NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
JBI, Inc. (the “Company” or “JBI”) was originally incorporated as 310 Holdings, Inc. (“310”) in the State of Nevada on April 20, 2006. 310 had no significant activity from inception through 2009. In April 2009, John Bordynuik purchased 63% of the issued and outstanding shares of 310. During 2009, the Company changed its name to JBI, Inc. and began operations of its main business operation, Plastic2Oil (“P2O”). Plastic2Oil is a combination of proprietary technologies and processes developed by JBI which convert waste plastics into fuel. JBI currently, as of the date of this filing, operates two processors at its Niagara Falls, NY, facility (the “Niagara Falls Facility”).
On August 24, 2009, the Company acquired Javaco, Inc. (“Javaco”), a distributor of electronic components, including home theater and audio video products. In July 2012, the Company closed Javaco and sold substantially all of the inventory and fixed assets of Javaco. The operations of Javaco have been classified as discontinued operations for all periods presented (Note 16).
Going Concern
These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), which contemplates continuation of the Company as a going concern which assumes the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has experienced negative cash flows from operations since inception and has an accumulated deficit of $50,582,330 for the period ending March 31, 2013. The report of the Company’s auditor on the Company’s financial statements for December 31, 2012 and 2011 contained a “going concern” opinion regarding the Company’s ability to continue as a going concern. These factors raise substantial doubt about the Company’s ability to continue as a going concern and to operate in the normal course of business. The Company has funded our activities to date almost exclusively from equity financings.
The Company will continue to require substantial funds to continue the expansion of its P2O business to achieve significant commercial productions, and to significantly increase sales and marketing efforts. Management’s plans in order to meet its operating cash flow requirements include financing activities such as private placements of its common and preferred stock, issuances of debt and convertible debt instruments.
While the Company believes that it will be successful in obtaining the necessary financing to fund its operations, meet regulatory requirements and achieve commercial production goals, there are no assurances that such additional funding will be achieved and that it will succeed in its future operations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue in existence.
NOTE 2 – SUMMARY OF ACCOUNTING POLICIES
Basis of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Plastic2Oil of NY#1, LLC, JBI (Canada) Inc., John Bordynuik, Inc., JBI CDE Inc., JBI Re One Inc., JBI Re#1 Inc., Plastic2Oil Marine Inc., Javaco, Pak-it and Plastic2Oil Land Inc.. All intercompany transactions and balances have been eliminated on consolidation. Amounts in the condensed consolidated financial statements are expressed in US dollars. Javaco has also been consolidated; however, as mentioned its operations are classified as discontinued operations (Note 16).
Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates include amounts for impairment of intangible assets, share based compensation, asset retirement obligations, inventory obsolescence, accrued liabilities and accounts receivable exposures.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
Restricted Cash
Restricted cash relates to cash on deposit, which secures the Company’s letter of credit with a banking institution, related to a fuel sales bond.
Cash Held in Attorney Trust
The amount held in trust represents retainer payments the Company have made to law firms which were being held on our behalf for the payment of future services.
Accounts Receivable
Accounts receivable represent unsecured obligations due from customers under terms requesting payments upon receipt of invoice up to ninety days, depending on the customer. Accounts receivable are non-interest bearing and are stated at the amounts billed to the customer net of an allowance for uncollectible accounts. Customer balances with invoices over 90 days old are considered delinquent. Payments of accounts receivable are applied to the specific invoices identified on the customer remittance, or if unspecified, are applied to the earliest unpaid invoice.
The allowance for uncollectible accounts reflects management’s best estimate of amounts that may not be collected based on an analysis of the age of receivables and the credit standing of individual customers. The allowance for uncollectible accounts for the periods ending March 31, 2013 and December 31, 2012 was $10,507 and $57,991, respectively.
Inventories
Inventories, which consist primarily of plastics, costs to process the plastic and processed fuel are stated at the lower of cost or market. We use an average costing method in determining cost. Inventories are periodically reviewed for use and obsolescence, and adjusted as necessary.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the various classes of assets, and capital leased assets are given useful lives coinciding with the asset classification they are classified as. These lives are as follows:
Leasehold improvements
|
lesser of useful life or term of the lease
|
Machinery and office equipment
|
3-15 years
|
Furniture and fixtures
|
7 years
|
Office and industrial buildings
|
25 years
|
Gains and losses on depreciable assets retired or sold are recognized in the statements of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred and expenditures that increase the value or useful life of the asset are capitalized.
Construction in Process
The Company capitalizes customized equipment built to be used in the future day to day operations at cost. Once complete and available for use, the cost for accounting purposes is transferred to property, plant and equipment, where normal depreciation rates are applied.
Impairment of Long-Lived Assets
The Company reviews for impairment of long-lived assets on an asset by asset basis. Impairment is recognized on properties held for use when the expected undiscounted cash flows for a property are less than its carrying amount at which time the property is written-down to fair value. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. The sale or disposal of a “component of an entity” is treated as discontinued operations. The operating properties sold by the Company typically meet the definition of a component of an entity and as such the revenues and expenses associated with sold properties are reclassified to discontinued operations for all periods presented (Note 16).
