Overview
We produce fuel products mainly from mixed, unwashed waste plastics for distribution across a number of markets. We continue to execute on our business strategy with the goal of becoming a leading North American fuel company that transforms waste plastic into ultra-clean, ultra-low sulphur fuel.
Currently, we provide environmentally-friendly solutions through our products and technologies. Our primary product 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. 6, Fuel Oil No. 2 and Naphtha for various uses by our customers. We own and operate our processors and have the capability to produce and store the fuels at, and ship from, our facilities in Niagara Falls, NY. We sell the fuels we produce to customers through two main distribution channels, fuel wholesalers and directly to commercial and industrial end-users. At March 14, 2013, we had two fully-permitted and operational P2O processors at our Niagara Falls, NY facility and a third processor was being assembled in Niagara Falls, NY and expected to be operational during 2013.
For financial reporting purposes, we operate in two business segments, (i) our P2O solution, which sells the fuel produced through our processors as well as processed waste paper fiber through our recycling facility and (ii) data storage and recovery (the “Data Business”). Previously, we operated a chemical processing and cleaning business, known as Pak-It and a retail and wholesale distribution business known as Javaco, Inc. As of December 31, 2012, we had exited both of these businesses and their results in all periods presented are classified as discontinued operations.
Our P2O business has been operating in a limited commercial capacity since December 2010 and we anticipate that this line of business will account for a majority of our revenues in 2013 and periods thereafter. Historically, however, our revenues have been partially derived from our other lines of business and products, Javaco and Pak-It, which are classified in this Annual Report as discontinued operations. In the year ended December 31, 2012, we had total sales of approximately $986,000, of which approximately $916,000 were derived from our P2O business and approximately $70,000 were derived from our Data Business. In the year ended December 31, 2011, we had total sales of approximately $288,000 from our P2O business. We had no sales derived from our Data Business during this period.
We conduct our P2O business at our facilities located in Niagara Falls, New York and Thorold, Ontario, Canada. Our corporate address is 20 Iroquois Street, Niagara Falls, NY 14303.
Organizational History
We were incorporated on April 20, 2006 under the laws of the State of Nevada under the name 310 Holdings Inc. (“310”). On April 24, 2009, John Bordynuik, purchased 63% of the issued and outstanding shares of 310 and became our chairman and chief executive officer. On June 25, 2009, we purchased certain assets from John Bordynuik, Inc., a corporation founded by Mr. Bordynuik. The assets acquired included tape drives, computer hardware, servers and a mobile data recovery container to read and transfer data from magnetic tapes. On August 24, 2009, we acquired all of the outstanding shares of Javaco, Inc., a wholly owned subsidiary of Domark International, Inc. From inception until August 2009, we were a shell company within the meaning of the rules of the Securities and Exchange Commission. On September 30, 2009, we acquired 100% of the issued and outstanding equity interests of Pak-It, LLC. We formed JBI (Canada) Inc. on February 9, 2010 for purposes of distributing Pak-It products in Canada. We formed Plastic2Oil of NY, #1, LLC on May 4, 2010, for the development and commercialization of our Plastic2Oil business in Niagara Falls, NY.
On October 5, 2009, we changed our corporate name to JBI, Inc. On February 10, 2012, we sold substantially all the assets of Pak-It. On July 9, 2012, we announced the closure of our Javaco operations and sold substantially all of its assets to an unrelated third party. Our common stock is quoted on the OTCQB Market under the symbol “JBII”.
Organizational Chart
The following chart outlines our corporate structure, as of March 14, 2013 and identifies the jurisdiction of organization of each of our material subsidiaries. Each material subsidiary is wholly-owned by the company.
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JBI, Inc.
(Nevada)
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JBI (Canada), Inc.
(Ontario, Canada)
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Plastic2Oil of NY #1, LLC
(New York)
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JBI, Inc.
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Parent company with corporate office in Niagara Falls, NY;
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Plastic2Oil of NY #1, LLC
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Operates our P2O business in Niagara Falls, NY.
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JBI (Canada) Inc.
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Conducts our P2O business in Canada, including management of our recycling center and our fuel blending site.
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Our Primary Product - Plastic2Oil
P2O Overview
Our P2O process is proprietary and converts waste plastic into fuel through a series of chemical reactions. We developed this process in 2009 and began very limited commercial production in 2010 following our receipt of a consent order from the New York State Department of Environmental Conservation (“NYSDEC”) allowing us to commercially operate our first large-scale P2O processor at our Niagara Falls, New York facility. Currently, we have two operational P2O processors, which produce Naphtha, Fuel Oil No. 2 and Fuel Oil No. 6, all of which are fuels produced to the specifications published by ASTM. Our process also produces two by-products, an off-gas similar to natural gas and a petcoke carbon residue. We primarily use our off-gas product in our operations to fuel the burners in our P2O processors. We currently have contracts to sell our fuel products through two main distribution channels comprised of fuel wholesalers and directly to commercial and industrial end-users.
Our P2O process accepts mainly mixed, unwashed waste plastics. Although many sources of plastic waste are available, we have focused our feedstock sources on primarily post-commercial and industrial waste plastic. Generally, we believe that this waste stream is more costly for companies to dispose of, making it more readily available in large quantities and cheaper for us to acquire than other potential types of feedstock. We believe our P2O process offers a cost-effective solution for businesses that currently have to pay to dispose of these types of waste.
Currently, we understand that there are several plastic-to-oil processes operational globally. These facilities employ a wide range of technologies and yield varying purities of fuel output. We believe that our process has many advantages over other commercially available processes in that our P2O solution requires a comparatively small initial capital investment and yields high-quality, ultra-low sulphur fuel, with no need for further refinement. Additionally, our process uses comparatively little energy and physical space, which, in our view, makes it better suited for high-volume production and expansion to multiple sites.
P2O Process and Operations
There are various processes in existence for converting plastic and other hydrocarbon materials into products for use in the production of fuels, chemicals and recycled items. These processes include: pyrolysis (conversion using dry materials at high pressure and temperature in the absence of oxygen), catalytic conversion (conversion using a catalyst for stimulating a chemical reaction), depolymerization (conversion using superheated water and high pressure and temperature) and gasification (conversion at high temperature using oxygen or steam). Our patent-pending P2O conversion process involves the cracking of the plastic hydrocarbon chains at ambient pressure and comparatively low temperature using a catalyst.
We have developed our Plastic2Oil processor to be continuously running, energy efficient and environmentally-friendly while converting waste plastics into end-user ready, ultra-clean, ultra-low sulfur fuels. The fuels produced can be used directly by our customers without further refining or processing. Over a three year period, we have successfully scaled our processing operations from a one gallon processor to two processors, each permitted to feed up to 4,000 pounds of feedstock per hour. Some of the milestones that we have reached include:
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Manufacturing and operating multiple processors at our Niagara Falls, NY site;
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From inception, the processors were designed with safety and green emissions as top priorities. There have been zero time loss accidents to date;
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Standardization and modularization of the components of our processors;
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Ability to continuously feed waste plastic 24 hours a day;
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Approximately 86% of waste plastic by weight is converted to liquid fuel conversion;
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Approximately 8% of waste plastic by weight is converted to gas and is used to fuel the process;
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Operating at atmospheric pressure, not susceptible to pinhole leaks and other problems with pressure and vacuum-based systems;
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No requirement for incinerators, thermal oxidizers or scrubbers and no stack monitoring is necessary;
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Three stack tests (two on the initial processor and one on the second processor) conducted by Conestoga-Rovers & Associates (“CRA”), prove emissions are extremely low;
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Process validation by SAIC Energy, Environment & Infrastructure, LLC and IsleChem, LLC, highly credible third-party independent labs;
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Permitted to operate three processors commercially in New York by the NYSDEC; and
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Continuous and ongoing fuel orders by our customers.
