NOTE 15 – SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
Common stock to be issued in connection with acquisition of property, plant and equipment
|
|
$
|
35,120
|
|
|
$
|
26,979
|
|
Common stock to be issued in connection with various services rendered
|
|
$
|
1,397,796
|
|
|
$
|
-
|
|
Stock-based compensation
|
|
$
|
1,220,920
|
|
|
$
|
-
|
|
Short term loan settled through stock issuance
|
|
$
|
200,000
|
|
|
$
|
35,000
|
|
Short-term note receivable from sale of Pak-It
|
|
$
|
481,582
|
|
|
$
|
-
|
|
Mortgage arising on acquisition of property, plant and equipment
|
|
$
|
-
|
|
|
$
|
270,089
|
|
NOTE 16 – DISCONTINUED OPERATIONS
As of September 30, 2012, there were no remaining assets held for sale related to Pak-It or Javaco.
The balances of the assets held for sale as of December 31, 2011were as follows:
|
|
December 31, 2011
|
|
|
|
Pak-It
|
|
Javaco
|
|
Total
|
|
|
|
|
|
|
|
|
|
Inventory, net
|
|
|
$
|
288,254
|
|
|
$
|
204,403
|
|
|
$
|
492,657
|
|
Property, plant and equipment, net
|
|
|
|
382,436
|
|
|
|
15,700
|
|
|
|
398,136
|
|
Intangible assets, net
|
|
|
|
196,213
|
|
|
|
-
|
|
|
|
196,213
|
|
Net assets held for sale
|
|
|
$
|
866,903
|
|
|
$
|
220,103
|
|
|
$
|
1,087,006
|
|
The results of operations for the nine and three months ended September 30, 2012 and 2011 are as follows:
|
|
Javaco and Pak-It Statements of Operations
|
|
|
|
Nine Months Ended September 30,
|
|
|
Three months Ended September 30.
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Sales
|
|
$
|
947,711
|
|
|
$
|
4,608,781
|
|
|
$
|
58,564
|
|
|
$
|
956,178
|
|
Cost of sales
|
|
|
780,405
|
|
|
|
3,928,241
|
|
|
|
30,768
|
|
|
|
954,377
|
|
Gross profit
|
|
|
167,306
|
|
|
|
680,540
|
|
|
|
27,796
|
|
|
|
1,801
|
|
Operating expenses
|
|
|
324,614
|
|
|
|
1,512,451
|
|
|
|
102,982
|
|
|
|
385,608
|
|
Impairment of intangibles
|
|
|
-
|
|
|
|
2,254,870
|
|
|
|
-
|
|
|
|
-
|
|
Other income
|
|
|
48,030
|
|
|
|
77,637
|
|
|
|
47,049
|
|
|
|
40,416
|
|
Loss before income taxes
|
|
|
(109,276
|
)
|
|
|
(3,009,144
|
)
|
|
|
(28,137)
|
|
|
|
(343,391
|
)
|
Future income tax recovery
|
|
|
-
|
|
|
|
128,553
|
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(109,276
|
)
|
|
$
|
(2,880,591
|
)
|
|
$
|
(28,137)
|
|
|
$
|
(343,391
|
)
|
Sale of Pak-It
On February 14, 2012, 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 three and nine months ended September 30, 2011 have been classified as discontinued operations. No operations for the three and nine months ended September 30, 2012 have been included in condensed 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 (Note 6).
As of September 30, 2012, there were no remaining assets held for sale related to Pak-It. The balances of the assets held for sale as of December 31, 2011were as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
|
|
|
|
Inventory (net of impairment loss and reserve of $159,140)
|
|
$
|
288,254
|
|
Property, plant and equipment (net of depreciation and impairment loss of $211,433)
|
|
|
382,436
|
|
Intangible assets (net of amortization and impairment loss of $108,266)
|
|
|
196,213
|
|
|
|
|
|
|
Net assets held for sale
|
|
$
|
866,903
|
|
The results of operations from these assets have been reclassified and presented as results of discontinued operations for all periods presented.