Asset Retirement Obligations
The fair value of the estimated asset retirement obligations is recognized in the consolidated balance sheets when identified and a reasonable estimate of fair value can be made. The asset retirement cost, equal to the estimated fair value of the asset retirement obligation, is capitalized as part of the cost of the related long-lived asset. The asset retirement costs are depreciated over the asset’s estimated useful life and are included in depreciation and accretion expense on the consolidated statements of income. Increases in the asset retirement obligation resulting from the passage of time are recorded as accretion of asset retirement obligation in the consolidated statements of operations. Actual expenditures incurred are charged against the accumulated obligation. As at March 31, 2013 and December 31, 2012, the Company recorded asset retirement obligations of $29,644 and $29,423, respectively. These costs include disposal of plastic and other non-hazardous waste, site closing labor and testing and sampling of the site upon closure. This liability is included in other long-term liabilities.
Environmental Contingencies
The Company records environmental liabilities at their undiscounted amounts on our balance sheets as other current or long-term liabilities when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. These costs may be discounted to reflect the time value of money if the timing of the cash payments is fixed or reliably determinable and extends beyond a current period. Estimates of our liabilities are based on currently available facts, existing technology and presently enacted laws and regulations, taking into consideration the likely effects of other societal and economic factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by the Environmental Protection Agency (EPA) or other organizations. Our estimates are subject to revision in future periods based on actual costs or new circumstances. We capitalize costs that benefit future periods and we recognize a current period charge in operation and maintenance expense when clean-up efforts do not benefit future periods.
We evaluate any amounts paid directly or reimbursed by government sponsored programs and potential recoveries or reimbursements of remediation costs from third parties including insurance coverage separately from our liability. Recovery is evaluated based on the creditworthiness or solvency of the third party, among other factors. When recovery is assured, we record and report an asset separately from the associated liability on our balance sheets. No amounts for recovery have been accrued to date.
Deposits
Deposits represent payments made to vendors for fabrication of key pieces of property, plant and equipment that have been made in accordance with the Company’s agreements to purchase such equipment. Payments are made to these vendors as progress is made on the fabrication of the equipment, with final payments made when the equipment is delivered. Until we have possession of the equipment, all payments made to these vendors are classified as deposits on assets. Deposits were $1,578,182 and $839,005 as of March 31, 2013 and December 31, 2012, respectively.
Leases
The Company has entered into various leases for buildings and equipment. At the inception of a lease, the Company evaluates whether it is operating or capital in nature. Operating leases are recorded as expense in the appropriate periods of the lease. Capital leases are classified as property, plant and equipment and the related depreciation is recorded on the assets. Also, the debt related to the capital lease is included in the Company’s short- and long-term debt obligations, in accordance with the lease agreement.
Lease inducements are recognized for periods of reduced rent or for larger than usual rent escalations over the term of the lease. The benefit of a rent free period and the cost of future rent escalations are recognized on a straight-line basis over the term of the lease.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and collection is reasonably assured. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
P2O sales are recognized when the customers take possession of the fuel since at that stage the customer has completed all prior testing necessary for their acceptance of the fuel. At the time of possession they have arranged for transportation to pick it up and the sales price has either been set in their purchase contract or negotiated prior to the time of pick up through the issuance of a purchase order. The Company negotiates the pricing of the fuel based on the quality of the product and the type of fuel being sold (i.e. Naphtha, Fuel Oil No. 6 or Fuel Oil No. 2).
Shipping and Handling Costs
The Company’s shipping and handling costs of $13,357 and $13,335 for the three month periods ended March 31, 2013 and 2012, respectively, are included in cost of goods sold for all periods presented.
Advertising costs
The Company expenses advertising costs as incurred. Advertising costs were $2,865 and $5,757 for the periods ended March 31, 2013 and 2012, respectively.
Research and Development
The Company is engaged in research and development activities. Research and development costs are charged as operating expense of the Company as incurred. For the periods ended March 31, 2013 and 2012, the Company expensed $109,046 and $95,150, respectively, towards research and development costs. Components of the processors that are fabricated or purchased with research and development plans and then used on the processor in production are capitalized into the cost of the processor and depreciated over the remaining life of the processor.
Foreign Currency Translation
The
condensed
consolidated financial statements have been translated into U.S. dollars in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830. All monetary items have been translated using the exchange rates in effect at the balance sheet date. All non-monetary items have been translated using the historical exchange rates at the time of transactions. Amounts included in the consolidated statement of operations have been translated using the average exchange rate for the period. Foreign exchange losses of $11,657 and $16,603 are included as general and administrative expenses in the condensed consolidated statements of operations for the three months ended March 31, 2013 and 2012, respectively.
Income Taxes
The Company utilizes the asset and liability method to measure and record deferred income tax assets and liabilities. Deferred tax assets and liabilities reflect the future income tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company adopted the accounting standards associated with uncertain tax positions as of January 1, 2007. The adoption of this standard did not have a material impact on the Company’s consolidated statements of operations or financial position. Upon adoption, the Company had no unrecognized tax benefits. Furthermore, the Company had no unrecognized tax benefits at March 31, 2013 or December 31, 2012. The Company files tax returns in the US federal and state jurisdictions as well as in Canada. The years ended December 31, 2009 through December 31, 2012 are open tax years for IRS review.
Loss Per Share
The financial statements include basic and diluted per share information. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period. Common stock equivalents are excluded from the computation of diluted loss per share when their effect is anti-dilutive. For the periods ended March 31, 2013 and 2012, potentially dilutive common stock equivalents consisted of the Preferred Stock Series B, the Common Stock Warrants and the outstanding stock based compensation awards, which were not included in the calculation of diluted loss per share, as the impact would have been anti-dilutive.
