgage and capital lease obligations are due in the next six months.

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

Commitments

 

As of June 30, 2016, the Company has committed to purchase certain pieces of key machinery from vendors related to the future expansion of its operations. In addition to the payments made to these vendors classified as deposits on the accompanying unaudited condensed consolidated balance sheet. The Company will be required to pay approximately $495,000 upon the delivery of these assets.

 

The Company leased premises in Thorold, Ontario, Canada which was previously used in the operation Plastic2Oil (Canada), Inc. doing business as Regional Recycling of Niagara (“RRON”). During the third quarter of 2013, the Company determined that it would shut down the operations of RRON (see Note 12). 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 2013, 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. The property was vacated on November 10, 2015. On January 15, 2016, the Company entered into a Surrender of Lease agreement which terminated its lease, dated December 1, 2010, between Avondale Store Limited Properties and JBI, (Canada) Inc. relating to the Company’s premises located at 1786 Allanport Road, Thorold, Canada. The effective date of the termination was October 31, 2015. The premises was the site of the Company’s Regional Recycling Center, which was part of a business line that was discontinued by the Company in 2013. The Company anticipates the termination will save approximately $1,161,360 in lease payments over the original life of the lease which had a term ending on December 1, 2030. The Company will remain liable for unpaid rent of approximately $43,875, covering the period from May 2016 to October 2016.

 

Contingencies

 

As of June 30, 2016, the Company is involved in litigation and 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 unaudited condensed consolidated financial statements of the Company.

 

  14  
     

 

NOTE 7 – WARRANTS

 

Warrants

 

The following table summarizes the activities for the period.

 

          Weighted     Weighted  
    Warrants     Average     Average  
    Number     Exercise Price     Remaining Term  
OUTSTANDING, December 31, 2015     14,350,000     $ 0.19       1.5  
Issued     -       -       -  
OUTSTANDING, June 30, 2016     14,350,000     $ 0.19       1.5  

 

NOTE 8 – STOCK OPTIONS

 

There were no options granted during the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, 1,540,000 options are fully vested.

 

A summary of stock option activity for the six months ended June 30, 2016 is as follows:

 

    Outstanding     Weighted-Average     Aggregate  
    Stock Options     Exercise Price     Intrinsic Value (1)  
Balance as of December 31, 2015     1,628,000     $ 1.30     $ -  
Expired     (88,000 )     0.38       -  
Balance as of June 30, 2016     1,540,000     $ 1.12     $ -  
                         
Equity awards available for grant, net of restricted stock (811,576) at June 30, 2016     7,648,424                  

 

(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.

 

  15  
     

 

NOTE 9 – RELATED PARTY TRANSACTIONS

 

From June 2014 to June 30, 2016, Mr. Heddle, the Company’s Chief Executive Officer, made several personal loans to the company to provide working capital. As of June 30, 2016, the current aggregate outstanding balance including accrued interest at 4% per annum was $1,708,205. (See Note 4).

 

On February 11, 2016, the Company issued a promissory note in favor of Richard Heddle, the Company’s President, Chief Executive Officer and Chairman of the Company’s board of directors, to memorialize various advances which are expected to be made by Mr. Heddle to the Company from February 11, 2016 until March 31, 2016. As of June 30, 2016, the current aggregate outstanding balance including accrued interest at 12% per annum was $500,385. (See Note 5).The promissory note bears interest at the rate of 12% per annum. All principal and interest on the promissory note is due and payable in full by the Company on demand. The repayment of promissory note will be secured by assets of the Company. The proceeds of these advances are being used for working capital purposes.

 

At June 30, 2016 and December 31, 2015, the company’s accounts payable and accrued expenses included a $132,218 outstanding balance due to Heddle Marine Services, a business controlled by Mr. Richard Heddle, the company’s Chief Executive Officer and member of the Company’s board of directors. The amounts payable arose from payments made in 2014 by Heddle Marine on behalf of the company to a logistics company to transport fuel from the Niagara Falls site to the blending tanks at our facility in Thorold, Ontario, as well as for labor and material provided by Heddle Marine towards upkeep of our Canadian facilities including 2015 cleanup costs incurred in order to terminate the lease with Avondale properties on the discontinued RRON Operation.

 

NOTE 10 – SEGMENT REPORTING

 

For the six months ended June 30, 2016 and 2015 the Company had no revenue. The company’s processors were idle for all of 2015 and remained idle during the six months ended June 30, 2016.

 

When operating, 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

 

When operating, 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.”