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Processor Input
Waste Plastics
: We are able to feed mainly mixed unwashed waste plastics into the Plastic2Oil processors. Waste plastic is widely available and we are focused on maximizing the types and densities of the plastic we procure for optimal processor performance.
Fuel Produced
: The fuel produced in our processors is ultra-low sulfur fuel and is ready for end-users without the need for further refinement.
Off-gas
: Approximately 8-10% of waste plastics fed into the processors are converted to a mixture of hydrogen, methane, ethane, butane and propane gas (“off-gas”). Once our processors are in a state to begin the P2O process, they use their own off-gas to fuel the burners in the process.
Residue
: There is approximately 2-4% residue from our process, which is petroleum coke or carbon black (“petcoke”) that needs to be removed on a periodic basis.
We are currently permitted to feed two tons, or 4,000 pounds, of waste plastic per hour into each processor by a continuous conveyor belt where it is heated by a burner that mainly burns off-gases produced from the P2O process. Plastic hydrocarbons are cracked into various shorter hydrocarbon chains and exit in a gaseous state. Any residue, metals and or non-usable substances remain in the reactor and are periodically removed. Through our proprietary process Fuel Oil No. 6, Fuel Oil No. 2, and Naphtha are condensed from the reactor through the remainder of the process. The fuel output is then transferred to storage tanks automatically by the system. Our process is mainly operated by an automated computer system that controls the conveyor feed rate, system temperatures, off-gas systems and the pumping out of newly created fuel to storage tanks. The plastic to liquid fuel conversion is approximately 86% by weight. Therefore, 20 tons of plastic would be processed into approximately 4,100 gallons of fuel. At March 14, 2012, we had two operational processors at our Niagara Falls, NY facility and a third processor being assembled.
Our processor has evolved significantly since inception. It currently takes up approximately 3,000 square feet of space, and is less than 20 feet high at its highest point. General operations involve a machine operator responsible for the monitoring of the control room monitors and cameras which track the machine’s operations and operating parameters, as well as a material handler loading plastic onto the machine’s in-feed system.
During February 2012, we completed the construction of our second processor. This processor was the first built in the modular design that we created in order to standardize the components in anticipation of our commercial rollout.
During the second quarter of 2012, we noted during a routine maintenance and safety inspection that the reactor on our first processor was 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. We then had to reassemble the first processor with certain pieces of updated hardware, mainly piping and connections that accommodated this nearly 20% larger reactor. The reconstruction and upgrade to this processor was completed during the fourth quarter of 2012 and produced minimal fuel during the year. We plan to continue to operate this processor in the future, but expect lower productivity compared to our newer processors.
In February 2012, we received final approval from the NYSDEC to modify our Air State Facility Permit allowing us to run our processor at the increased rate of 4,000 pounds per hour. Subsequently, in July 2012, the NYSDEC amended our solid waste permit to allow our processors to feed up to 4,000 pounds of plastic per hour into the each of our processor. This increase allows us to feed heavier, denser material into the processor at a higher rate, maximizing the fuel production of the processor while running.
Feedstock
Our P2O process primarily uses post-commercial and industrial waste plastic that might otherwise be sent to a landfill by the commercial and industrial producers of such waste plastic. We believe that this can be costly for these producers due to the large volumes of plastic waste that they generate. As such, our business model is premised on our ability to accept numerous types of waste plastics from such sources at a relatively low cost. We believe that our ability to accept mainly mixed, unwashed waste plastics is a significant advantage of our P2O process compared to similar operations in our industry.
Fuel Products
Our P2O process makes both light and heavy fuel products which are; specifically Naphtha, Fuel Oil No. 2 and Fuel Oil No. 6, as defined by ASTM. Our process also generates two main by-products, an off-gas similar to natural gas and a carbon residue known as petcoke.
Naphtha is a very light fuel product that is used as a cutting component for both high and regular grade gasoline. Fuel Oil No. 2 is a mid-range fuel commonly known as diesel and has numerous transportation, manufacturing and industrial uses. Fuel Oil No. 6 is a heavy fuel generally used in industrial boilers and ships. Our process produces high quality, ultra-low sulphur fuels, without the need for further refinement which enables us to sell our fuel directly from our processors to the end-user.
The off-gas that is produced by the P2O process is used to fuel the burner that heats the entire processor.
P2O Facilities
We currently have two main operating facilities that we use in our P2O business, our P2O plant and our recycling facility, as well as a third facility, our fuel blending site, for use in the future. These are briefly described below. Additional information on our properties can be found in Item 2 of this report.
Niagara Falls, NY facility: Our Niagara Falls, NY facility currently has two operating buildings, a 10,000 square foot building that currently houses two commercial-scale P2O processors and a 7,200 square foot building that will be utilized for expansion of our P2O business and currently houses various other fabrication equipment and parts relevant to the process. Our Niagara Falls operations are situated on eight acres which can accommodate expansion of our growing operations. This facility also serves as the center of our research and development operations and our administrative offices.
Recycling Facility: We lease an 18,000 square foot recycling facility located on a nine acre site in Thorold, Ontario approximately 15 miles from our Niagara Falls, NY facility. The facility primarily accepts, separates and processes mixed paper and cardboard and various grades of plastic waste. From this facility, we transport the feedstock to our Niagara Falls, NY facility for processing into fuel and sell processed waste paper fiber to paper mills.
Blending Site: We own a 250,000 gallon fuel-blending facility in Thorold, Ontario, which, when in use, would allow us to blend and self-certify certain fuels that are produced from our process to meet government specifications.
Sales & Distribution
We currently sell our fuel products through two main channels; fuel brokers and direct to end-users. We sell through long-term contracts with customers as well as to customers who purchase our fuel through the issuance of routine purchase orders. Most of our customers have continued to increase their fuel purchases as we have increased our production. We have also added new customers as we have grown. Customer feedback suggests that they appreciate the high quality of our fuels. In fact, to date, we have not had a single load of our fuel rejected for quality issues.
During the years ended December 31, 2012, 2011 and 2010, 58.0%, 50.5% and Nil % of total net revenues were generated from three customers. As at December 31, 2012 and 2011, three and Nil customers, respectively, accounted for 75.8% and Nil % of accounts receivable.
Suppliers
The principal goods that we require for our P2O business are the waste plastic that we use as feedstock for production of our fuels. We collect waste plastics, from commercial and industrial businesses that generate large amounts of this waste stream.
We also rely on third party manufacturers for the manufacture of many components of our processors including kilns and distillation towers. During the years ended December 31, 2012, 2011 and 2010, 25.5%, 8.3% and Nil % of total net purchases revenues were generated from four vendors. As at December 31, 2012 and 2011, three and two vendors, respectively, accounted for 36.6% and 42.9%, respectively, of accounts payable.