Segment Reporting
The Company operates in two reportable segments. ASC 280-10, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for the way that public business enterprises report information about operating segments in their consolidated financial statements. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our operating segments include plastic to oil conversion (Plastic2Oil), which includes our fuel sales as well as sales of waste paper fiber and Data Recovery and Migration, our magnetic tape reading segment. Our chief operating decision maker is the Company’s Chief Executive Officer.
Concentrations and Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company’s policy is to place our cash and cash equivalents with high credit quality financial institutions that are insured by the FDIC, however, account balances may at times exceed insured limits. The Company extends limited credit to its customers based upon their creditworthiness and establishes an allowance for doubtful accounts based upon the credit risk of specific customers, historical trends and other pertinent information.
Fair Value of Financial Instruments
Fair value is defined under FASB ASC Topic 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for an asset or liability in an orderly transaction between participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The levels are as follows:
●
|
Level 1 - Quoted prices in active markets for identical assets or liabilities;
|
●
|
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities; and
|
|
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities
|
The carrying amounts of cash and cash equivalents, cash held in attorney trust, restricted cash, accounts receivable, accounts payable, accrued expenses, mortgage payable and capital leases approximate their fair values because of the short-term nature of these items. Per ASC Topic 820 framework these are considered Level 2 inputs where estimates are unobservable by market participants outside of the Company and must be estimated using assumptions developed by the Company. The short-term notes receivable is carried at fair value and is valued using Level 2 inputs, see Note 13.
Reclassifications
To conform with the basis of presentation adopted in the current year, certain figures previously reported have been reclassified.
Specifically, during 2012, the Company identified certain amounts of employee payroll related to employees that were predominantly involved in research and development activities as defined under ASC 730-10-25. Accordingly, it was determined that the employee payroll expenses related to these individuals should be reclassified from selling, general and administrative expenses to research and development for all periods presented. The resulting impact is a reclassification of $95,150 for the period ended March 31, 2012 As this is a reclassification between two expense categories, there is no impact on the balance sheet, net loss, accumulated deficit or cash flows for the all periods presented. Additionally, the opening balances of additional paid in capital and accumulated deficit were overstated and understated by $16,193, respectively. This amount has been reclassified into the correct accounts for the balance sheet as of December 31, 2012. This reclassification had no impact on the balance sheet, net loss or cash flows for the periods presented.
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
There are no recently adopted accounting pronouncements that impact the Company’s financial statements.
Recently Issued Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.
The Company believes the above discussion addresses its most critical accounting policies, which are those that are most important to the portrayal of the financial condition and results of operations and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
NOTE 4 – INVENTORIES, NET
Inventories consist of the following:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
276,272
|
|
|
$
|
222,642
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
70,244
|
|
|
|
74,077
|
|
Obsolescence reserve
|
|
|
(56,623
|
)
|
|
|
(56,623
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
289,893
|
|
|
$
|
240,096
|
|
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
March 31, 2013
|
|
Cost
|
|
|
|
|
|
Net Book
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
77,907
|
|
|
$
|
(13,125
|
)
|
|
$
|
64,782
|
|
Machinery and office equipment
|
|
|
4,923,150
|
|
|
|
(1,376,383
|
)
|
|
|
3,546,767
|
|
Furniture and fixtures
|
|
|
24,918
|
|
|
|
(13,134
|
)
|
|
|
11,784
|
|
Land
|
|
|
273,118
|
|
|
|
-
|
|
|
|
273,118
|
|
Asset retirement obligation
|
|
|
27,745
|
|
|
|
(2,497
|
)
|
|
|
25,248
|
|
Office and industrial buildings
|
|
|
1,157,794
|
|
|
|
(76,966
|
)
|
|
|
1,080,828
|
|
Fixed assets under capital lease
|
|
|
108,317
|
|
|
|
(20,962
|
)
|
|
|
87,355
|
|
Construction in process
|
|
|
2,124,044
|
|
|
|
-
|
|
|
|
2,124,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,716,993
|
|
|
$
|
(1,503,067
|
)
|
|
$
|
7,213,926
|
|
December 31, 2012
|
|
Cost
|
|
|
|
|
|
Net Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
59,271
|
|
|
$
|
(11,787
|
)
|
|
$
|
47,484
|
|
Machinery and office equipment
|
|
|
4,782,323
|
|
|
|
(1,187,768
|
)
|
|
|
3,594,555
|
|
Furniture and fixtures
|
|
|
24,918
|
|
|
|
(12,306
|
)
|
|
|
12,612
|
|
Land
|
|
|
273,118
|
|
|
|
-
|
|
|
|
273,118
|
|
Asset retirement obligation
|
|
|
27,745
|
|
|
|
(2,220
|
)
|
|
|
25,525
|
|
Office and industrial buildings
|
|
|
1,126,522
|
|
|
|
(65,593
|
)
|
|
|
1,060,929
|
|
Fixed assets under capital lease
|
|
|
108,317
|
|
|
|
(17,094
|
)
|
|
|
91,223
|
|
Construction in process
|
|
|
1,780,613
|
|
|
|
-
|
|
|
|
1,780,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,182,827
|
|
|
$
|
(1,296,768
|
)
|
|
$
|
6,886,059
|
|
As of March 31, 2013 and 2012, the Company had recorded impairment losses on property, plant and equipment of $Nil and $36,500, respectively. These charges related to the impairment of tape reading equipment in the Data Business.