Our statements of operations from discontinued operations related to Pak-it for September 30, 2011 are as follows:
Condensed Statements of Operations of Pak-It
|
|
Nine Months Ended September 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Sales
|
|
$
|
-
|
|
|
$
|
2,926,853
|
|
|
$
|
-
|
|
|
$
|
304,735
|
|
Cost of sales
|
|
|
-
|
|
|
|
2,561,345
|
|
|
|
-
|
|
|
|
485,530
|
|
Gross profit
|
|
|
-
|
|
|
|
365,508
|
|
|
|
-
|
|
|
|
(180,794
|
)
|
Operating expenses
|
|
|
-
|
|
|
|
1,332,868
|
|
|
|
-
|
|
|
|
240,617
|
|
Impairment of intangibles
|
|
|
-
|
|
|
|
1,900,000
|
|
|
|
-
|
|
|
|
-
|
|
Other income
|
|
|
-
|
|
|
|
37,230
|
|
|
|
-
|
|
|
|
40,407
|
|
Loss before income taxes
|
|
|
-
|
|
|
|
(2,589,953
|
)
|
|
|
-
|
|
|
|
(381,004
|
)
|
Future income tax recovery
|
|
|
-
|
|
|
|
128,553
|
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations, net of tax
|
|
$
|
-
|
|
|
$
|
(2,461,400
|
)
|
|
$
|
-
|
|
|
$
|
(381,004
|
)
|
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 three and nine months ended September 30, 2012 and 2011 have been classified as discontinued operations.
The Company accrued approximately $38,000 in severance and lease termination related expenses for the period ended September 30, 2012. During the quarter, the Company liquidated the inventory and fixed assets of Javaco for net proceeds of approximately $180,000.
As of September 30, 2012, there are no remaining assets held for sale related to Javaco. The balances of the assets held for sale as of December 31, 2011 were as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
|
|
|
Inventory (net of obsolescence reserve of $160,000)
|
|
$
|
204,403
|
|
Property, plant and equipment, (net of depreciation of $36,157)
|
|
|
15,700
|
|
|
|
|
|
|
Net assets held for sale
|
|
$
|
220,103
|
|
Our statements of operations from discontinued operations related to Javaco for the three and nine month periods ended September 30, 2012 and 2011 are as follows:
Condensed Statements of Operations of Javaco
|
|
Nine Months Ended September 30,
|
|
|
Three Months Ended September 30.
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Sales
|
|
$
|
947,711
|
|
|
$
|
1,681,928
|
|
|
$
|
58,564
|
|
|
$
|
651,443
|
|
Cost of sales
|
|
|
780,405
|
|
|
|
1,366,897
|
|
|
|
30,768
|
|
|
|
468,846
|
|
Gross profit
|
|
|
167,306
|
|
|
|
315,031
|
|
|
|
27,796
|
|
|
|
182,597
|
|
Operating expenses
|
|
|
324,614
|
|
|
|
387,827
|
|
|
|
102,982
|
|
|
|
148,397
|
|
Impairment of intangibles
|
|
|
-
|
|
|
|
354,870
|
|
|
|
-
|
|
|
|
-
|
|
Other income
|
|
|
48,030
|
|
|
|
-
|
|
|
|
47,049
|
|
|
|
9
|
|
Loss before income taxes
|
|
|
(109,276
|
)
|
|
|
(427,666
|
)
|
|
|
(28,137)
|
|
|
|
34,209
|
|
Future income tax recovery
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(109,276
|
)
|
|
$
|
(427,666
|
)
|
|
$
|
(28,137)
|
|
|
$
|
34,209
|
|
NOTE 17 – RISK MANAGEMENT
Concentration of Credit Risk and Economic Dependence
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 three and nine months periods ended September 30, 2012, 61% and 84% (September 30, 2011 – Nil and Nil), respectively, of total net revenues were generated from 3 (September 30, 2011 – Nil) customers. As at September 30, 2012 and December 31, 2011, 2 customers accounted for 41% and 73.5%, respectively of accounts receivable.
As at September 30, 2012 and December 31, 2011, 3 and Nil vendors accounted for 42% and Nil, respectively, of our total accounts payable.
NOTE 18 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events occurring after the balance sheet date and has identified the following:
In October 2012, the Company issued 41,399 shares of common stock that had previously been subscribed as compensation for services and recorded in the Condensed Consolidated Statement of Stockholders’ Equity for the period ended September 30, 2012.