Licenses, Permits and Testing
We maintain the following permits and licenses in connection with the operation of our P2O business.
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License/Permit
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Issuing Authority
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Registration Number
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Issue/Expiration Date
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Air Permit
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NYSDEC
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9-2911-00348/00002
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06/30/2014
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Solid Waste Permit
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NYSDEC
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9-2911-00348/00003
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06/30/2014
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Bulk Fuel Blending License
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Ontario Technical Standards & Safety Authority
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000184322
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10/12/2013
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Waste Disposal Site
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Ontario Ministry of the Environment
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A121029
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Perpetual (subject to annual reviews)
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In 2010, our P2O process and processors were tested by IsleChem, LLC, an independent chemical firm providing contract research and development, manufacturing and scale-up services, using two small prototypes of our P2O processor. The IsleChem test results indicated that our process is both repeatable and scalable. Following this testing, we assembled a large-scale P2O processor capable of processing at least 20 metric tons of plastic per day. In September 2010, we had a stack test performed by Conestoga-Rovers & Associates (“CRA”), an independent engineering and consulting firm, which concluded that, with a feed rate of 2,000 pounds of plastic per hour, our processor’s emissions were below the maximum emissions levels allowed by the NYSDEC simple air permit, which is needed to commercially operate the P2O processor at that location. We used the CRA test results to apply for the required operating permits and in June 2011 we received an Air State Facility Permit (“Air Permit”) and Solid Waste Management Permit (“Solid Waste Permit”) for up to three processors at the Niagara Falls, NY facility. In December 2011 we had a second stack test performed by CRA for an increased rate of 4,000 pounds per hour. In January 2012, we received a final emissions report from CRA confirming that emissions were considerably decreased with an increased feed rate. In December 2012, we had a stack test performed on the second processor
The emissions tests conducted by CRA on our processors are summarized in the following table:
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Emissions
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Units
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Original Stack Test (2010) – Processor #1
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Final Stack Test (Dec. 2011) – Processor #1
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Stack Test (Dec. 2012) – Processor #2
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CO – Carbon Monoxide
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ppm
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3.16
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3.1
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3.7
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SO
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- Sulphur Dioxide
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ppm
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0.23
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0.02
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0.39
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NOx – Oxides of Nitrogen
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ppm
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86.4
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15.1
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21.3
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TNMHC – Total Non-Methane Hydrocarbons
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ppm
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0.25
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3.92
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0.62
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PM – Particulate Matter
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Lbs./hr.
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0.016
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0.002
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0.012
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Hexane
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Lbs./hr.
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Not tested
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0.00001
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0.0013
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Industry Background
Alternative fuels are generally considered to be any substances that can be used as fuel, other than conventional fossil fuels such as naturally occurring oil, gas and coal. There have been many approaches taken to producing alternative fuels, including conversion of corn oil, vegetable oil and non-food-based materials. These approaches have demonstrated varying degrees of commercial potential. Some of the challenges that alternative fuel producers have faced include high feedstock supply costs, lower perceived value of fuel product, higher capital costs and dependence on government regulations for economic viability.
We believe our company is distinguishable from other producers of alternative or renewable fuels because our P2O solution represents a process and product that is commercially viable and designed to provide immediate benefit for industries, communities and government organizations with waste plastic recycling challenges. Our business model is premised on the need for a more efficient and cost-effective alternative to disposing of waste plastic in jurisdictions where the cost of transporting and landfilling large amounts of plastic is quite costly.
Competition
Our P2O business has elements of both a recycling business and a fuel refiner/ production business. 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 mild competition in the plastics-to-energy market, including competition from Envion, Polymer Energy, LLC, and Agilyx, each of which have each developed alternative methods for obtaining and generating fuel from plastics. See “Risk Factors—Risks Related to Our Business”.
Business Model
We believe that our Plastic2Oil business model provides a unique proposition for both the supply side and the end-user side of the waste-to-fuel value chain. Our P2O technology is positioned to link these two sides by offering economic incentives in both directions. We believe P2O offers value to suppliers of waste plastic by saving transport and landfill Tipping Fees, and value to fuel end-users by providing ultra-low sulphur green fuel. Given these incentives, the Company believes that its Plastic2Oil business will be sought after by those industries that can benefit from the added value that we provide, thus allowing the potential for our company’s growth.
Business Strategy
Our long-term strategy is to become the leading vertically-integrated, North American fuel company that is a plastic recycler, fuel processor and fuel seller. The key elements of our strategy to achieve this goal are as follows:
Marketing Strategy
We target post-commercial and industrial waste plastic partners. We believe this allows us to identify sources of large plastic waste streams, such as industrial sites, material recovery facilities, etc., and to sell fuel to customers through two main distribution channels: fuel wholesalers and directly to commercial and industrial end-users. We are also partnering with businesses and municipalities who collect waste plastics. Our vision is to help redirect these waste plastic streams, preventing them from entering landfills.
Manufacturing Strategy
Our P2O business model allows us to simultaneously pursue multiple commercial opportunities across the waste plastic and fuel markets. We will own and operate all of our P2O processors, including those to be operated on our partner sites. We intend to construct clusters of P2O processors at sources of large plastic waste streams, such as industrial sites, material recovery facilities and recycling centers.
Procurement Strategy
The Company’s feedstock strategy is as follows:
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Get the Right Material to Maximize Throughput
. Although the P2O processor can process many different types of plastic and create consistent fuels, we will focus on the types of plastic that will maximize the machine’s productivity. This is typically high density material.
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Contract for Long-Term Consistent Feedstock Supply
. By contracting with our suppliers, we are able to gain commitments for consistent flows of feedstock. This also allows us to more accurately forecast our feedstock supply and fuel outputs. An additional benefit of contracting with suppliers is that we are able to rely on this material flow as it relates to our continued growth planning.
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Cost to the Processor
. We look at all feedstock opportunities considering the “cost to the processor”. In other words, whether the cost is the price we pay to the supplier, the cost of transportation or our costs to pre-process the material, the critical thing is the total cost incurred for “ready to process” material.
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Competitive Strengths
We believe that our competitive strengths are as follows:
In addition to producing fuel, our P2O solution simultaneously addresses the problem of disposing of waste plastic.
We offer an alternative to disposing of waste plastic in a landfill. Our processors can accept mainly mixed, unwashed plastic feedstock. In the United States and Canada, a substantial amount of plastic is currently considered waste and is disposed of in landfills, resulting in Tipping Fees levied by the landfill or other waste disposal facility fees. We believe that the current low landfill diversion rates for waste plastic in the United States and Canada, together with the costs of transporting and disposing of plastic in bulk, present a significant opportunity to provide an alternative to conventional recycling and waste disposal.
The P2O process provides a highly efficient means of converting plastic into fuel.
Our proprietary P2O process and catalyst provide a highly efficient means of converting plastic into fuel. Our business model depends on us being able to provide both a cost-competitive means of disposing of waste plastic and an efficient and non-energy intensive means of producing fuel. Our process requires comparatively minimal electricity to operate, and the energy balance of the process is positive, meaning that more energy can be produced than is consumed by the process.
Low capital costs and small footprint.
