Item 2.
|
Management’s Discussion and Analysis of Financial Conditions and Results of Operations
|
The following management’s discussion and analysis (the “MD&A”) of the results of financial condition and operations contains “forward looking statements” within the meaning of applicable securities laws. Such statements include, but are not limited to, statements with respect to our beliefs, plans, strategies, objectives, goals and expectations, including expectations about our future financial or operating performance and our projects, capital expenditures, capital needs, government regulation of the industry, environmental risks, limitations of insurance coverage, and the timing and possible outcome of regulatory matters, including the granting of patents and permits. Words such as “expect”, “anticipate”, “intend”, “attempt”, “may”, “will”, “plan”, “believe”, “seek”, “estimate”, and variations of such words and similar expressions are intended to identify such forward looking information. These statements are not guarantees of future performance and involve assumptions, risks and uncertainties that are difficult to predict.
These statements are based on and were developed using a number of factors and assumptions including, but not limited to: stability in the U.S. and other foreign economies; stability in the availability and pricing of raw materials, energy and supplies; stability in the competitive environment; our continued ability to access cost effective capital when needed; and no unexpected or unforeseen events occurring that would materially alter our current plans.
All of these assumptions have been derived from statements currently available to us including information obtained by us from third party sources. Although management believes that these assumptions are reasonable, these assumptions may prove to be incorrect in whole or in part. As a result of these and other factors, actual results may differ materially from those expressed, implied or forecasted in such forward looking statements, which reflect our expectations only as of the date hereof.
Factors that could cause actual results or outcomes to differ materially from the results expressed, implied or forecasted by the forward looking statements include risks associated with general business, economic, competitive, political and social uncertainties; risks associated with changes in project parameters as plans continue to be refined; risks associated with failure of plant, equipment or processes to operate as anticipated; risks associated with accidents or labor disputes; risks associated with delays in obtaining governmental approvals or financing, or in the completion of development or construction activities; risks associated with financial leverage and the availability of capital; risks associated with the price of commodities and our inability to control commodity prices; risks associated with the regulatory environment within which we operate; risks associated with litigation including the availability of insurance; and risks posed by competition. These and other factors that could cause actual results or outcomes to differ materially from the results expressed, implied or forecasted by the forward looking statements are discussed in more detail in the section entitled “Risk Factors” in Part IA of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
We do not intend to, and the Company disclaims any obligation to, update any forward looking statements, whether written or oral, or whether as a result of new information, future events or otherwise, except as required by law.
For financial reporting purposes, we operate two business segments, which are our fuel production business using our P2O solution, which also includes revenue from waste paper fiber, and our Data Recovery & Migration Business. Previously, we operated an electronic and video equipment distribution business, conducted by Javaco, Inc. (“Javaco”). As of June 30, 2013, no assets related to Javaco remained on the books. For the six and three month periods ending June 30, 2012, the operations of Javaco have been classified as discontinued.
Our P2O business has begun the transition from research and development to a commercial production business. We anticipate that this segment will continue to grow and ultimately will account for substantially all of our revenues for the remainder of 2013 and periods thereafter. Historically, however, our revenues have been derived primarily from our other segments and products, including those noted above as discontinued operations.
Plastic2Oil Business
Our P2O solution is a proprietary process that converts waste plastic and heat transfer fluids into fuel through a series of chemical reactions. We developed this process in 2009 and began limited commercial production in 2010 following our receipt of a consent order from the New York State Department of Environmental Conservation (“NYSDEC”) allowing us to commercially operate our first large-scale P2O processor located at our Niagara Falls, New York facility. Currently, as of the filing of this report, we have three operational P2O processors, all of which are located at our Niagara Falls, NY plant. Each of these processors are capable of producing naphtha, Fuel Oil No. 2 and Fuel Oil No. 6, which are fuels produced to the specifications published by ASTM International, the organization that establishes the international technical standards for fuel products. Our process also produces two by-products, an off-gas similar to natural gas and a petcoke carbon residue. The off-gas is used in our process to fuel the burners when the processors are in steady operating state and the petcoke carbon residue is disposed of once removed from the processors. We currently sell our fuel product to fuel wholesalers and directly to commercial and industrial end-users.
Our P2O process accepts certain mixed, unwashed waste plastics. Although many sources of plastic waste are available, we concentrate our feedstock procurement efforts on sources primarily including post-commercial and industrial waste plastic. Generally, this waste stream offers a more constant supply of the same waste streams, requiring less ongoing testing of the plastics and more consistent deliveries of feedstock.