In October 2012, the Company received a reimbursement of previously paid legal costs related to outstanding litigation from its insurance carrier in the amount of $247,603. This amount was recorded as a receivable during the period ended September 30, 2012 and was recorded as a reduction of selling, general and administrative expenses in the third quarter of 2012.
On October 17, 2012, the Company filed a registration statement on Form S-8 to register up to 10,000,000 shares of common stock under its 2012 Long-Term Equity Incentive Plan.
Item 2.
|
Management’s Discussion and Analysis of Financial Conditions and Results of Operations
|
The following management’s discussion and analysis (the “MD&A”) of the results of operations contains “forward looking information” within the meaning of applicable securities laws. Such statements include, but are not limited to, statements with respect to our beliefs, plans, strategies, objectives, goals and expectations, including expectations about our future financial or operating performance and ours 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 information. 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; our continued ability to access cost effective capital when needed; and no unexpected or unforeseen events occurring that would materially alter our current plans. All of these assumptions have been derived from information currently available to us including information we obtained 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 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 information 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 our inability to control commodity prices; risks associated with the regulatory environment within which we operate; 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 information are discussed in more detail in the section entitled “Risk Factors” in our most recent Annual Report, as may be supplemented or amended from time to time.
Some of the forward-looking information 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 us to benchmark the results of the Plastic2Oil business. These financial outlooks may not be appropriate for other purposes and readers should not assume they will be achieved.
We do not intend to, and we disclaim any obligation to, update any forward-looking information (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.
Business Overview
For financial reporting purposes, we operate two business segments, which are our fuel production business using our P2O solution and our Data Recovery & Migration Business. Previously, we operated a chemical processing and cleaning business, known as Pak-It as well as an electronic and video equipment distribution business, conducted by Javaco, Inc. (“Javaco”). As of December 31, 2011, substantially all of the assets of Pak-It were classified as held for sale and in February 2012, we sold Pak-It and accordingly, its operations have been classified as discontinued for all periods reported. During the second quarter, we determined that the business of Javaco was no longer a key component of our business and during the third quarter its operations were closed down. For all periods presented, the operations of Javaco have been shown as discontinued operations and the assets are classified as held for sale. During the quarter we liquidated the inventory and fixed assets of Javaco for approximately $180,000. For further information, please refer to our Current Report on Form 8-K dated July 9, 2012 filed with the SEC on July 13, 2012, as amended on October 10, 2012.
Our P2O business has begun the transition from research and development to a commercial production business. We anticipate that this segment will continue to grow and ultimately will account for substantially all of our revenues for the remainder of 2012 and periods thereafter. 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 solution is a proprietary process that converts waste plastic into fuel through a series of chemical reactions. We developed this process in 2009 and began 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 located at our Niagara Falls, New York facility. Currently, as of the filing of this report, we have one operational P2O processor and a second that is in start-up mode. Each of these processors are capable of producing naphtha, Fuel Oil No. 2 and Fuel Oil No. 6, which are fuels produced to the specifications published by ASTM International, the organization that establishes the international technical standards for fuel products. Our process also produces two by-products, an off-gas similar to natural gas and a petcoke carbon residue, both of which have a potential market value. We currently sell our fuel product 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 process
.
Our P2O process accepts mixed, unwashed waste plastics. Although many sources of plastic waste are available, we concentrate our feedstock procurement efforts on sources primarily including post-commercial and industrial waste plastic. Generally, this waste stream is costly for companies to dispose of, which makes it readily available for us to acquire. We believe our P2O process offers a cost-effective solution for businesses that currently have to pay to dispose of this type of waste.
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. In the future, we do not anticipate providing updates at a processor by processor level. However, in an effort to give a update, the following is the current status of our processors:
●
|
Processor #1 – This is our first processor that was built and provided key research and development data. During the second quarter of 2012, processor #1’s reactor began displaying severe signs of wear due to extensive research and development performed on it since 2010. In order to maximize future production from this processor, the original reactor was replaced. This reactor included a more modular design and several technical improvements to the original reactor. Processor #1 then had to be reassembled with certain pieces of updated hardware, mainly piping and connections that accommodated this nearly 20% larger reactor. Processor #1’s reconstruction and upgrade was completed during the fourth quarter of 2012 and currently is in start-up mode, however, we did not produce any fuel from processor #1 during the third quarter of 2012. The lack of production from processor #1 during the third quarter of 2012 was a factor that negatively impacted our revenue from the P2O business.