For the period ended March 31, 2013, total depreciation expense consists of $7,646 included in Cost of Sales (March 31, 2012 - $2,838) and depreciation of property, plant and equipment and accretion of long-term liability of $189,327 (March 31, 2012 - $137,196), which is separately disclosed in the condensed consolidated statements of operations.
NOTE 6 – SHORT-TERM NOTES RECEIVABLE
Upon consummation of the sale of Pak-It, the Company entered into a long-term note receivable (the “Note”) with the buyer of Pak-It in the amount of $500,000. The Note was recorded as of the date of closing at the fair value determined by discounting the face value of the Note using 7%, based on factors considered by the Company at the time of recording the Note. Interest income is amortized into the value of the Note during the life of the Note and is recognized as interest income throughout the term of the Note, which is due on July 1, 2013. Interest income recognized on the Note for the periods ended March 31, 2013 and 2012 were $6,139 and $Nil, respectively.
NOTE 7 –
RESTRICTED CASH AND LETTER OF CREDIT
|
|
March 31,
2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Restricted Cash securing $100,000 Letter of Credit
|
|
$
|
|
|
|
$
|
|
|
During 2012, the Company entered into a letter of credit with one of its financial institutions to secure a performance bond required by a governmental agency for the sale of fuel. This letter of credit is fully secured by restricted cash held by this institution and was not utilized at any point during the period ended March 31, 2013. Restricted cash consists of $100,000 plus interest earned on the balance.
NOTE 8 - INCOME TAXES
The Company calculates its income tax expense by estimating the annual effective tax rate and applying that rate to the year-to-date ordinary income (loss) at the end of the period. The Company records a tax valuation allowance when it is more likely than not that it will not be able to recover the value of its deferred tax assets. As of March 31, 2013 and 2012, the Company calculated its estimated annualized effective tax rate at 0% and 0%, respectively, for both the United States and Canada. The Company had no income tax expense on its $2,714,521 pre-tax loss from continuing operations for the three months ended March 31, 2013. The Company recognized no income tax expense based on its $2,770,493 pre-tax loss from continuing operations and $57,736 pre-tax loss from discontinued operations for the three months ended March 31, 2012.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest accrued on uncertain tax positions as well as interest received from favorable tax settlements within interest expense. The Company recognizes penalties accrued on unrecognized tax benefits within general and administrative expenses. As of March 31, 2013 and 2012, the Company had no uncertain tax positions.
The Company does not anticipate any significant changes to the total amounts of unrecognized tax benefits in the next twelve months. The years ending December 31, 2009 through December 31, 2012 are open tax years.
NOTE 9 – LONG TERM DEBT & MORTGAGE PAYABLE
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Mortgage in the amount of $280,000 Canadian dollars, bears simple interest at 7% per annum, secured by the land and building, and matures on June 15, 2015. Principal and interest are due, in their entirety, at maturity.
|
|
$
|
280,700
|
|
|
$
|
280,700
|
|
Equipment capital lease bears interest at 5.0% per annum, secured by the equipment and matures in April 2015, repayable in monthly installments of approximately $360.
|
|
|
9,424
|
|
|
|
9,485
|
|
Equipment capital lease, bears interest at 5.85% per annum, secured by the equipment and matures in November 2015, repayable in monthly installments of approximately $516
|
|
|
14,352
|
|
|
|
17,000
|
|
Equipment capital lease bears interest at 3.9% per annum, secured by the equipment and matures on May 10, 2015, repayable in monthly installments of approximately $1,194.
|
|
|
27,464
|
|
|
|
30,599
|
|
|
|
|
331,940
|
|
|
|
337,784
|
|
Less: current portion
|
|
|
23,223
|
|
|
|
23,068
|
|
|
|
$
|
308,717
|
|
|
$
|
314,716
|
|
The following annual payments of principal are required over the next five years in respect of the mortgage and capital leases:
|
|
Annual
Payments
|
|
To March 31, 2014
|
|
$
|
23,223
|
|
To March 31, 2015
|
|
|
24,306
|
|
To March 31, 2016
|
|
|
284,411
|
|
Total repayments
|
|
$
|
331,940
|
|
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Commitments
One of the Company’s subsidiaries entered into a consulting service contract with a shareholder. The minimum future payment is equal to fifty percent of the operating income generated from the operations of two of the most profitable devices and 10% from all the other devices. This agreement relates to Plastic2Oil Marine, Inc, which the Company is currently not operating.
The Company leases the JBI Recycling Facility in Thorold, Ontario, Canada with terms remaining of up to 17 years.
Our lease on the Recycling Facility contained both a rent free period as well as rent escalations. In order to recognize these items on a straight-line basis over the term of the lease the Company has recorded a deferred rent liability of $63,173 and $60,277, which is included in accrued liabilities at both March 31, 2013 and December 31, 2012.