We have designed the processors with a modular design with standardized components, making construction of our processors relatively simple and cost effective. We have designed our processors to take up approximately 3,000 square feet of space, giving the processors a relatively small footprint. We believe that this design facilitates the construction and operation of multiple processors on a single site. We estimate that the costs of constructing our processors on industrial partner sites will be approximately $1.3 to $1.4 million per processor, excluding additional infrastructure costs , which we believe to be substantially less than the cost of constructing waste-to-fuel facilities offered by our competitors.
Lower emissions
In the United States, businesses and other producers of emissions are subject to various regulatory requirements, including the National Emission Standards for Hazardous Air Pollutants. These emission standards may be established according to Maximum Achievable Control Technology requirements set by the EPA, often referred to as “MACT standards”. MACT standards apply to a number of sources of emissions, including operators of boilers, process heaters and certain solid waste incinerators. Because our P2O fuel products have ultra-low sulphur content, we believe that our P2O fuel can assist industrial partners with meeting MACT requirements through reduced hazardous emissions.
Our processors produce fuels that have very low sulphur content, which allows the end-user to potentially lower the emissions generated by its operations while using our fuels. These lower emissions potentially could save the end-user from expensive environmental compliance costs, stemming from such initiatives as the NESHAP regulations and more specifically the MACT standards for each pollution source.
Validation of repeatability and scalability of P2O processors.
Our P2O business has been validated by extensive testing by our customers and multiple independent tests by outside consultants and third party laboratories.
Other Businesses
Data Recovery & Migration
In June 2009, we purchased certain assets from John Bordynuik, Inc., a corporation founded by John Bordynuik, our former Chief Executive Officer and current Chief of Technology. The assets acquired from John Bordynuik, Inc. included tape drives, computer hardware, servers and a mobile data recovery lab to read and transfer data from magnetic tapes and these assets are used in our Data Recovery & Migration business.
Magnetic tapes were previously a primary media for data storage. Because of its cost effectiveness, magnetic tape was widely used by government, scientific, educational and commercial organizations for decades. Over time, these tapes can become vulnerable to deterioration when exposed to natural elements, which can render the tapes difficult to read or unreadable using the original tape-reading equipment. Our Data Business involves reading old magnetic tapes, interpreting and restoring the data where necessary and transferring the recovered data to storage formats used in current systems. The recovered data is verified for accuracy and returned to customers in the media storage format of their choice. Our process gives customers the ability to conveniently catalogue and safely archive difficult-to-retrieve data on readily accessible, contemporary storage media. Users of these services generally include businesses or organizations that have historically stored information on magnetic tape, such as government agencies, oil and gas companies and academic institutions.
The process for data recovery was developed and is very highly dependent on John Bordynuik, the founder of our company. The significance of the Data Business’s reliance on Mr. Bordynuik has been a key driver to the Data Recovery & Migration Business achieving significant revenue in 2012 and no revenue in 2011 and 2010.
In light of our business strategy to increase the focus on our P2O business, we anticipate that revenues and profits generated from our Data Business operations will represent a decreasing share, if any, of our total revenues and profits in future reporting periods. Due to these factors, the Company recorded an impairment of $36,500 during the first quarter of 2012 related to the assets of the Data Business.
Pak-It
From September 2009 until February 2012, through Pak-It, we were engaged in the manufacture of cleaning chemicals. As previously reported, we sold substantially all of the assets of this business in February 2012 because management felt that Pak-It’s business was no longer aligned with our strategic focus on our P2O business. For all periods reported, the results of operations of Pak-It have been recorded as discontinued operation, as recorded in Footnote 19 of the Consolidated Financial Statements.
Javaco
From August 2009 until July 2012, through Javaco, we were a retailer and wholesale distributor of equipment, hardware and tools for the safety, maintenance and construction industries. As previously reported, in July 2012, we closed Javaco and liquidated substantially all of the fixed assets and inventory because management felt that Javaco’s business was no longer aligned with our strategic focus on our P2O business. For all periods reported, the results of operations of Javaco have been recorded as discontinued operations, as recorded in Footnote 19 of the Consolidated Financial Statements.
Intellectual Property
To ensure the protection of our proprietary technology, we have applied for patent protection for both the P2O process and P2O processor. As of March 14, 2013, no patents have been issued. Management anticipates filing additional patent applications for various aspects of our P2O process in the near future. A lack of patent protection could have a material adverse effect on our ability to gain a competitive advantage for our process and processors, since it is possible that our competitors may be able to duplicate the P2O process for their own purposes. We also rely on our trade secrets to provide protection from portions of our process and proprietary catalyst. See “Risk Factors—Risks Related to Our Business”.
We also hold a U.S. patent relating to our Data Business for the recovery of tape information.
Research and Development
Given our strategic focus on developing our P2O business, we anticipate that our research and development activities in the short to medium-term will mostly relate to our P2O processors and the construction, operation and systems management of those processors. Specifically, we will seek to increase the operational capabilities and performance of our P2O processors as opportunities arise. Research and development expenditures were $445,945, $1,452,932 and $761,231 in 2012, 2011 and 2010, respectively.
Employees
As of March 14, 2013, we employed 55 persons on a full-time basis, of which 3 were executive management, 7 were in finance and administration, 4 were in procurement, sales and marketing, 37 were in operations and 4 were in technology/ research and development.
None of our employees are subject to a collective bargaining agreement and we believe that our labor relations are good.
Environmental and Other Regulatory Matters
As we further develop and commercialize our P2O business, we will be subject to extensive and frequently developing federal, state, provincial and local laws and regulations, including, but not limited to those relating to emissions requirements, fuel production, fuel transportation, fuel storage, waste management, waste storage, composition of fuels and permitting. Compliance with current and future regulations could increase our operational costs. Management believes that the company is currently in substantial compliance with applicable environmental regulations and permitting.
Our operations require various governmental permits and approvals. We believe that we have obtained, or are in the process of obtaining, all necessary permits and approvals for the operations of our P2O business; however, any of these permits or approvals may be subject to denial, revocation or modification under various circumstances. Failure to obtain or comply with the conditions of permits and approvals or to have the necessary approvals in place may adversely affect our operations and may subject us to penalties.
Company Information
We are a reporting company and file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy these reports, proxy statements and other information at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 or e-mail the SEC at publicinfo@sec.gov for more information on the operation of the public reference room. Our SEC filings are also available at the SEC’s website at http://www.sec.gov. Our Internet address is http://www.plastic2oil.com. There we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC.
The following risk factors should be considered in evaluating our businesses and future prospects. These risk factors represent what we believe to be the known material risk factors with respect to our business and our company. Our businesses, operating results, cash flows and financial condition are subject to these risks and uncertainties, any of which could cause actual results to vary materially from recent results or from anticipated future results.
Risks Related to our Business
We are an early stage company with a history of net losses, and we may not achieve or maintain profitability.
We have incurred net losses since our inception, including losses of $13,322,205, $18,259,363 and $14,343,469 in 2012, 2011 and 2010, respectively. We expect to incur losses and potentially have negative cash flow from operating activities for the near future. We have divested of our significant non-core businesses, which historically had generated revenues for the Company and have transitioned our focus solely on the development of our P2O business. To date, our revenues from our P2O business have been limited and we expect to invest significant additional capital in the further development and expansion of our P2O business and for marketing and general and administrative expenses associated with our planned growth and management of operations as a public company. As a result, even if our revenues increase substantially, we expect that our expenses could exceed revenues for the foreseeable future. It is not certain when we will achieve profitability. If we fail to achieve profitability, or if the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. We may experience significant fluctuations in our revenues, significantly driven in part by the market price of fuel and we may incur losses from period to period. The impact of the foregoing may cause our operating results to be below the expectations of investors and securities analysts, which may result in a decrease in the market value of our securities.