|
●
|
Processor #2 – This is the second processor which we built and began production late in the first quarter of 2012. During the latter part of the first quarter of 2012 and during all of the second quarter of 2012, processor #2 primarily produced No. 6 Fuel Oil and Naphtha. Early in the third quarter of 2012, we made the decisions that due to the considerably higher market price for No. 2 Diesel Fuel Oil as compared to that for No. 6 Fuel Oil and Naphtha, we would make modifications (i.e. the addition of a cyclone) to the processor to enable the consistent production of No. 2 Diesel Fuel Oil. The modification caused approximately two weeks of down time during July 2012. Since completion of this modification, processor #2 has been producing ASTM D975 #2, Fuel Grades 2 & 4. Processor #2 also continues to produce a small amount of light naphtha as a by-product of #2 fuel production. The Company continues to focus on producing high quality fuel products that have the potential to generate the highest revenue for us.
Additionally, during both July and August of the third quarter of 2012, we experienced issues with feedstock quality in the system that caused downtime. These issues resulted in the need to shut down the processor down and perform a full system clean out in order to remove the material causing the issues. The inability to process feedstock during these periods was a significant factor affecting our ability to generate more substantial revenue for the quarter. In September 2012, we were able to identify and remove the problem sources from our feedstock supply chain.
|
●
|
Other – All of the components for a third processor in our Niagara Falls facility have been ordered and nearly all of the key components have been received. We will begin assembly of the third processor in the very near future in Niagara Falls. We are continuing to negotiate the final site details with RockTenn and have ordered many of the longer lead time components for this site.
|
As mentioned above, during the third quarter of 2012, we were able to switch the output from processor #2 to a variety of fuel grades based on current market pricing. Routinely, our fuel buyers have communicated that they are very pleased with the quality of all of our fuel products. Our fuel is currently being sold without the need for additives or further refining, directly from our processors to our customers. We remain extremely satisfied with our processors’ ability to make a range of fuels, which allows us to take advantage of changing market conditions.
Data Recovery & Migration Business
In 2009 the Company purchased the Data Recovery & Migration Assets (“Data Assets”) from John Bordynuik, Inc., thereby providing the Company with the ability to operate what was once John Bordynuik, Inc.’s data restoration and recovery business. This was a business originally developed by our founder, John Bordynuik in 2006.
The Data Recovery & Migration Business is not as capital intensive as the other businesses of JBI, but is time consuming with regards to the allocation of the time of John Bordynuik, our founder. Revenues for this segment will vary based on the availability of Mr. Bordynuik to dedicate portions of his time to reading and interpreting the data from our customers’ media.
Results of Operations - Nine Month periods ended September 30, 2012 and September 30, 2011
Revenue Sources
For the nine month periods ended September 30, 2012 and 2011, we had total revenues of $665,897 and $221,653, respectively. These included P2O revenues of $595,516 and $221,653, respectively and Other Sales, consisting of revenues from our Data Recovery & Migration business of $70,381 and $Nil, respectively.
Our P2O revenues consist of sales of our No. 6 Fuel Oil, No. 2 Diesel Fuel Oil and Naphtha as well as sales of processed waste product (primarily paper fiber) from our Canadian Recycling Facility.
Data Recovery & Migration revenues consist of services provided by the Company in reading and restoring older forms of media that have been damaged or corrupted. As noted earlier, we are focusing our efforts and resources on our P2O business and, thus, for future reporting period periods, we anticipate revenues from our P2O business will represent an increasingly larger percentage of total revenues and revenues from our Data Recovery & Migration business to represent an increasingly smaller percentage of total revenues.
|
|
Nine months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
P2O Sales
|
|
|
595,516
|
|
|
|
221,653
|
|
Other Sales
|
|
|
70,381
|
|
|
|
-
|
|
Cost of Sales
For our P2O business, cost of sales consists of costs to procure the appropriate material for our processors as well as the costs of our Canadian Recycling Facility for processing and delivery of waste materials. Additionally, we incur costs to operate our P2O processors in Niagara Falls, NY.