All future payments required under various agreements are summarized below:
To March 31, 2014
|
|
$
|
97,500
|
|
To March 31, 2015
|
|
|
102,000
|
|
To March 31, 2016
|
|
|
102,000
|
|
To March 31, 2017
|
|
|
102,000
|
|
To March 31, 2018
|
|
|
103,500
|
|
Thereafter
|
|
|
1,467,000
|
|
Total
|
|
$
|
1,974,000
|
|
Contingencies
In August 2010, a former employee filed a complaint against the Company’s subsidiary alleging wrongful dismissal and seeking compensatory damages. The Company denied the validity of the contract which was signed by the former employee as employee and president of the subsidiary. The Company entered into negotiations with the former employee to trade-off some of the benefits of the alleged employment agreement in return for repayment of debts to the Company incurred by the former employee while in the employment of the Company’s subsidiary. The debt in the amount of $346,386 was written off. Prior to December 31, 2011, the former employee settled the dispute with the Company and agreed to repay $250,813 to the Company. The employee owns shares of the Company and will sell and use the proceeds to make the repayments. The Company recognizes these receipts as recoveries when realized. As of March 31, 2013, the Company has received $94,250 of repayments
; however, no repayments were received during the period ended March 31, 2013.
As previously reported, on July 28, 2011, certain of the Company’s stockholders filed a class action lawsuit against the Company and Messrs. Bordynuik and Baldwin on behalf of purchasers of its securities. In an amended complaint filed on July 10, 2012, these shareholders sought to represent such purchasers during the period August 28, 2009 and January 4, 2012. The original and amended complaints in that case, filed in federal court in Nevada, allege that the defendants made false or misleading statements, or both, and failed to disclose material adverse facts about the Company’s business, operations, and prospects in press releases and filings made with the SEC. Specifically, the lawsuit alleges that the defendants made false or misleading statements or failed to disclose material information, or a combination thereof regarding: (1) that the Media Credits were substantially overvalued; (2) that the Company improperly accounted for acquisitions; (3) that, as such, the Company's financial results were not prepared in accordance with Generally Accepted Accounting Principles; (4) that the Company lacked adequate internal and financial controls. During the quarter ended June 30, 2012, a lead plaintiff was appointed in the case and an amended complaint was filed. The defendants’ answer to the amended complaint was filed during the fourth quarter of 2012. Subsequently, a case management order was entered and limited discovery commenced. The Company cannot predict the outcome of the class action litigation at this time.
As previously reported, on January 4, 2012, the Securities and Exchange Commission filed a civil complaint in federal court in Massachusetts against the Company. The complaint alleges that the Company reported materially false and inaccurate financial information in our financial statements (which were later restated) for the third quarter of 2009 and the year end 2009 by overvaluing certain media credits (“Media Credits”) on its balance sheet, in violation of, among other things, the antifraud, reporting, books and records, internal controls and periodic report certification provisions of the U.S. Securities Laws. The Complaint named the Company’s former Chief Executive Officer and current Chief of Technology, John Bordynuik, and its former Chief Financial Officer, Ronald Baldwin, Jr., as co-defendants. Among other relief requested, the complaint sought an order requiring the defendants to pay unspecified disgorgement and civil penalty amounts. The SEC approved a settlement under which the Company and its former Chief Executive Officer and current Chief of Technology, John Bordynuik, would pay fines of $150,000 and $110,000, respectively, and consent to the imposition of injunctions against future violations. During the quarter ended March 31, 2013, the court approved this settlement and the Company paid $150,000 which had previously been accrued for and was classified as cash held in attorney trust at December 31, 2012.
As previously reported, on March 16, 2012, a stockholder derivative suit was filed in the U.S. District Court in the State of Massachusetts, naming the Company as a nominal defendant and naming as defendants each member of the Board of Directors (the “Board”) of the Company, including current director Mr. John Wesson, former director Mr. John Bordynuik and other former directors. The complaint alleges that the individual members of the Board breached their fiduciary duties to the Company in connection with the alleged improper accounting treatment of the Media Credits and public disclosures regarding the status of its Plastic2Oil, or P2O, process. During the third and fourth quarters of 2012, the individual defendants filed a motion to dismiss the complaint arguing, among other things, that the plaintiff stockholder failed to allege sufficient facts demonstrating that presenting a demand to the Company’s Board of Directors prior to filing suit would have been futile. The plaintiff filed an opposition to this motion and the Company has replied to that opposition. The Company cannot predict the outcome of the litigation at this time.
At March 31, 2013, the Company is involved in litigation and claims in addition to the above mentioned legal claims, which arise from time to time in the normal course of business. In the opinion of management, based upon the information and facts known to them, any liability that may arise from such contingencies would not have a material adverse effect on the
condensed
consolidated financial statements of the Company.
NOTE 11 – SHAREHOLDERS’ EQUITY
Common Stock and Additional Paid in Capital
During the first quarter of 2013, the Company issued 34,247 shares of common stock that had previously been subscribed. These shares were valued at $0.73 per share, on the date of approval by the Board of Directors.