We have a limited operating history and are focused on our P2O business, which may make it difficult to evaluate our current business and predict our future performance.
After divesting certain non-core business lines, we are solely focused on our P2O business and our limited operating history may make it difficult to evaluate our current business and predict future performance as we continue to expand and grow, as well as modify the current processors to become more efficient. Additionally, with the divestitures of Pak-It and Javaco in 2012, our historical results are not indicative of future revenues. Any assessment of our current business and predictions about our future success or viability may not be as accurate as otherwise possible if we had a longer operating history. We have encountered, and may continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries. If we do not address these risks successfully, our business could be harmed.
Our process and processors may fail to produce fuel at the volumes we expect.
Even if we secure a reliable supply of sufficient volumes of waste plastic, our processors may fail to perform due to mechanical failure or unscheduled maintenance resulting in potentially significant downtime. Our processors do not have a long operating history, and accordingly the equipment and systems in any given processor may not operate as planned or for as long as expected based on preliminary testing and trials.
We may be required to replace parts more often than expected due to excessive wear and tear or malfunction due to their use during the evolution of our process. Replacement of parts or components of the processor could result in additional unplanned downtime, resulting in lower fuel volume productions.
Different feedstock may result in different fuel yields including potentially higher production of off-gas or petcoke residue, which would proportionately reduce the amount of salable fuels produced. The presence of contaminants in our feedstock could reduce the purity of the fuel that we produce and require further investment in more costly separation processes or equipment. Additionally, contaminants that are present in the feedstock could result in damage to the processor which would cause unplanned downtime and lower expected fuel volumes.
Unexpected problems with either the processor or our feedstock supplies may force us to cease or delay production and the time and costs involved with such delays may be significant. Any or all of these risks could prevent us from achieving the production volumes and yields, and producing fuel at the costs, necessary to achieve profitability from our business. Failure to achieve expected production volumes and yields, or achieving them only after significant additional expenditures, could substantially harm our financial condition and operating results.
We need substantial additional capital in the future in order to develop our business.
Our future capital requirements will be substantial, particularly as we continue to develop our P2O business. Barring any unforeseen expenses, we believe that our current cash and cash equivalents will allow us to expand commercial operations at the Niagara Falls, NY Facility as well as implement commercial operations in Jacksonville, Florida, our next planned site. Because the costs of developing the P2O business on a commercial scale are highly contingent on our approach to commercialization, and are subject to many variables, including site-specific development costs and the number of processors to be placed at a given location, we cannot reliably reasonably estimate the amount of capital required to expand the P2O business to the planned Jacksonville, Florida locations or otherwise beyond the Niagara Falls, NY facility. If we are successful in achieving our plans to enter into other P2O industrial partnerships, we may require significant additional funding to execute such partnerships and may not be able to rely on funding through our own earnings. Funding would be required for constructing P2O processors, site specific build-outs and developing other aspects of our business with our industrial partners.
To date, we have funded our operations primarily through private offerings of equity securities. If future financings involve the issuance of equity securities, our existing stockholders could suffer dilution. If we were able to raise debt financing to expand our operations, we may be subject to restrictive covenants that could limit our ability to conduct our business. Our plans and expectations may change as a result of factors currently unknown to us, and we may need additional funds sooner than planned. We may also choose to seek additional capital sooner than required due to favorable market conditions or strategic considerations.
Our future capital requirements will depend on many factors, including:
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the financial success of our P2O business and processors;
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the timing of, and costs involved in, entering into agreements with suitable industrial partners, and the timing and terms of those agreements;
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the cost of constructing P2O processors and the amount of other capital expenditures related to site development;
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our ability to negotiate distribution or further sale agreements for the fuel we produce, and the timing and terms of those agreements;
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the timing of, and costs involved in obtaining, the necessary government or regulatory approvals and permits; and
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Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If funds are necessary or required and are not available to us on a timely basis, we may delay, limit, reduce or terminate:
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our R&D activities;
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our plans to construct additional processors at the planned Jacksonville, FL site or otherwise;
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our plans to expand our business through industrial partnerships;
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our activities in negotiating agreements necessary in connection with the commercial scale operation of the P2O business; and
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the development of the P2O business, generally.
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If we fail to raise sufficient funds and continue to incur losses, our ability to fund our operations, construct processors, enter into agreements with suitable industrial partners, take advantage of other strategic opportunities and otherwise develop our business could be significantly limited. We may not be able to raise sufficient additional funds on terms that are favorable or acceptable to us, if at all. If adequate funds are required for operations and are not available, we may not be able to successfully execute our business plan or continue our business.
Our future success is dependent, in part, on the performance and continued service of John Bordynuik, and on being able to attract and retain qualified management and personnel.
We are presently dependent to a great extent upon the experience, knowledge and abilities of John Bordynuik, our founder and current Chief of Technology. Mr. Bordynuik has been critical to the development of our P2O business, and the loss of his services could have a material adverse effect on our business, financial condition or results of operations, and could also significantly limit our growth potential.
We will also require additional expertise in specific areas applicable to our P2O business and will require the addition of new personnel, and the development of additional expertise by existing personnel. The inability to attract talented personnel with appropriate skills or to develop the necessary expertise could impair our ability to develop and grow our business.
The loss of any key members of our management team or the failure to attract or retain qualified management and personnel who possess the requisite expertise for the conduct of our business could prevent us from further developing our businesses according to our current strategy. We may be unable to attract or retain qualified personnel in the future due to the intense competition for qualified personnel amongst technology-based businesses, or due to the unavailability of personnel with the qualifications or experience necessary for our business. Competition for business, financial, technical and other personnel from numerous companies and academic and other research institutions may limit our ability to attract and retain such personnel on acceptable terms. If we are unable to attract and retain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that will adversely affect our ability to meet the demands of our industrial partners and customers in a timely fashion or to support continued development of our P2O business.
Competitors and potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete or may use their greater resources to gain market share at our expense.
Our P2O business has elements of both a recycling business and a fuel sales business. The recycling and energy sectors are characterized by rapid technological change. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Our P2O business faces mild competition in the plastics-to-energy market, including competition from Envion, Polymer Energy, LLC, and Agilyx, who have each developed alternative methods for obtaining and generating fuel from plastics.
Our P2O business faces competition in acquiring feedstock, mainly because there are other technologies and processes that are being developed and/or commercialized to offer recycling solutions for plastic. Additionally, there is significant competition from businesses in the energy sector that sell fuel, including both traditional producers and alternative fuel producers. Companies in the fuel sales industry may be able to exert economies of scale in the fuels market to limit the success of our fuel sales business. We believe that our business is more appealing in both the recycling sector and the fuel sector due to its green aspect. Technological developments by any form of competition could result in our products and technologies becoming obsolete.
In addition, various governments have recently announced a number of spending programs focused on the development of clean technologies, including alternatives to petroleum-based fuels and the reduction of carbon emissions. Such spending programs could lead to increased funding for our competitors or a rapid increase in the number of competitors within these markets.