These costs related to procurement, processing and transportation of material feedstock can vary greatly depending upon the type and quality of material, distance from our facilities and pre-processing required to prepare it to be fed into our P2O processors. As we continue to grow and have a need for more waste material, we will continue to refine our process and processing abilities in order to improve throughput and improve our cost structure.
The cost of sales related to the Data Recovery & Migration business mainly relate to the direct labor costs of employees who are specifically dedicated to performing certain data processing functions in preparing the data for recovery and review.
|
|
Nine months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
P2O Cost of Sales
|
|
|
493,136
|
|
|
|
50,539
|
|
Other Cost of Sales
|
|
|
52,097
|
|
|
|
-
|
|
Gross Profit
The gross profit is as follows:
|
|
Nine months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
P2O
|
|
|
102,380
|
|
|
|
171,114
|
|
Other
|
|
|
18,284
|
|
|
|
-
|
|
For the nine month period ending September 30, 2012, P2O gross profit was 17.2%, as compared to the same period in 2011, in which the gross profit was approximately 77.2%. The cost of sales during the third quarter 2012 was higher than in the prior periods primarily due to the processing of a significant amount of a particular feedstock that we were able to secure in large volumes and allowed us to maximize our processor up-time and revenues primarily in September 2012. This was a crucial short-term strategy to provide us with key data as we continue to enhance our production roll-out strategies. Our longer term strategy regarding this feedstock is to identify sources and channels at a significantly lower cost than paid during the quarter, in order to not only maximize revenues and processor up-time, but also to maximize our gross profit.
The gross profit for Data Recovery & Migration was 25.3%, as compared to Nil% in the same period of the prior year, due to the Company’s ability to perform certain services in the current year related to this business.
Operating Expenses from Continuing Operations
Operating expenses for the nine month period ended September 30, 2012 were $10,308,364 as compared to $10,279,657 for the same period of 2011. These expenses are comprised of the following elements:
|
|
Nine months Ended September 30.
|
|
|
|
2012
|
|
|
2011
|
|
Selling, general & administrative expenses
|
|
$
|
9,666,901
|
|
|
$
|
9,113,296
|
|
Depreciation of property, plant and equipment
|
|
|
446,021
|
|
|
|
269,525
|
|
Accretion of other long-term obligation
|
|
|
516
|
|
|
|
-
|
|
Research and development expenses
|
|
|
2,095
|
|
|
|
896,836
|
|
Impairment loss
|
|
|
192,831
|
|
|
|
-
|
|
|
|
$
|
10,308,364
|
|
|
$
|
10,279,657
|
|
Selling, general and administrative expenses consist primarily of personnel-related costs, legal costs, accounting costs and other professional, regulatory and administrative costs.
For the nine month period ended September 30, 2012, selling, general and administrative expenses increased by $553,605 over the same period of the prior year. This increase was driven by the granting of stock options to key senior executives and the related compensation expense recorded in the current period, as well as other stock based payment arrangements to contractors and employees. Additionally, as the Company continues our strive to commercial roll-out, we have slightly increased our headcount. Also, as we have begun the transition from a research and development company to a full commercial production company, certain costs that had in the past periods been classified as research and development due to the testing nature of these costs, have been proven and now are classified as both operating expenses and capitalized as costs in property, plant and equipment. These increases in costs were slightly offset by the reduction of accounting and legal service fees as well as the recording of a recovery of legal fees from our insurance carrier.
Depreciation costs are determined on a consistent basis for each of the periods with no revision to any estimated useful lives of the property, plant and equipment or the intangible assets to which these charges relate. In the nine month periods ended September 30, 2012, depreciation expenses were higher as we have continued to build our processors and make other necessary capital expenditures to develop the business.
Research and development expenses decreased by $894,741 for the nine month period ended September 30, 2012 as compared to the same period ending September 30, 2011. During the current year, we have begun to change our focus to the commercial roll-out of our processors. Thus the expenses previously incurred in refining our current processors are now included in operating costs and/ or capitalized as part of the costs of property, plant and equipment.