As we move from research and development to commercial production, we plan to grow from both expansion of current production capabilities and through expansion of new locations and processors. In the future, we do not anticipate providing updates at a processor by processor level. However, in an effort to give an update, the following is the current status of our Niagara Falls facility and processors as of the date of this filing:
●
|
Niagara Falls Plastic2Oil Facility – During the second quarter, we made significant upgrades and enhancements to our facility infrastructure, in order to enable us to simultaneously run three processors at the Niagara Falls site. A new off-gas compression system was added to allow for the storage and use of the off-gas from the processors at all times and not just when the processors are operating in steady state. This upgrade required the shutdown of all processors in order to complete the new piping that was needed to fuel the burners on all three processors. We also added a 17,000 gallon off-gas storage tank to store this volume and reconfigured the piping of the facility to connect all of our processors to this system. Additionally, we added a 60 ton chiller and a 10,000 gallon water tank to allow for the cooling of all three processors with significantly more efficiency and speed than in the past. We also purchased and piped into the processors, two high capacity centrifuges, which are used to pre-process the heat transfer fluid prior to feeding into the machine. During the quarter, we reconfigured the piping for Processors #1 and #2 to accommodate the significant increase in heat transfer fluid that will be introduced to the process.
|
●
|
Processor #1 – This is our first processor that was built and provided key research and development data. The new layout of Processor #1 has resulted in a lower feedrate than our other processors and ultimately, significantly less fuel output than anticipated from this processor. As a result of the low output, we are currently using this processor primarily for the pre-heating of heat transfer fluid to be pumped into Processors #2 and #3 for processing into fuels. This process will allow for more efficient processing and in turn will allow for higher feedrates in Processors #2 and #3 than otherwise would be possible. Based on our process and financial analyses, we anticipate that this slightly modified use of Processor #1 will allow for greater production from both Processor #2 and #3 going forward. As of the date of this filing, all of the required piping has been completed to allow for this processing and no additional components are required for this change.
|
●
|
Processor #2 – The second processor operated sporadically throughout the second quarter, due largely to our primary focus being on completing the assembly and start-up of our third processor. This required the redeployment of much of our plant operations staff in assisting in the construction of Processor #3, due to their specific knowledge and expertise. Additionally, as discussed above, with the key upgrades to the Niagara Falls facility infrastructure, the second processor was shut down for significant periods of time during the quarter in order to reconfigure the facility layout, change and upgrade both the facility support systems and the piping.
|
●
|
Processor #3 – On June 13, 2013, we completed the assembly of our third P2O processor and began start-up testing. The overall system design, as well as the individual component designs behind the third processor have undergone significant upgrades from the previous generation processors. One of the most significant of these changes is the addition of a real-time residue removal process that we anticipate will significantly increase processor uptime, which we measure by the amount of time the processor is at steady state, with full capacity, producing fuel. As of the end of the quarter, we were in the process of performing start up testing, including the initial feeding of plastic, fuel production and overall process debugging, which is designed to address any initial problems and any parts that may potentially fail under the full heat of the process and feedstock loads. There was no meaningful production by this processor during the quarter, as the testing discussed above was not completed until early in July.
|
●
|
Other –The kilns for the fourth and fifth processors have been completed, tested and prepared for shipment. In addition, the towers for these two processors are nearing completion, as well, with certain internal components remaining to be installed. The production data we are gathering on processor #3 is critical to decisions to be made regarding timing of assembly and implementation of these two additional processors. As previously discussed, we have an agreement with RockTenn Company to place these two processors at their location in Jacksonville, Florida.
|
Routinely, our fuel buyers have communicated that they are very pleased with the quality of all of our fuel products. Our fuel is sold without the need for additives or further refining, directly from our processors to our customers. We remain satisfied with our processors’ ability to make a range of fuels, which allows us to take advantage of changing market conditions. We believe we have enough customer demand for our current fuel production levels and, in fact, we continue to receive inquiries from prospective customers that we believe will enable us to continue to keep up with our anticipated increase in production.
Data Recovery & Migration Business
In 2009 the Company purchased the Data Recovery & Migration Assets (“Data Assets”) from John Bordynuik, Inc., thereby providing the Company with the ability to operate what was once John Bordynuik, Inc.’s data restoration and recovery business. This was a business originally developed by our founder, John Bordynuik in 2006.