 

P2O assets include the Company headquarters and various machinery and equipment used at the Niagara Falls Facility. At June 30, 2016, total long-lived assets of $2,703,248 and $233,877 were located in the United States and Canada, respectively. As of December 31, 2015, total long-lived assets of $3,010,831 and $258,056 , were located in the United States and Canada, respectively. The mortgage payable of $215,320 and the equipment capital lease of $20,130, both disclosed in Note 5, relate to assets held in Canada. The mortgage payable of $10,000 on November 31, 2016 disclosed in Note 5, relates to assets held in United States.

 

NOTE 11 – 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.

 

NOTE 12 – DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

 

Regional Recycling of Niagara

 

On January 15, 2016, the Company entered into a Surrender of Lease agreement which terminated its lease, dated December 1, 2010, between Avondale Store Limited Properties and JBI, (Canada) Inc. relating to the Company’s premises located at 1786 Allanport Road, Thorold, Canada. The effective date of the termination was October 31, 2015. The premises was the site of the Company’s Regional Recycling Center, which was part of a business line that was discontinued by the Company in 2013. The Company anticipates the termination will save approximately $1,161,360 in lease payments over the original life of the lease which had a term ending on December 1, 2030. The Company will remain liable for unpaid rent of approximately $43,875, covering the period from May 2016 to October 2016

 

NOTE 13 – SUBSEQUENT EVENTS

 

On August 8, 2016, the Company entered into a Subscription Agreement with an investor, pursuant to which, the Company sold to the investor in a private placement a $100,000 principal amount 12% Secured Promissory Note due on August 10, 2021, together with a five-year warrant to purchase up to 100,000 shares of the Company’s common stock at an exercise price of $0.12 per share.

 

  16  
     

 

ITEM 2. 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 the six months ended June 30, 2016 and 2015 the company has no revenue. The Company’s P2O processors were idle for all of 2015 and remained idle during the six months ended June 30, 2016.

 

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”). As of this filing date of the report, our two operating processors were idle and not producing fuel products. 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 June 30, 2016, we had exited all of these businesses and their results in all periods presented are classified as discontinued operations (see Note 12).

 

Our P2O business is a commercial manufacturing and production business. We plan to grow mainly from sale of processors, and secondarily from the sale of fuel products. Historically, our revenues have been derived primarily from our other segments and products, including those noted above as discontinued operations.

 

The following table highlights since inception the proceeds from financings, research and development expenditures, investment in property, plant and equipment and fuel produced:

 

    FY
2009-2011
    FY 2012     FY 2013     FY 2014     FY 2015     Total  
Financing proceeds   $ 12,316,292     $ 11,699,066     $ 7,072,752     $ 1,705,095     $ 25,000     $ 32,818,205  
Research & development expenditures   $ 1,540,942     $ 445,947     $ 465,671     $ 20,999     $ 1,653     $ 2,475,212  
Investment in property, plant & equipment   $ 4,480,435     $ 311,998     $ 2,581,555     $ 13,775       -     $ 7,387,763  
Fuel produced (in gallons)     -       317,224       337,813       12,959       -       667,996  

 

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Plastic2Oil Business

 

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 PK Clean, Vadxx Energy, Green Envirotec Holdings LLC, and RES polyflow, 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.

 

We continue our business strategy with the goal of becoming a leading North American company that transforms waste plastic into ultra- clean, ultra-low sulphur fuel.

 

When in operation, 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 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.

 

Our P2O processors have evolved to be modular solutions 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 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 processors and components for two additional processors at an outside vendor site which are included in the balance sheet as deposits. These processors were idle for all of 2015 and remained idle for the six months ended June 30, 2016. Our processors are capable of producing Naphtha, Fuel Oil No. 2 and Fuel Oil No. 6. Our P2O process also produces two by-products, a reusable 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. We have years of significant operating data and have solved numerous challenges that have blocked competitor success. Since inception we have produced a total of 667,996 gallons of fuel.

 

  18  
     

 

Listing on the OTCQB

 

At August 19, 2016, we had 124,756,158 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 “PTOI.” On August 19, 2016, the last trading day prior to the date of this filing, the closing price of the common stock on the OTCQB was $0.03.

 

Sources of Revenues and Expenses

 

Results of Operations – Six Months ended June 30, 2016 compared to Six Months Ended June 30, 2015.

 

Revenue

 

As we only recently shifted our business strategy to selling fuel processors, we did not derive any revenue from processor sales in 2015 or during the six months ended June 30, 2016. We did not derive any revenue from our Data Business for the six months ended June 30, 2016.