As mentioned above, during the second quarter, a safety and maintenance check was performed on processor #1. At that time it was determined that the reactor of processor #1 needed to be taken offline (i.e. no commercial production) in order to perform additional maintenance and retrofit the processor for future use. The Company recorded an impairment expense of $156,331. Additionally, in the first quarter of 2012, we determined that our legacy tape reading services would not be continued in the foreseeable future due to the time constraints on our Chief of Technology. As such, these assets were determined to no longer be of use and they were impaired for their full carrying value of $36,500. As noted above, due to the ability for Mr. Bordynuik to focus a small portion of his time completing outstanding Data Recovery & Migration projects, we were able to generate revenue in the third quarter from these assets.
Results of Operations - Three Month periods ended September 30, 2012 and September 30, 2011
Revenue Sources
For the three month period ended September 30, 2012, we had revenues of $189,634 as compared to $140,552, for the three month period ended September 30, 2011, respectively. Other Sales, consist of revenues from our Data Recovery & Migration business of $70,381 and $Nil, for the three month periods ended September 30, 2012 and 2011, respectively.
As described in the Plastic2Oil Business section above, during the months of July and August of 2012, we experienced downtime with processor #2 related to both a planned downtime while we installed hardware to maximize our production of No. 2 Diesel Fuel Oil as well as unplanned downtime due to feedstock quality issues. These downtimes resulted in low fuel production during those months. However, our fuel production in September 2012 rebounded such that it was the single highest fuel producing month (in gallons) that the Company has seen to date. In fact, this momentum in fuel productions continued through the month of October 2012.
Additionally, as described in the nine month comparison section above, we are focusing our efforts and resources on our P2O business and, thus, for future reporting period periods, we anticipate revenues from our P2O business will represent an increasing larger percentage of total revenues and revenues from our Data Recovery & Migration business to represent a smaller percentage of total revenues.
|
|
Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
P2O Sales
|
|
|
189,634
|
|
|
|
140,552
|
|
Other Sales
|
|
|
70,381
|
|
|
|
-
|
|
Cost of Sales
As described in greater detail in the nine month comparison section above, for our P2O business, cost of sales consists of costs to procure the appropriate material for our processors as well as the costs of our Canadian Recycling Facility for processing and delivery of waste materials. Additionally, we incur costs with the operating of our P2O processors in Niagara Falls, NY. Additionally, cost of sales includes the costs of procuring and processing waste product (primarily paper fiber).
The cost of sales related to the Data Recovery & Migration business mainly relate to the direct labor costs of employees who are specifically dedicated to performing certain processing functions in preparing the data for recovery and review.
|
|
Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
P2O Cost of Sales
|
|
|
188,958
|
|
|
|
23,010
|
|
Other Cost of Sales
|
|
|
51,217
|
|
|
|
-
|
|
Gross Profit
The gross profit is as follows:
|
|
Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
For the three months period ended September 30, 2012, P2O gross profits were 0.3%, as compared to the same period in 2011, in which the gross profit was approximately 83.6%. As described in the nine month section, the cost of sales during the third quarter 2012 was higher than in the prior periods primarily due to the processing of a significant amount of a particular feedstock that we were able to secure in large volumes and allowed us to maximize our processor up-time and revenues. This is crucial as we continue to enhance our production roll-out strategy. Additionally, downtime was increased due to adjustments to key components of processor #2, that were necessary to allow processing of additional types of feedstock and to allow for the production of our No. 2 Diesel Fuel Oil, which commands a significantly higher price per gallon than other fuels.
The gross profit for Data Recovery & Migration was 27.2%, as compared to Nil% in the same period of the prior year, due to the Company’s ability to perform certain services in the current year related to this business.
Operating Expenses from Continuing Operations
Operating expenses for the three month period ended September 30, 2012 were $3,301,673 as compared to $3,472,647 for the same period of 2011. These expenses are comprised of the following elements:
|
|
Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Selling, general & administrative expenses
|
|
$
|
2,822,486
|
|
|
$
|
2,978,680
|
|
Depreciation of property, plant and equipment
|
|
|
170,207
|
|
|
|
103,617
|
|
Accretion of other long-term obligation
|
|
|
88
|
|
|
|
-
|
|
Research and development expenses
|
|
|
-
|
|
|
|
390,350
|
|
|
|
$
|
2,992,781
|
|
|
$
|
3,472,647
|
|
As described in the nine month comparison above, selling, general and administrative expenses consist primarily of personnel-related costs, legal costs, accounting costs and other professional, regulatory and administrative costs.