The Data Recovery & Migration Business is not as capital intensive as the other businesses of JBI, but is time consuming with regards to the allocation of the time of John Bordynuik. Revenues for this segment will vary based on the availability of Mr. Bordynuik to dedicate portions of his time to reading and interpreting the data from our customers’ media.
Results of Operations
Six months ended June 30, 2013 compared to June 30, 2012
Revenue
Revenue is primarily derived from our P2O business through the sale of our fuels and processed waste paper fiber. Additionally, from time to time, we are able to supplement this revenue with revenue from our Data Business through reading and interpreting magnetic tape media, dependent on the time constraints of John Bordynuik. The following table shows a breakdown of our revenues from these sources.
Revenue
|
|
Six Months ended June 30,
2013
|
|
|
Six Months ended June 30,
2012
|
|
|
% Change
|
|
P2O Revenue
|
|
|
|
|
|
|
|
|
|
Fuels
|
|
$
|
199,538
|
|
|
$
|
219,879
|
|
|
|
(9.3)
|
|
Waste paper fiber
|
|
|
74,797
|
|
|
|
186,003
|
|
|
|
(59.8
|
)
|
Total P2O Revenue
|
|
|
274,335
|
|
|
|
405,882
|
|
|
|
(32.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Business
|
|
|
50,232
|
|
|
|
-
|
|
|
|
100.0
|
|
TOTAL REVENUE
|
|
$
|
324,567
|
|
|
$
|
405,882
|
|
|
|
(20.0
|
)
|
Our fuel revenue comprised approximately 61% of our total revenue for the six months ended June 30, 2013, as compared to approximately 54% for the six months ended June 30, 2012. Fuel sales are based on either a set pricing structure with our customers or the prevailing market rate for the specific type of fuel being sold. Our fuels are sold under both long term sale contracts with specified pricing or through the issuance of purchase orders by our customers. Generally, we are able to obtain a higher price per gallon for our Fuel Oil No. 2 as compared to Fuel Oil No. 6, and a significantly lower price for our Naphtha. The decrease in fuel revenues for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 is due to the following key factors:
●
|
Machine downtime due to the upgrade of the gas compression and chillers added to the facility, which required the shutdown of all systems while construction was being completed;
|
●
|
Focused effort by all facility staff on the completion of the third processor, including our plant operations staff who were focused on the construction of key components of the processor;
|
The following tables provide a comparison of production and sales of our three specific fuels for the six month periods ended June 30, 2013 and 2012 as well as a comparison of our average price per gallon of fuel sold in each of the two periods.
|
|
Gallons Produced (Six months ended June 30,)
|
|
|
Gallons Sold (Six months ended June 30,)
|
|
Fuel Type
|
|
2013
|
|
|
2012
|
|
|
% Change
|
|
|
2013
|
|
|
2012
|
|
|
% Change
|
|
Fuel Oil No. 6
|
|
|
52,191
|
|
|
|
84,576
|
|
|
|
(38.3)
|
|
|
|
45,190
|
|
|
|
87,990
|
|
|
|
(48.6
|
)
|
Fuel Oil No. 2
|
|
|
19,451
|
|
|
|
-
|
|
|
|
100.0
|
|
|
|
24,737
|
|
|
|
-
|
|
|
|
100.0
|
|
Naphtha
|
|
|
48,232
|
|
|
|
48,383
|
|
|
|
(0.3)
|
|
|
|
50,939
|
|
|
|
46,206
|
|
|
|
30.7
|
|
TOTAL
|
|
|
119,874
|
|
|
|
132,959
|
|
|
|
(9.8)
|
|
|
|
120,866
|
|
|
|
134,250
|
|
|
|
(10.0)
|
|
Fuel Type
|
|
Six months ended June 30, 2013
Average Price
per Gallon
|
|
|
Six months ended June 30, 2012
Average Price
per Gallon
|
|
|
% Change
|
|
Fuel Oil No. 6
|
|
$
|
1.89
|
|
|
$
|
1.94
|
|
|
(2.0)
|
|
Fuel Oil No. 2
|
|
|
2.79
|
|
|
|
-
|
|
|
|
N/A
|
|
Naphtha
|
|
|
0.91
|
|
|
|
1.07
|
|
|
|
(15.3
|
)
|
During the six months ended June 30, 2013, we completed reconfiguring the programming of the processors to primarily produce Fuel Oil No. 2, as opposed to Fuel Oil No. 6, as there is a significantly higher price per gallon that we are able to obtain from this product. We expect that this will continue in the future as we focus our processors on making the most profitable fuels. In addition, although Naphtha will always be a fuel made through the conversion process, we are working to minimize the relative production of Naphtha, as its sale price per gallon is significantly lower than that of our other fuels.