 

We had no fuel production or processor sales in the six months ended June 30, 2016. Consequently, there was neither fuel shipment nor fuel revenue. This was mainly due to management’s decision to shut down its production in the fourth quarter of 2013 due to the severe cold weather that caused damage to condensers and other components of our processors and the lack of operating cash. The damage requires substantial working capital for general repairs and replacement of damaged condensers and we have been unable to obtain the financing necessary to make these repairs. These processors were idle for all of 2014, 2015 and remain idle through the date of this filing. Management estimates the processors will remain idle until the company can raise additional capital, 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 usually 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.

 

As indicated earlier, we did not produce any fuel in 2016 and 2015 and we had no revenue from our Data Business segment for the six months ended June 30, 2016 and 2015. The Company’s operating expenses consisted of the following:

 

Operating Expenses

 

    For the Three month Ended
June 30,
    For the Six month Ended
June 30,
 
    2016     2015     2016     2015  
Selling, General and Administrative expenses                                
   Professional Fees   $ 21,676     $ 253,705     $ 67,044     $ 347,896  
   Compensation     131,252       220,852       270,008       441,415  
   Other     55,958       382,657       145,185       566,953  
Depreciation & Accretion     216,664       216,877       436,298       432,474  
Research & Development     -       -       -       1,653  
Total Operating Expenses   $ 425,550     $ 1,074,091     $ 918,535     $ 1,790,391  

   

We incurred operating expenses of $918,535 during the six months ended June 30, 2016, compared to $1,790,391 for the six months ended June 30, 2015. This $871,856 decrease was driven by a $280,852 in professional fees decrease from elimination of outside consultants, a $171,407 reduction in compensation from employee layoffs and $421,768 reduction of additional operational expenses. In 2015 the operational cost included approximately $320,000 from the settlement of the class action suit. Tight control on operating expenses provided the approximately $100,000 of additional reduction in operating expenses.

 

Non-Operating Expenses

 

Interest Expenses

 

For the six months ended June 30, 2016, we incurred net interest expense of $364,191 as compared to $293,293 for the six months ended June 30, 2015 on the related party secured promissory and short term notes.

 

Income Tax Expenses

 

For the six months ended June 30, 2016, and 2015, 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.

 

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Net Loss

 

We incurred a net loss of $1,282,760 for the six months ended June 30, 2016 as compared to a net loss of $2,095,213 for the six months ended June 30, 2015. These losses consisted of losses from continuing operations of $1,282,760 and $2,077,799 for the six months ended June 30, 2016 and 2015, respectively, and gains from discontinued operations of $0 and $17,414 for the six months ended June 30, 2016 and 2015, respectively.

 

Liquidity and Capital Resources

 

We do not have sufficient cash to operate our business which has forced us to suspend our operations until such time as we receive a capital infusion or cash advances on the sale of our processors. We intend to source additional capital through the sale of our equity and debt securities and other financing methods. We plan to use the cash proceeds from any financing to complete the repairs on Processors #3 to resume production of fuels for pilot runs and customer demonstrations. At June 30, 2016, we had a cash balance of $3,294. Our principal sources of liquidity in 2016 were the proceeds from the related party short-term loans from our chief executive officer.

 

As discussed earlier in this MD&A, our processors are currently idle and, thus, we are not producing fuel or generating fuel sales or processor 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 significant additional capital through the sale of our equity and debt securities and other financing methods to enable us to make the repairs, to meet ongoing operating costs and reduce existing liabilities. We also intend to seek cash advances or deposits under any new processor sale agreements and/or related technology licenses. Management currently anticipates that the processors will remain idle until the company can raise additional capital. 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 2016, or at all. In the interim, we anticipate that our level of operations will continue to be nominal, although we plan to continue to market our P2O processors with the intention of making P2O processor sales and technology licenses.

 

Our limited capital resources, lack of Revenue 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 financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

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Cash Flow from Operations

 

Cash used in operations was $456,374 and $1,068,253 for the six months ended June 30, 2016 and 2015, respectively. In 2016 and 2015 cash was mainly used to continue funding the minimum operating costs. The drop in cash used is from reduction in personnel, less use of professional consultants and tighter spending control.

 

Cash Flow from Investing Activities

 

Cash flow from investing activities was $25, and $50, for the six months ended June 30, 2016 and 2015 respectively from an increase in restricted cash.

 

Cash Flow from Financing Activities

 

Cash flow from financing activities was $441,205, and $937,555, for the six months June 30, 2016 and 2015, respectively. For 2016 and 2015, these amounts were mainly driven by the proceeds received from short-term notes from related parties.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements in the periods ended June 30, 2016 and 2015.