For the three month period ended September 30, 2012, selling, general and administrative expenses decreased by $156,194 from the same quarter of the prior year. This decrease was mainly driven by significant decreases in the accounting, legal and other professional fees incurred by us in the current period coupled with the recovery of legal fees related to previous litigation from our insurance carrier. These decreases were offset by the expenses recorded relating to the granting of stock options to key senior executives and the related compensation expense recorded in the current period.
As described in the nine month comparison section above, depreciation costs are determined on a consistent basis for each of the periods with no revision to any estimated useful lives of the property, plant and equipment or the intangible assets to which these charges relate. In the three month periods ended September 30, 2012, depreciation expenses were higher as we have continued to build our processor and make other necessary capital expenditures to develop the business.
Research and development expenses decreased by $390,350 for the three month period ended September 30, 2012 as compared to the same period ended September 30, 2011. During the current year, we have significantly decreased our research and development efforts and focused mainly on the commercial roll-out of our processors and additional processors at our sites and elsewhere. During the current period, we have begun to change our focus to the commercial roll-out of our processors. Thus the expenses previously incurred in refining our current processor are now included in operating costs and/ or capitalized as part of the costs of property, plant and equipment.
.
Liquidity and Capital Resources
As of September 30, 2012 we had cash and cash equivalents of $2,763,962 on hand compared to $2,511,469 at December 31, 2011.
Our cash flow for the periods can be summarized as follows:
|
|
2012
|
|
|
2011
|
|
Net loss from continuing operations
|
|
$
|
(9,783,637
|
)
|
|
$
|
(10,102,713
|
)
|
Net loss from discontinued operations
|
|
|
(109,276
|
)
|
|
|
(2,880,591
|
)
|
Items not affecting cash from continuing operations
|
|
|
2,726,513
|
|
|
|
4,665,409
|
|
Items not affecting cash from discontinued operations
|
|
|
5,591
|
|
|
|
2,580,278
|
|
Working capital changes from continuing operations
|
|
|
(638,584
|
)
|
|
|
484,109
|
|
Working capital changes from discontinued operations
|
|
|
(5,592)
|
|
|
|
(91,375
|
)
|
Investing activities
|
|
|
(3,511,587
|
)
|
|
|
(1,270,489
|
)
|
Financing activities
|
|
|
11,569,066
|
|
|
|
8,298,854
|
|
Increase in cash
|
|
$
|
252,493
|
|
|
$
|
1,683,482
|
|
At September 30, 2012 we reported working capital of $2,522,140. We are not yet generating positive cash flows from operations and likely will not during the fiscal year ending December 31, 2012. As we continue to make progress in executing our business plan, we anticipate achieving increases in production and revenue that we expect will allow us to achieve cash flow positive results during the first quarter of 2013. In addition, we expect to continue to require additional financings to meet our anticipated targets for the growth of our operations.
We do not currently generate sufficient cash to fund operations and we have limited capital resources. To fund operations during its development, we have primarily relied on net proceeds from the sale of its equity securities in private placement transactions. If we fail to raise additional capital as and when needed, then we may be forced to severely curtail or cease operations. There can be no assurance that financing will be available on favorable terms or at all. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders.
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 the ability to raise additional capital. The audit report prepared by our independent registered public accounting firm relating to its consolidated financial statements for the year ended December 31, 2011 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
In each of the periods presented, we have significant charges included in the reported Net Loss that had no effect on cash flows. In both periods, these charges included, but are not limited to, depreciation of property, plant and equipment, amortization of intangible assets, allowances for uncollectible amounts, amortization of stock compensation expense and stock issued for services.
Investing activities include our cash investment in property, plant and equipment, cash held in attorney trusts and deposits on assets which amounted to $3,511,587 in the current period. This amount includes $35,120 that we have committed to settle through the issuance of shares. As we continue to grow and expand the number of processors and P2O plant locations and make necessary modifications to the processors and other enhancements, we expect to continue to make significant investment in property, plant and equipment in future periods.