Warrants
Pursuant to a private placement that took place between December 30, 2011 and January 6, 2012, the Company issued 1,997,500 warrants to purchase shares of common stock for $2.00 to the subscribers of the December 2011 through January 2012 private placements. The warrants have an eighteen month term from the date of issuance and expire on July 6, 2013. As of March 31, 2013, all 1,997,500 warrants were still outstanding. As of the date of their issuance, the warrants were determined to have a fair value of $1.02. The Company determined this valuation through use of a binomial pricing model, the assumptions in valuing these Warrants consisted of:
●
|
Volatility – 163.67%, based on the Company’s Historical Stock Price
|
●
|
Probability of Occurrence – 100%, based on the expectation and discussions the Company held with additional investors during and after the consummation of this private placement
|
|
Risk Free Rate – 2.70%, based on the long-term US Treasury rate
|
Preferred Stock
Series A Preferred Stock
The Company’s founder and current Chief of Technology holds all outstanding 1,000,000 shares of the Company’s issued and outstanding Series A Preferred Stock. These shares have no participation rights, however, they carry super voting rights in which each share of Preferred Stock has 100:1 times the voting rights of common stock.
The Series B Preferred Stock was created pursuant to the Certificate of Designation setting forth the powers, designations, preferences, rights, qualifications, limitations and restrictions of the Series B Convertible Preferred Stock filed with the Secretary of State of the State of Nevada on December 24, 2012 (the “Series B Designation”). Pursuant to the Series B Designation, the Series B Preferred Stock are convertible at the election of the holder into shares of Common Stock, par value $0.001 per share, of the Company, at the rate of seven (7) shares of Common Stock for each share of Series B Preferred Stock, subject to proportional adjustment for stock splits, combinations, consolidations, stock dividends, stock distributions, recapitalizations, reorganizations, reclassifications and other similar events. Upon any conversion, a holder of shares of Series B Preferred Stock must convert all shares of Series B Preferred Stock then held by such holder. All shares of Series B Preferred Stock that remain outstanding on June 30, 2014 shall be automatically converted into Common Stock.
Pursuant to the Series B Designation, in the event of the liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock shall be entitled to receive out of assets of the Company available for distribution to stockholders of the Company, prior and in preference to any distribution to the holders of any other capital stock of the Company, an amount per share of Series B Preferred Stock equal to the original purchase price for such shares of Series B Preferred Stock. The holders of the Series B Preferred Stock will vote together with the Common Stock and not as a separate class, except as otherwise required by law. Each share of Series B Preferred Stock will have a number of votes equal to the number of shares of Common Stock then issuable upon conversion of such shares of Series B Preferred Stock. The approval of the holders of a majority of the Series B Preferred Stock will be required to amend the Certificate of Designation or to alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock in a manner that adversely affects such shares.
The holders of the Series B Preferred Stock shall not be entitled to receive dividends on the Series B Preferred Stock; provided, however, in the event the Board of Directors of the Company (the “Board”) declares and pays a dividend in respect of any Common Stock, then the Board shall declare and pay to the holders of the Series B Preferred Stock in an amount per share of Series B Preferred Stock equal to the number of shares of Common Stock into which the Series B Preferred Stock is convertible on the record date established by the Board or under applicable law for such dividend multiplied by the per share amount declared and paid in respect of each share of Common Stock.
The Series B Preferred Stock was valued at the subscribed amount less issue costs. The beneficial conversion feature was valued using the number of common shares available upon conversion of all shares of Series B Preferred Stock and the differential between the closing market price of the Company’s Common Stock on the date of the execution of the subscription agreements and the exercise price of the conversion option, the number of shares and market prices are as follows:
Date of Closing
|
|
Preferred Shares Issued
|
|
|
Closing Market Price
|
|
December 27, 2012
|
|
|
860,544
|
|
|
$
|
0.80
|
|
December 31, 2012
|
|
|
285,900
|
|
|
$
|
0.83
|
|
January 11, 2013
|
|
|
896,456
|
|
|
$
|
0.81
|
|
January 17, 2013
|
|
|
148,100
|
|
|
$
|
0.76
|
|
January 31, 2013
|
|
|
109,000
|
|
|
$
|
1.29
|
|
Total
|
|
|
2,300,000
|
|
|
|
|
|
The beneficial conversion feature was valued at $2,451,378 on the Preferred Stock Subscribed as at December 31, 2012, and issued during the period ended March 31, 2013, and at $2,817,622 on the additional Preferred Stock Series B shares issued during the period. The beneficial conversion feature is then amortized into accumulated paid in capital as a deemed dividend, since the conversion option may be exercised at any time, the beneficial conversion feature will be amortized over eighteen months, which is the term of the conversion option. During the period ended March 31, 2013, the Company recognized a deemed dividend of $800,818 related to the amortization of the beneficial conversion feature.
The Company incurred stock issue costs in relation to the Series B Preferred Stock. Stock issue costs of $29,361 were recorded for the Series B Preferred Stock Subscribed as at December 31, 2012, which were issued during the period ending March 31, 2013. Stock issue costs of $39,154 were recorded for the Series B Preferred Stock subscribed and issued during the period ending March 31, 2013.
NOTE 12 – STOCK-BASED COMPENSATION PLANS AND AWARDS
The Company’s 2012 Long Term Incentive Plan (the “2012 Plan”) provides for the issuance of stock options, restricted stock units and other stock-based awards to members of management and key employees. The 2012 Plan is administered by the compensation committee of the board of directors of the Company, or in the absence of a committee, the full board of directors of the Company.
Valuation of Awards
The per-share fair value of each stock option with a service period condition was determined on the date of grant using the Black-Scholes option pricing model. There has not been an issuance of stock options during the three months ended March 31, 2013 or March 31, 2012.