Revenues from the Data Business were driven by the completion of both open and new purchase orders. During the six months ended June 30, 2013, we were able to complete certain open orders as well as certain new purchase orders.
Cost of Goods Sold
Our costs of goods sold consist of feedstock procurement costs, overhead incurred at both our recycling facility in Thorold, Ontario and our Niagara Falls, NY facility as well as the freight associated with the shipments of our plastics and fuels. The costs incurred at our recycling facility are directly proportional to the amount of plastic that is processed at this facility as well as the costs incurred to process waste paper fiber. Our feedstock procurement strategy is geared towards obtaining significant amounts of high quality feedstock at the lowest pricing available. The following table provides a breakdown of the costs of goods sold:
Cost of Goods Sold
|
|
Six months ended June 30, 2013
|
|
|
Six months ended June 30,
2012
|
|
|
% Change
|
|
P2O COGS
|
|
|
|
|
|
|
|
|
|
Fuels
|
|
$
|
241,910
|
|
|
|
228,680
|
|
|
|
5.8
|
|
Waste paper fiber
|
|
|
38,858
|
|
|
|
75,498
|
|
|
|
(48.5
|
)
|
Total P2O COGS
|
|
|
280,768
|
|
|
$
|
304,178
|
|
|
|
(7.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Business
|
|
|
18,351
|
|
|
|
-
|
|
|
|
N/A
|
|
TOTAL COGS
|
|
$
|
299,119
|
|
|
$
|
304,178
|
|
|
|
(1.7
|
)
|
Fuel cost of goods sold increased 5.8% in the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 while total fuel gallons sold decreased 10.0%. The increase in cost of goods sold and cost per gallon was due to the following factors:
●
|
Increased costs to procure optimal feedstock for the processors. We have identified a number of significant sources of optimal feedstock which can be delivered directly to our Niagara Falls plant, without the need for pre-processing at our recycling center. During the quarter, we processed a significant amount of this feedstock, which is at a higher cost than that which requires pre-processing.
|
●
|
Increased freight costs to receive feedstock. Much of the optimal feedstock discussed above came from suppliers that are not in close proximity to our Niagara Falls plant. As a result of this, we incurred significantly higher transportation costs.
|
The following is a detail of the cost per gallon of fuel as well as the individual components that make-up the cost per gallon.
Fuel Type
|
|
Six months ended June 30, 2013 Average
Cost per
Gallon
|
|
|
Six months ended June 30, 2012 Average
Cost per
Gallon
|
|
|
% Change
|
|
Fuel Oil No. 6
|
|
$
|
2.00
|
|
|
$
|
1.70
|
|
|
|
17.5
|
|
Fuel Oil No. 2
|
|
$
|
2.00
|
|
|
$
|
1.70
|
|
|
|
17.5
|
|
Naphtha
|
|
$
|
2.00
|
|
|
$
|
1.70
|
|
|
|
17.5
|
|
Cost of Goods Sold Components
|
|
Six months ended June 30, 2013
Percentage
Cost per
Gallon (%)
|
|
|
Six months ended June 30, 2012
Percentage
Cost per
Gallon (%)
|
|
|
% Change
|
|
Feedstock Costs
|
|
|
52.6
|
|
|
|
37.8
|
|
|
|
39.0
|
|
Preprocessing Costs
|
|
|
30.5
|
|
|
|
43.4
|
|
|
|
(29.8
|
)
|
P2O Plant Costs
|
|
|
10.2
|
|
|
|
15.3
|
|
|
|
(32.9)
|
|
Freight
|
|
|
6.7
|
|
|
|
3.5
|
|
|
|
91.5
|
|
The costs of goods related to waste paper fiber are comprised primarily of the direct material costs to acquire the material prior to processing and selling the recycled material.
The cost of goods sold related to the Data Business relate to the direct labor incurred in the reading and interpreting of the magnetic tape data.