Our limited resources relative to many of our competitors may cause us to fail to anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competiveness and market share, adversely affect our results of operations and financial position and prevent us from obtaining or maintaining profitability.
The effectiveness of our business model may be limited by the availability or potential cost of plastic feedstock sources.
Our P2O business model depends on the availability of waste plastic obtained at relatively low cost to be used as a feedstock to produce our end fuel products. If the availability of feedstock decreases, or if we are required to pay substantially more than is reasonable to become profitable for feedstock, this could reduce our fuel production and/or potentially reduce our profit margins if we are forced to use alternative, more costly measures to procure feedstock. It is possible that an adequate supply of feedstock may not be available to our P2O processors to meet daily processing capacity. This could have a materially adverse effect on our financial condition and operating results.
Our P2O financial results will also be dependent on the operating costs of our processors, including costs for feedstock and the prices at which we are able to sell our end products. Volatility in both the pricing of feedstock as well as the market price for fuels could have an impact on this relationship. General economic, market, and regulatory factors may influence the availability and potential cost of waste plastic. These factors include the availability and abundance of waste plastic, government policies and subsidies with respect to waste management and international trade and global supply and demand. The significance and relative impact of these factors on the availability of plastic is difficult to predict.
We will, for the very near future, depend on one production facility for revenues related to our business. Therefore, any operational disruption could result in a reduction of our fuel production volumes.
A significant portion of our anticipated revenue for fiscal 2013 will be derived from the sale of fuel that we produce at our Niagara Falls, NY Facility. We will incur additional expenses to increase production at that facility and any failure to produce fuel at anticipated volumes and costs would adversely affect our revenues, free cash flow and potential ability to build other planned production facilities. Such failure would adversely affect our business, financial condition and results of operations.
Unforeseen manufacturing issues or processor downtime could have significant adverse impact on our business.
Our business and strategic growth plans rely on assumptions of processor uptime reaching certain levels in which ample fuel can be produced to meet the needs of our customers and provide us with adequate operating cash flow to cover our cost of operating. Unforeseen manufacturing issues with the processors or unscheduled downtime due to mechanical failure, low quality feedstock or unexpected issues with the processors could have a material adverse impact on our fuel production and operating results. In addition, manufacturing and/ or fabrication delays with respect to additional processors could cause our revenues and fuel production to be lower than anticipated.
We may have difficulties gaining market acceptance and successfully marketing our fuel to our customers.
A key component of our business strategy is to market our fuel as a viable high quality fuel to wholesalers and industrial end users. If we fail to successfully market our fuel or the targeted customers do not accept it, our business, financial condition and results of operations will be materially adversely affected.
To gain market acceptance and successfully market our fuel, we must effectively demonstrate the advantages of using P2O fuel over other fuels, including conventional fossil fuels, biofuels and other alternative fuels and blended fuels. We must show that P2O fuel is a direct replacement for fossil fuels. We must also overcome marketing and lobbying efforts by producers of other fuels, many of whom have greater resources than we do. If the markets for our fuel do not develop as we currently anticipate, or if we are unable to penetrate these markets successfully, our revenue and revenue growth rate could be materially and adversely affected.
Pre-existing contractual commitments and skepticism of new production methods for fuels may hinder market acceptance of our fuel.
Adverse public opinions concerning the alternative fuel industry in general could harm our business.
The plastic-to-fuel industry is new, and general public acceptance of this method of recycling and fuel generation is uncertain. Public acceptance of P2O fuel as a reliable, high-quality alternative to traditionally refined petroleum fuels may be limited or slower than anticipated due to several factors, including:
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public perception issues associated with the fact that P2O fuel is produced from waste plastics;
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public perception that the use of P2O fuel will require excessive burner, boiler or engine modifications;
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actual or perceived problems with P2O fuel quality or performance; and
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to the extent that P2O fuel is used in transportation applications, concern that using P2O fuel will void engine warranties.
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Such public perceptions or concerns, whether substantiated or not, may adversely affect the demand for our fuels, which in turn could decrease our sales, harm our business and adversely affect our financial condition.
We lack significant experience operating commercial scale processors and may encounter significant difficulties operating on a commercial scale or expanding our business.
We began limited commercial operations at the Niagara Falls, NY facility in 2010. Although we operated in a limited capacity during 2011 and we believe that our processors are commercially viable, there is no assurance that they can be operated profitably on a large scale at a wide variety of locations. We may be unable to effectively manage operations, especially given the potential variables that could affect costs in constructing site-specific processors.
The skills and knowledge gained in operating the Niagara Falls, NY facility may prove insufficient for successful operation of P2O facilities in other locations. We may be required to expend significant time and money to develop our capabilities in processing waste plastic and producing fuel in other locations. We may also need to hire new employees or contract with third parties to help manage our operations, and our performance will suffer if we are unable to hire qualified parties or if they perform poorly.
We may face additional operational difficulties as we expand our business. Growth of our business may impose a significant burden on our administrative and operational resources. In order to effectively manage our growth and execute our development plans, we will need to expand our administrative and operational resources substantially and attract, train, manage and retain qualified management, technical and other personnel. Failure to meet the operational challenges of developing and managing our business, or failure to otherwise manage our growth, may have a material adverse effect on our business, financial condition and results of operations.
A decline in the price of petroleum products may reduce demand for our P2O fuels and may otherwise adversely affect our business.
We anticipate that our fuels will be marketed as alternatives to their corresponding conventional petroleum product counterparts, such as heating oil, diesel fuel and naphtha. If the prices of these products fall, we may be unable to produce products that are cost-effective alternatives to conventional petroleum products. Declining oil prices, or the perception of a future decline in oil prices, may adversely affect the prices we can obtain from our potential customers or prevent potential customers from entering into agreements with us to buy our products. During sustained periods of lower oil prices, we may be unable to sell some of our fuel products, which could materially and adversely affect our operating results.
In addition, recent discoveries and drilling of shale gas deposits has caused a general decrease in natural gas prices which could cause commercial and industrial fuel users to switch from using petroleum-based products to natural gas to power their equipment, machinery and operations. In such case, demand for our fuel products may decline. Any decline in demand for petroleum-based products could materially and adversely affect our results from operation.
Our operations are subject to various regulations, and failure to obtain necessary permits, licenses or other approvals, or failure to comply with such regulations, could harm our business, results of operations and financial condition.
We are, and may become subject to, various federal, state, provincial, local and foreign laws, regulations and approval requirements in the United States, Canada and other jurisdictions, including those relating to the discharge of materials or pollutants into the air, water and ground, the generation, storage, handling, use, transportation and disposal of waste materials, and the health and safety of our employees.
The Company currently possesses an Air Permit and Solid Waste Permit for up to three processors at the Niagara Falls, NY facility. Failure to maintain these permits on terms and conditions acceptable to and achievable by us, or at all, could affect the commercial viability of the Niagara Falls, NY facility, which could have a material adverse effect on our business, financial condition and results of operations.
As we implement our growth strategy, our planned P2O business will require additional permits, licenses or other approvals from various governmental authorities. Our ability to obtain, amend, comply with, sustain or renew such permits, licenses or other approvals on acceptable, commercially viable terms may change, as could the regulations and policies of applicable governmental authorities. Our inability to obtain, amend, comply with, sustain or renew such permits, licenses or other approvals may have a material adverse effect on our business, financial condition and results of operations.