Stock Options
A summary of stock option activity for the three months ended March 31, 2013 is as follows:
|
|
Options
Outstanding
Stock
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Aggregate (1)
Intrinsic
Value
|
|
Balance as of December 31, 2012
|
|
|
5,240,000
|
|
|
$
|
1.50
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2013
|
|
|
5,240,000
|
|
|
$
|
1.50
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity awards available for grant at March 31, 2013
|
|
|
4,721,731
|
|
|
|
|
|
|
|
|
|
Restricted
The fair value of the restricted stock is expensed ratably over the vesting period. During the three months ended March 31, 2013 and 2012, no restricted stock was issued.
For the three months ended March 31, 2013 and 2012, the Company recorded compensation expense (included in selling, general and administrative expense) of $260,745 and $Nil, respectively, related to the recognition of the awards over the requisite service period.
During the three months ended March 31, 2013 and 2012, no options or shares of restricted stock vested and no stock options were exercised.
(1)
|
Amounts represent the difference between the exercise price and the fair value of common stock at period end for all in the money options outstanding based on the fair value per share of common stock. As of March 31, 2013, no options that had been granted were “in the money.”
|
NOTE 13 – FAIR VALUE MEASUREMENTS
The following table summarizes the valuation of the Company’s financial instruments by the following three categories as of March 31, 2013 and December 31, 2012:
●
|
Level 1 - Quoted prices in active markets for identical assets or liabilities
|
●
|
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities
|
●
|
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities
|
|
|
|
March 31,
2013
|
|
|
December 31, 2012
|
|
Balance Sheet Classification
|
|
|
|
|
|
|
|
Short term notes receivable
|
Level 1
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Level 2
|
|
|
493,861
|
|
|
|
487,722
|
|
|
Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
493,861
|
|
|
$
|
|
|
We have elected to use the income approach to value the short term note receivable, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present value amount assuming that participants are motivated, but not compelled, to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability (specifically Prime interest rates). Mid-market pricing is used as a practical expedient for fair value measurements. Fair value measurement of the asset must reflect the nonperformance risk of the counterparty. Therefore, the impact of the counterparty’s creditworthiness has also been factored into the fair value measurement and did not have a material impact on the fair value of these derivative instruments. The counterparty is expected to perform under the contractual terms of the note receivable. Additionally, during the quarter ended March 31, 2013, the Company recognized an increase in the carrying value of its short term note receivable of approximately $6,139 of interest income related to this note, which has been classified as net interest income in the statement of operations.
As of March 31, 2013 and December 31, 2012, the Company has no non-financial assets or liabilities that are measured and recorded at fair value on a recurring basis, and our other financial assets or liabilities generally consist of cash and cash equivalents, cash held in attorney’s trust, restricted cash, accounts receivable, accounts payable, accrued expenses, notes payable, mortgage payable, short-term loans and stock subscriptions payable. The estimated fair values of our cash and cash equivalents is determined based on quoted prices in active markets for identical assets. The fair value of the other financial assets and liabilities is based on the value that would be received or paid in an orderly transaction between market participants and approximates the carrying value due to their nature and short duration.
NOTE 14 – SEGMENTED REPORTING
The Company has two operating segments, Plastic2Oil and Data Recovery & Migration. These operating segments were determined based on the nature of the products and services offered. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company’s Chief Executive Officer has been identified as the chief operating decision maker, and directs the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.
The Company evaluates performance based on several factors, of which the primary financial measure is net income. The accounting policies of the business segments are the same as those described in “Note 2: Summary of Accounting Policies.” The following tables show the operations of the Company’s reportable segments:
|
Three Months Ended March 31, 2013
|
|
|
Data Recovery
& Migration
|
|
|
Plastic2Oil
|
|
|
Total
|
|
Sales
|
|
$
|
14,920
|
|
|
$
|
181,897
|
|
|
$
|
196,817
|
|
Cost of Sales
|
|
$
|
8,460
|
|
|
$
|
151,516
|
|
|
$
|
159,976
|
|
Total Operating Expenses
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
|
|
Net Income (Loss)
|
|
$
|
6,460
|
|
|
$
|
(
2,720,981
|
)
|
|
$
|
|
)
|
Total Assets
|
|
$
|
58,930
|
|
|
$
|
14,108,775
|
|
|
$
|
14,167,705
|
|
Accounts Receivable
|
|
$
|
58,930
|
|
|
$
|
85,642
|
|
|
$
|
144,572
|
|
Inventories
|
|
$
|
-
|
|
|
$
|
289,893
|
|
|
$
|
289,893
|
|
|
Three Months Ended March 31, 2012
|
|
|
Data Recovery
& Migration
|
|
|
Plastic2Oil
|
|
Total
|
|
Sales
|
|
$
|
-
|
|
|
$
|
226,462
|
|
|
$
|
226,462
|
|
Cost of Sales
|
|
$
|
-
|
|
|
$
|
177,849
|
|
|
$
|
177,849
|
|
Total Operating Expenses
|
|
$
|
36,500
|
|
|
$
|
3,031,304
|
|
|
$
|
3,067,804
|
|
Net Loss
from Continuing Operations
|
|
$
|
(36,500
|
)
|
|
$
|
(
2,733,993
|
)
|
|
$
|
(
2,770,493
|
)
|
Total Assets
|
|
$
|
-
|
|
|
$
|
7,263,577
|
|
|
$
|
7,263,577
|
|
Accounts Receivable
|
|
$
|
-
|
|
|
$
|
303,646
|
|
|
$
|
303,646
|
|
Inventories
|
|
$
|
-
|
|
|
$
|
29,393
|
|
|
$
|
29,393
|
|
(1)
|
All sales from the Data business were recorded in the United States for the period ended March 31, 2013. For the period ended March 31, 2013, P2O sales in the United States and Canada were $26,161 and $155,736, respectively. For the period ended March 31, 2012, P2O sales in the United States and Canada were $56,932 and $169,530, respectively.