Financing activities represent the cash received upon the issuance of common shares during the period, proceeds from short-term loans and the repayment of such short-term loans and proceeds from stock subscription advances. We expect to continue to rely upon funds raised from private placements, additionally we could potentially undertake future equity and debt offerings to implement our growth and construction plans and meet our liquidity needs going forward.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Transactions with Related parties
In November 2010, a member of the Board of Directors entered into a short-term loan agreement with us in the amount of $30,000 (see Notes 7 and 13 to our condensed consolidated financial statements included in this report). This note was repaid in cash during the second quarter of 2012.
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 7 and 13 to our condensed 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 7 and 13 to our condensed consolidated financial statements included in this report). This note was repaid in cash during the second quarter of 2012.
Critical Accounting Policies, Estimates and Assumptions
We believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of the financial condition and results of operations and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
We have disclosed our accounting policies in “NOTE 2 – SUMMARY OF ACCOUNTING POLICIES” in the Notes to the Condensed Consolidated Financial Statements included above and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The following accounting policies provide an update to those included under the same captions in our Annual Report on Form 10-K.
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 those estimates. Significant estimates include amounts for impairment of intangible assets, asset retirement obligations, environmental contingencies, revenue recognition and share based compensation.
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 allocated 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. Accounts receivable determined to be uncollectible are recognized using the allowance method. The allowance for uncollectible accounts for the period ended September 30, 2012 and year ended December 31, 2011 was $67,325 and $331,695, respectively.
Impairment of Long-Lived Assets
We review 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 us 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.
As of September 30, 2012 and December 31, 2011, we determined that due to the time constraints placed on our founder and current Chief of Technology, John Bordynuik as the growth of the P2O business has been nearly his sole focus and where the vast majority of his time is spent, it is unable to determine when our magnetic tape reading, data business, will begin producing revenues. Therefore, we cannot justify the value of the assets on our books. As such, we determined that these assets no longer had value to us and recorded an impairment charge of $36,500 to write the assets down to $Nil. While we generated revenues in the third quarter of 2012 related to the Data Recovery & Migration Business, we do not expect these revenues to be continuous or regular due to the ability of Mr. Bordynuik to focus on these matters.
The determination and calculation of impairment of a long-lived asset inherently involves estimating the future cash flows to be derived from the asset or group of assets, using discount rates to determine these future cash flows commensurate with the uses of the assets and ultimately determining if any future value can be derived from these assets.
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 amortization expense on the consolidated statements of income. Increases in the asset retirement obligation resulting from the passage of time are recorded as accretion of other long-term liabilities in the consolidated statements of operations. Actual expenditures incurred are charged against the accumulated obligation. The balance of such asset retirement obligation is included in accrued expenses for the short-term portion and other long-term liabilities for the long term portion, with balances of $29,209 and $28,566 as of September 30, 2012 and December 31, 2011, respectively.
In determining our asset retirement obligations, we use estimates of the expected future costs to return our property to the state in which we originally obtained the property, which includes estimating costs for waste disposal, any potential clean-up of the property, disposal of assets on site and the engineering and labor costs to perform such work. These estimates can vary based on current costs to perform such work versus the future costs we estimate to perform this work, additional costs and fees we may incur to dispose of the aforementioned products and assets and any other future regulations which we may be subject to.
Environmental Contingencies
We records environmental liabilities at their undiscounted amounts on our balance sheet 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 evaluates 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
We recognize revenue when it is realized or realizable and collection is reasonably assured. We consider 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. We negotiate 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).
Data Recovery & Migration Sales are recognized when the terms of the recovery agreement are completed and the migrated data is returned to the customer in a readable format. Pricing for these services is agreed to prior to the consummation of the work and invoiced subsequent to completion.
Stock Based Compensation
We account for stock-based compensation under the provisions of ASC Topic 718, “Compensation
—Stock Compensation
” We recognize compensation cost in our financial statements for all share based payments granted, modified, or settled during the period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the related vesting period.
Estimating stock based compensation expense under a Black-Scholes model requires us to make assessments of the estimated life of the options prior to exercise, the volatility of the stock price at the time of the grant, an estimate of the percentage of granted shares that will be forfeited during the life of the option grants and the estimated dividend rate of the stock. At the time of valuation of the stock based compensation, management estimates these amounts to the best information that is available, however, should actual results vary from these estimates, the values assigned to the stock based compensation could change.