Any fuels developed using our P2O process will be required to meet applicable government regulations and standards. Any failure to meet these standards and/or future regulations and standards could prevent or delay the commercialization or sale of any fuels developed using our P2O process or subject us to fines and other penalties.
All phases of designing, constructing and operating fuel production facilities present environmental risks and hazards. Among other things, environmental legislation provides for restrictions and prohibitions on spills and discharges, as well as emissions of various substances produced in association with fuel operations. Legislation also requires that sites be operated, maintained, abandoned and reclaimed in such a way that would satisfy applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner that may result in stricter standards and enforcement, larger fines, penalties and liability, as well as potentially increased capital expenditures and operating costs. The discharge of pollutants into the air, soil or water may give rise to liabilities to governments and third parties, and may require us to incur costs to remedy such discharge.
There is no assurance that our operations will comply with environmental or occupational, safety and health regulations in any applicable jurisdiction. Failure to comply with applicable laws, regulations and approval requirements could subject us to civil and criminal penalties, require us to forfeit property rights, and may affect the value of our assets or our ability to conduct our business. We may also be required to take corrective actions, including, but not limited to, installing additional equipment, which could require us to make substantial capital expenditures. These penalties could have a material adverse effect on our business, financial condition and results of operations.
We may be unable to produce our fuel products in accordance with governmental specifications.
Even if we produce P2O fuel at our targeted volumes and yields we anticipate, we may be unable to produce fuel that meets current or future governmental regulations. If we fail to meet these specific regulations, customers may not purchase our fuel or, to the extent we have an agreement in place for the supply of fuel, the customer may seek an alternate supply of fuel or terminate the agreement completely. A failure to successfully meet these specifications could decrease demand for our fuel, leading to reduced sales and operating results.
Our dependence on contract manufacturers for processor components exposes our business to supply risks.
We have limited internal capacity to manufacture our processor components. As a result, we are heavily dependent upon the performance and capacity of third party manufacturers for the manufacturing of many of the key components of our processors, including kilns and distillation towers as well as certain other key components that require specialized machining and fabrication.
We currently rely on a small number of primary contract manufacturers to produce the components of our processors. Our business, therefore, could be adversely affected if these contract manufactures are unable to produce, or are delayed in producing or delivering to us, the required components in the timeframes that we have agreed upon or they have promised, the occurrence of which could adversely impact the availability and launch of additional processors. The failure of any manufacturers that we may use to supply manufactured products on a timely basis, or at all, or to manufacture our processor components in compliance with our specifications or applicable quality requirements or in volumes sufficient to meet demand, would adversely affect our ability to produce numerous processors, could harm our relationships with our business partners or customers and could negatively affect our revenues and operating results.
We are working to establish long-term supply contracts with contract manufacturers and are evaluating whether to invest in our own manufacturing capabilities. However, we cannot guarantee that we will be able to enter into long-term supply contracts on commercially reasonable terms, or at all, or to acquire, develop or contract for internal manufacturing capabilities. Any resources we expend on acquiring or building internal manufacturing capabilities could be at the expense of other potentially more profitable opportunities.
We currently have only patent-pending protection for our P2O process and processor.
We have sought patent protection of our intellectual property by filing for international patents via the Patent Cooperation Treaty, however, as yet, none have been granted. We also rely on trade secrets to provide protection for our proprietary catalyst. We currently have patent pending status for our P2O process and processor. However, a lack of patent protection could have a material adverse effect on our ability to gain a competitive advantage for our P2O processors, since it is possible that our competitors may be able to duplicate our P2O process for their own purposes. This may have a material adverse effect on our results of operations, including on our ability to enter into industrial partnership arrangements or other agreements relating to our P2O processors.
We rely in part on trade secrets to protect some of our intellectual property, and our failure to obtain or maintain trade secret protection could adversely affect our competitive position.
We rely on trade secrets to protect some of our intellectual property, such as our proprietary catalyst. However, trade secrets are difficult to maintain and protect. We have taken measures to protect our trade secrets and proprietary information, but there is no guarantee that these measures will be effective. We require new employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. Nevertheless, our proprietary information may be disclosed, or these agreements may be unenforceable or difficult and costly to enforce. If any of the above risks materialize, our failure to obtain or maintain trade secret protection could adversely affect our competitive position.
Collaborations with third parties have required us to share some confidential information, including with employees of these third parties. Our strategy for the development of our business may require us to share additional confidential information with our industrial partners and other third parties. While we use reasonable efforts to protect our trade secrets, third parties, or our industrial partners’ employees, consultants, contractors and/or other advisors may unintentionally or willfully disclose proprietary information to competitors. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In addition, foreign courts are sometimes less willing than domestic courts to protect trade secrets. If our competitors develop equivalent knowledge, methods and know-how, we may not be able to assert our trade secrets against them. Without trade secret protection, it is possible that our competitors may be able to duplicate our process for their own purposes. This may have a material adverse effect on our results of operations, including on our ability to enter into industrial partnership arrangements or other agreements relating to our process and processors.
Our quarterly operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of investors or research analysts, which could cause our share price to decline.
Our financial condition and operating results have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the various risk factors described elsewhere in this report. Due to these various risk factors, and others, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.
During the ordinary course of business, we may become subject to lawsuits or indemnity claims, which could materially and adversely affect our business and results of operations.
From time to time, we may in the ordinary course of business be named as a defendant in lawsuits, claims and other legal proceedings. Plaintiffs in these actions may seek, among other things, compensation for alleged personal injury, worker’s compensation, damages for employment discrimination or breach of contract, property damages and injunctive or declaratory relief. In the event that such actions or indemnities are ultimately resolved unfavorably at amounts exceeding our accrued liability, or at material amounts, the outcome could materially and adversely affect our reputation, business and results of operations. In addition, payments of significant amounts, even if reserved, could adversely affect our liquidity position.
We are responsible for the indemnification of our officers and directors.
Our by-laws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against costs and expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. Consequently, we may be required to expend substantial funds to satisfy these indemnity obligations. We currently hold directors’ and officers’ liability insurance policies for the benefit of our directors and officers, although our insurance coverage may not be sufficient in some cases, including the liability we may face in connection with pending actions. See “Legal Proceedings.” Furthermore, our insurance carriers may seek to deny coverage in some cases, in which case we may have to fund the indemnification amounts owed to such directors and officers ourselves.
We may have difficulty in attracting and retaining management and outside independent members to our Board of Directors as a result of their concerns relating to their increased personal exposure to lawsuits and stockholder claims by virtue of holding these positions in a publicly held company.
The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and stockholder claims, as well as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws imposing additional duties, obligations and liabilities on management and directors. Due to these perceived risks, directors and management are also becoming increasingly concerned with the availability of directors’ and officers’ liability insurance to pay on a timely basis the costs incurred in defending such claims. Although we currently maintain directors’ and officers’ liability insurance, our coverage has limits and has recently become more expensive. If we are unable to continue or provide directors’ and officers’ liability insurance at affordable rates or at all, it may become increasingly more difficult to attract and retain qualified outside directors to serve on our Board of Directors.