|
(2)
|
P2O assets include the Company headquarters and various machinery and equipment used at the aforementioned sites and at the Niagara Falls Facility. As at March 31, 2013, total long-lived assets of $8,002,401 and $789,707 were located in the United States and Canada, respectively. As at December 31, 2012, total long-lived assets of $5,956,508 and$ 929,551, were located in the United States and Canada, respectively.
|
NOTE 15 – SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
March 31, 2013
|
|
|
March 31, 2012
|
|
Common shares to be issued in connection with acquisition of property, plant and equipment
|
|
$
|
-
|
|
|
$
|
35,120
|
|
Common shares to be issued in connection with various services rendered
|
|
$
|
-
|
|
|
$
|
783,878
|
|
Stock based compensation
|
|
$
|
260,745
|
|
|
$
|
-
|
|
Short term loan settled through share issuance
|
|
$
|
-
|
|
|
$
|
200,000
|
|
Note receivable from sale of Pak-It
|
|
$
|
-
|
|
|
$
|
467,257
|
|
Derivative equity liability incurred in conjunction with December 2011 - January 2012 Private Placement
|
|
$
|
-
|
|
|
$
|
1,000,643
|
|
NOTE 16 – DISCONTINUED OPERATIONS
During the second quarter of 2012, the Company determined that the operations of Javaco no longer coincided with the strategy of the Company and that it would close down Javaco’s operations. In July 2012, the Company shut down the Javaco operations, including the termination of the five employees of Javaco, the liquidation of the inventory and fixed assets and the termination of the lease for the building.
As of March 31, 2013 and December 31, 2012, no assets related to Javaco remained.
There are no operations of Javaco included in the condensed consolidated financial statements as of March 31, 2013. The results of operations from Javaco for the three months ended March 31, 2012 have been classified as discontinued operations and are as follows:
Condensed Statements of Operations
|
|
Three Months Ended
March 31, 2012
|
|
|
|
|
|
Revenues
|
|
$
|
406,718
|
|
|
|
|
|
|
Cost of sales
|
|
|
339,658
|
|
Gross profit
|
|
|
67,060
|
|
Operating expenses
|
|
|
(125,738
|
)
|
|
|
|
|
|
Other expense
|
|
|
|
)
|
Loss before income taxes
|
|
|
(59,620
|
)
|
Future income tax recovery
|
|
|
-
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes
|
|
$
|
(59,620
|
)
|
NOTE 17 – RISK MANAGEMENT
Concentration of Credit Risk and Economic Dependence
The Company maintains cash balances, at times, with financial institutions in excess of amounts insured by the Canada Deposit Insurance Corporation and the U.S. Federal Deposit Insurance Corporation. Management monitors the soundness of these institutions and has not experienced any collection losses with these financial institutions.
During the period ended March 31, 2013, 92.4% (March 31
,
2012 – 67.3%) of total net
sales
were generated from 3 (2012 – 3) customers. As at March 31, 2013, 4 (December 31, 2012 – 2) customers accounted for 90.5% (December 31, 2012 – 50.6%) of accounts receivable.
For the period ended March 31, 2013, the Company had approximately 29.1% of its purchases from 1 vendor (201
2
– Nil). As at March 31, 2013 this vendor accounted for 9.8% (December 31, 2012 – 19.2%) of accounts payable.
NOTE 18 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events occurring after the balance sheet and has identified the following:
Subsequent to March 31, 2013, the Company issued 51,168 shares of the Company’s common stock, for services, that had previously been subscribed. The shares were valued at a price of $0.70 per share.
On April 19, 2013, John Wesson resigned as a member of the Board of Directors of JBI, Inc. and from each committee of the Board.
On May 1, 2013, Kevin Rauber informed the Board of Directors (the “Board”) of JBI, Inc. (the “Company”) of his resignation from his positions as the Company’s President and Chief Executive Officer and from the Board, effective May 2, 2013. In connection with Mr. Rauber’s resignation, Mr. Rauber and the Company executed a separation agreement (the "Separation Agreement") on May 1, 2013. Pursuant to the terms of the Separation Agreement, Mr. Rauber will receive payment of the equivalent of four months of his base salary ($83,333) payable in accordance with the Company’s payroll practices and immediate accelerated vesting of options to purchase 200,000 shares of the Company’s common stock. The exercise period of the vested options will be extended from ninety (90) days to seven years after execution of the Separation Agreement. The remaining unvested options held by Mr. Rauber will be forfeited. In addition, Mr. Rauber will receive continued coverage under the Company's benefit plans or equivalent coverage through July 31, 2013.
On May 2, 2013, Tony Bogolin, the Company’s Chief Operating Officer, was appointed to the role of the Company's President and Chief Executive Officer as well as a director of the Company.