 

Transactions with Related Parties

 

From June 2014 to June 30, 2016, Mr. Heddle, the Company’s Chief Executive Officer, made several personal loans to the company to provide working capital. As of June 31, 216 and December 31, 2015, the aggregate outstanding balance including accrued interest at 4% per annum was $1,708,205 and $1,593,291 respectively. (See Note 4).

 

From January 2016 to June 30, 2016, Mr. Heddle, the Company’s Chief Executive Officer, made several personal loans to the company to provide working capital. At June 30, 2016, the aggregate outstanding balance including accrued interest at 12% per annum was $500,385. (See Note 4).

 

At June 30, 2016, the company’s accounts payable and accrued expenses included a $132,218 outstanding balance due to Heddle Marine Services, a business controlled by Mr. Richard Heddle, the company’s Chief Executive Officer and member of the Company’s board of directors. The amounts payable arose from payments made in 2014 by Heddle Marine on behalf of the company to a logistics company to transport fuel from the Niagara Falls site to the blending tanks at our facility in Thorold, Ontario, as well as for labor and material provided by Heddle Marine towards upkeep of our Canadian facilities including 2015 cleanup costs incurred in order to terminate the lease with Avondale properties on the discontinued RRON Operation.

 

In November 2014, we entered into a Subscription Agreement with Heddle Marine Services, a business controlled by Mr. Richard Heddle, the Company’s Chief Executive Officer and a member of the Company’s board of directors, pursuant to which we issued to Heddle Marine 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 $0.12 per share.

 

Critical Accounting Policies

 

Basis of Consolidation

 

The condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, Plastic2Oil (Canada) Inc., JBI CDE Inc., Plastic2OilI Re One Inc., and JBI Re #1 Inc., Plastic2Oil of NY #1, and Plastic2Oil Marine Inc.. The results of Javaco and Pak-It are consolidated and classified as discontinued operations for all periods presented (See Note 12). 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 long-lives assets, share based compensation, asset retirement obligations, inventory obsolescence, accrued liabilities and accounts receivable exposures.

 

Accounts Receivable

 

Accounts receivable represent unsecured obligations due from customers under terms requesting payments upon receipt of invoices 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.

 

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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   25-30 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 (See Note 12).

 

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. As of the date of the creation of the asset retirement obligation in the amount of $57,530, 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 in the unaudited condensed consolidated statements of operations. Increases in the asset retirement obligation resulting from the passage of time are recorded as accretion of asset retirement obligations in the unaudited condensed consolidated statements of operations. Actual expenditures incurred are charged against the accumulated obligations.

 

  22  
     

 

Environmental Contingencies

 

The Company records 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.

 

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 processor sales are recognized when the customer take possession of the processors since title to the goods and the risk of loss transfers from P2O to Customer upon delivery. P2O fuel 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 (e.g. Naphtha, Fuel Oil No.6 or Fuel Oil No. 2).

 

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. Resulting differences are reflected in accumulated other comprehensive income in the accompanying consolidated balance sheets. Foreign exchange loss of $99 and gain of $4,712 for monetary items are included as general and administrative expenses in the condensed consolidated statements of operations for the six months ended June 30, 2016 and 2015, respectively.

 

  23  
     

 

ITEM 3. 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 June 30, 2016 and December 31, 2015 was $2,208,590 and $1,593,291, 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.

 

  24  
     

 

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.

 

ITEM 4. 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 June 30, 2016. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of June 30, 2016 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.

 

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.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management has reported to the Board of Directors material weaknesses described under the heading Management’s Report on Internal Control over Financial Reporting” in Section 9A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

ITEM 5. Other Information

 

None.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Not applicable.

 

  25  
     

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

For a discussion of legal proceedings affecting the Company, see the information in Footnote 6, “Commitments and Contingencies”, to the financial statements, included in Part I of this Report.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

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

 

  26  
     

 

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.

 

  PLASTIC2OIL, INC.
     
Date: August 22, 2016 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   August 22, 2016
Richard Heddle   (Principal Executive Officer) and Chairman of the Board of Directors    
         
/s/ Philip J Bradley   Director   August 22, 2016
Philip J. Bradley        
         
/s/ Rahoul S. Banerjea   Chief Financial Officer   August 22, 2016
Rahoul S. Banerjea   (Principal Financial Officer and Principal Accounting Officer)    

 

  27  
     

 

Item 6. Exhibits

 

(a) Exhibits

 

101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

 

  28  
     

 

 

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