Total Gross Profit
Gross Profit
|
|
Six months ended June 30,
2013
|
|
|
Gross Profit % - Six months ended
June 30,
2013
|
|
|
Six months ended June 30,
2012
|
|
|
Gross Profit % - Six months ended
June 30,
2012
|
|
P2O
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuels
|
|
$
|
(42,372)
|
|
|
|
(21.2)
|
|
|
$
|
(8,801
|
)
|
|
|
(4.0
|
)
|
Waste paper fiber
|
|
|
35,939
|
|
|
|
48.0
|
|
|
|
110,505
|
|
|
|
59.4
|
|
Total P2O Gross Profit
|
|
|
(6,433)
|
|
|
|
(2.3)
|
|
|
|
101,704
|
|
|
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Business
|
|
|
31,881
|
|
|
|
635
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL GROSS PROFIT
|
|
|
25,448
|
|
|
|
7.8
|
|
|
|
101,704
|
|
|
|
25.1
|
|
For the six months ended June 30, 2013 and 2012, we recorded a total gross profit of $25,448 and $101,704, respectively.
The gross profit related to our fuel sales for the six months ended June 30, 2013 was negatively impacted by our decision to secure optimal feedstock, albeit at higher pricing, in addition to increased costs to transport the feedstock to our Niagara Falls facility, as compared to the same period of 2012.
Our gross profit of $35,939 related to waste paper fiber was mainly driven by the commodities markets for the product. We are generally able to procure waste paper fiber at low costs and then bale the raw materials for sales to local paper mills. Additionally, we use the waste paper fiber markets to gain access to other feedstock waste streams.
The gross profit of $31,881 in the Data Business was mainly due to the low operating costs associated with this business segment.
Operating Expenses
We incurred operating expenses of $5,308,715 during the six months ended June 30, 2013, compared to $7,301,304 for the period ended June 30, 2012. This is a decrease in the current period, mainly driven by a decrease in legal and accounting fees, the recovery of $700,000 related to insurance reimbursement of prior legal expenses and stock compensation expense, as there were a significant number of stock options that vested in the prior year that did not recur in the current year. This was partially offset by increases in payroll as the Company continued to execute on the construction of the third processor, and insurance costs, which are related to the Company’s expansion and need for additional coverage. A breakdown of the components of operating expenses for the six month periods ended June 30, 2013 and 2012 are as follows:
Operating Expenses
|
|
Six months ended June 30,
2013
($)
|
|
|
Six months ended June 30,
2012
($)
|
|
Selling, General and Administrative expenses
|
|
|
4,653,302
|
|
|
|
6,628,593
|
|
Depreciation & Accretion
|
|
|
397,767
|
|
|
|
276,243
|
|
Research & Development
|
|
|
257,646
|
|
|
|
203,637
|
|
Impairment Loss
|
|
|
-
|
|
|
|
192,831
|
|
Total Operating Expenses
|
|
|
5,308,715
|
|
|
|
7,301,304
|
|
Non-Operating Expenses
Interest Expenses
For the six months ended June 30, 2013, we had net interest income of $3,935, mainly from the recognition of interest on the note receivable from the sale of PakIt offset by interest payments on the mortgage on our facility in Canada as well as interest payments on our capital leases. This was compared to the six months ended June 30, 2012, where we recognized net interest expense of $3,918, mainly through interest payments on the mortgage on our facility in Canada as well as interest payments on our capital leases.
Gain on Fair Value Measurement of Equity Derivative Liability
For the six months ended June 30, 2012 we recorded a gain of $305,798 on the fair value measurement of the price protection clause contained in the Private Placement that occurred in January 2012. This gain was based on the difference between the closing price of our common stock on the valuation date (January 6, 2012) when we closed the private placement and the closing price of our common stock when the price protection clause was triggered (June 7, 2012) and subsequently paid to the requisite investors. There was no such clause in any future private placement and thus, no similar amount in the six months ended June 30, 2013.
Income Tax Expenses
For the six month periods ended June 30, 2013 and 2012, we had no federal taxable income due to net losses and have recorded a deferred tax asset and a valuation allowance to the extent that those assets are attributable to net operating losses. We recognized the valuation allowance because we are unsure as to the ability to use these assets in the near future due to continued operating losses.
For the six month periods ended June 30, 2013 and 2012, we incurred $Nil current income tax and future income tax expenses from continuing operations.