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm, in its audit opinion issued in connection with our consolidated balance sheets as of December 31, 2012 and 2011 and our consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2012 and 2011, has expressed substantial doubt about our ability to continue as a going concern given our net losses, accumulated deficit and negative cash flows. The accompanying consolidated financial statements were prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business, and accordingly do not contain any adjustments which may result due to the outcome of this uncertainty.
Risks Relating to Ownership of Securities of the Company
Investors may lose their entire investment in our securities.
Investing in our securities is speculative and the price of our securities has been and may continue to be volatile. Only investors who are experienced in high risk investments and who can afford to lose their entire investment should consider an investment in our securities.
Shares of our common stock are quoted and trade on the OTCQB Market, which may have an unfavorable impact on our stock price and liquidity.
Shares of our common stock are quoted and traded on the OTCQB Market. Trading in shares quoted on the OTCQB is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with a company’s operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to our operating performance. Moreover, the OTCQB is not a stock exchange and is a significantly more limited market than the New York Stock Exchange, NASDAQ or other stock exchanges. Stockholders may have difficulty buying and/ or selling their shares. The quotation of our shares on the OTCQB may result in a less liquid market available for existing and potential stockholders to trade our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.
Our common stock is subject to price volatility unrelated to our operations.
The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve planned growth, quarterly operating results of other companies in the same or similar industries, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, stock markets may be subject to price and volume fluctuations. This volatility could have a significant effect on the market price of our common stock for reasons unrelated to our operating performance.
Our common stock may be classified as a “penny stock” as that term is generally defined in the United States Securities Exchange Act of 1934 to mean equity securities with a price of less than $5.00. As such, our common stock would be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.
We may be subject to the penny stock rules adopted by the SEC that require brokers to provide extensive disclosure to its customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which in all likelihood would make it difficult for investors to buy or sell shares.
Rule 3a51-1 of the United States Securities Exchange Act of 1934 establishes the definition of a “penny stock” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. This classification would severely and adversely affect any market liquidity for our common stock.
For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth the basis on which the broker or dealer has made the suitability determination and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commission payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell our common stock, which may affect the ability of stockholders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our common stock, if and when such shares become listed on a stock exchange. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common stock. Our common stock could be subject to such penny stock rules for the foreseeable future and our stockholders could find it difficult to sell their common stock.
Listing our stock on markets other than the OTCQB could be costly for us.
Our common stock is currently quoted and traded on the OTCQB Market. In the future, we may file an application to be listed on a stock exchange in the United States or elsewhere. Unlike the OTCQB, a stock exchange has corporate governance and other listing standards, which we will have to meet. Such standards and regulations may restrict our capital raising or other activities by requiring stockholder approval for certain issuances of stock, for certain acquisitions, and for the adoption of stock option or stock purchase plans. Applying for and obtaining any such listing on a stock exchange, and complying with the requirements of such stock exchange, would require us to incur significant expenses.
Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant corporate decisions and depress our share price.
As of the date of this report, our officers, directors and existing stockholders who hold at least 10% of our shares will together beneficially own approximately 17.03% of our issued and outstanding common stock. As of the date of this report, our founder and current Chief of Technology, John Bordynuik owns approximately 4.81% of our issued and outstanding common stock. In addition, Mr. Bordynuik is the sole owner of our issued and outstanding Series A Preferred Shares, consisting of 1,000,000 Series A Preferred Shares. The Series A Preferred Shares have voting rights that are 100 times the voting rights of our common stock. Therefore, Mr. Bordynuik controls approximately 50.65% of the voting power of the Company’s share capital. Mr. Bordynuik’ s voting ability is limited to certain matters of the Company, pursuant to an agreement with certain shareholders of the Company, however, even with these limitations, he is able to exert a significant degree of influence over matters requiring shareholder approval, including the election of directors, any amendments to our articles or by-laws and significant corporate transactions. The interests of this concentration of ownership may not always coincide with the Company’s interests or the interests of other stockholders. For instance, officers, directors, and principal stockholders, acting together, could cause the Company to enter into transactions or agreements that it would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of the Company otherwise favored by our other stockholders. This concentration of ownership could depress our share price.
We do not anticipate paying cash dividends, and accordingly, stockholders must rely on share appreciation for any return on their investment.
Since inception, we have not paid dividends on our common stock and we do not anticipate paying cash dividends in the near future. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders. Investors seeking cash dividends should consider not investing in our common stock.
We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.
As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as related rules implemented by the SEC, the Public Company Accounting Oversight Board (“PCAOB”) and the OTCQB impose various requirements on public companies. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities, such as maintaining director and officer liability insurance, more time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404(a) of the Sarbanes-Oxley Act. Our compliance with Section 404(a) will require that we incur substantial accounting expense and expend significant management time on compliance-related issues. If we are not able to comply with the requirements of Section 404 in a timely manner, our stock price could decline, and we could face sanctions, delisting or investigations, or other material adverse effects on our business, reputation, results of operations, financial condition or liquidity.
Shares of
common stock eligible for sale in the public market may adversely affect the market price of our common stock.
Sales of substantial amounts of our common stock by stockholders in the public market, or even the potential for such sales, may adversely affect the market price of our common stock and could impair our ability to raise capital through selling equity securities. As of the date of this filing, approximately 59.9 million of the 89.9 million shares of common stock currently outstanding were freely transferable without restriction or further registration under the securities laws, unless held by "affiliates" of our company, as that term is defined under the securities laws. We also have outstanding, approximately 30.0 million shares of restricted stock, as that term is defined in Rule 144 under the securities laws that are eligible for sale in the public market, subject to compliance with the requirements of Rule 144. Additionally, upon conversion of the Series B Preferred Stock, an additional 16.1 million shares will become outstanding and freely transferable.
Holders of our outstanding shares of Series B Convertible Preferred Stock have a liquidation preference senior to that of the holders of our common stock.
Our board of directors authorized and filed the Certificate of Designation of Series B Convertible Preferred Stock, as amended (the “Series B Designation”), pursuant to which we issued 2,300,000 shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”) in a private placement. Pursuant to the Series B Designation, in the event of the liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock shall be entitled to receive out of assets of the Company available for distribution to stockholders of the Company, prior and in preference to any distribution to the holders of any other capital stock of the Company, an amount per share of Series B Preferred Stock equal to $3.50 per share, the original purchase price of such shares of Series B Preferred Stock. Therefore, upon a liquidation, dissolution or winding up of the Company, if there are insufficient assets available for distribution to first satisfy the liquidation preference on the Series B Preferred Stock, the holders of common stock will not be entitled to any of such proceeds.
Techniques employed by manipulative short sellers may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. While traditionally these disclosed shorts were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall Street firms and independent research analysts. These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base. Issuers who have limited trading volumes and are susceptible to higher volatility levels than large-cap stocks, can be particularly vulnerable to such short seller attacks.
These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the Securities and Exchange Commission in Regulation AC (Regulation Analyst Certification) and, accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, fabrications of facts. In light of the limited risks involved in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed short sellers will continue to issue such reports.
While we intend to strongly defend our public filings against any such short seller attack, oftentimes we are constrained, either by principles of freedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller. Investors should be aware that in light of the relative freedom to operate that such persons enjoy, should we be targeted for such an attack, our common stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by market participants.