Net Loss
We incurred a net loss of $5,770,236 for the six months ended June 30, 2013 compared to a net loss of $6,883,373 in the six months ended June 30, 2012. These losses consisted of losses from continuing operations of $5,270,236 and $6,800,270 for the six months ended June 30, 2013 and 2012, respectively, and losses from discontinued operations of $500,000 and $83,103 for the six months ended June 30, 2013 and 2012, respectively. The increase in net loss for the six months ended June 30, 2013 was driven by the impairment recorded on the note receivable from the sale of PakIt when management determine that collectability was not reasonably ensured with regards to the balance.
Quarter ended June 30, 2013 compared to June 30, 2012
Revenue
Revenue is primarily derived from our P2O business through the sale of our fuels and processed waste paper fiber. Additionally, from time to time, we are able to supplement this revenue with revenue from our Data Business through reading and interpreting magnetic tape media, dependent on the time constraints of John Bordynuik. The following table shows a breakdown of our revenues from these sources.
Revenue
|
|
Quarter ended June 30,
2013
|
|
|
Quarter ended June 30,
2012
|
|
|
% Change
|
|
P2O Revenue
|
|
|
|
|
|
|
|
|
|
Fuels
|
|
$
|
69,903
|
|
|
$
|
99,201
|
|
|
|
(29.5)
|
|
Waste paper fiber
|
|
|
22,788
|
|
|
|
80,219
|
|
|
|
(71.6
|
)
|
Total P2O Revenue
|
|
|
92,691
|
|
|
|
179,420
|
|
|
|
(48.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Business
|
|
|
35,312
|
|
|
|
-
|
|
|
|
100.0
|
|
TOTAL REVENUE
|
|
$
|
128,003
|
|
|
$
|
179,420
|
|
|
|
(28.7
|
)
|
Our fuel revenue comprised approximately 52% and 66% of our total revenue for the quarters ended June 30, 2013 and June 30, 2012. Fuel sales are based on either a set pricing structure with our customers or the prevailing market rate for the specific type of fuel being sold. Our fuels are sold under both long term sale contracts with specified pricing or through the issuance of purchase orders by our customers. Generally, we are able to obtain a higher price per gallon for our Fuel Oil No. 2 as compared to Fuel Oil No. 6, and a significantly lower price for our Naphtha. The decrease in fuel revenues for the quarter ended June 30, 2013 as compared to the quarter ended June 30, 2012 is due to the following key factors:
●
|
Machine downtime due to the upgrade of the gas compression and chillers added to the facility, which required the shutdown of all systems while construction was being completed;
|
●
|
Focused effort by all facility staff on the completion of the third processor, including our plant operations staff who were focused on the construction of key components of the processor;
|
The following tables provide a comparison of production and sales of our three specific fuels for the quarters ended June 30, 2013 and 2012 as well as a comparison of our average price per gallon of fuel sold in each of the two periods.
|
|
Gallons Produced (Quarter ended June 30,)
|
|
|
Gallons Sold (Quarter ended June 30,)
|
|
Fuel Type
|
|
2013
|
|
|
2012
|
|
|
% Change
|
|
|
2013
|
|
|
2012
|
|
|
% Change
|
|
Fuel Oil No. 6
|
|
|
6,947
|
|
|
|
42,724
|
|
|
|
(83.7)
|
|
|
|
6,514
|
|
|
|
38,275
|
|
|
|
(83.0
|
)
|
Fuel Oil No. 2
|
|
|
12,358
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
14,598
|
|
|
|
-
|
|
|
|
N/A
|
|
Naphtha
|
|
|
24,509
|
|
|
|
25,845
|
|
|
|
(5.2)
|
|
|
|
25,403
|
|
|
|
26,482
|
|
|
|
(4.1)
|
|
TOTAL
|
|
|
43,814
|
|
|
|
68,569
|
|
|
|
(36.1)
|
|
|
|
46,515
|
|
|
|
64,757
|
|
|
|
(28.2)
|
|
Fuel Type
|
|
Quarter ended June 30, 2013
Average Price
per Gallon
|
|
|
Quarter ended June 30, 2012
Average Price
per Gallon
|
|
|
% Change
|
|
Fuel Oil No. 6
|
|
$
|
1.85
|
|
|
$
|
1.89
|
|
|
(2.2)
|
|
Fuel Oil No. 2
|
|
|
2.59
|
|
|
|
-
|
|
|
|
N/A
|
|
Naphtha
|
|
|
0.79
|
|
|
|
1.01
|
|
|
|
(22.0
|
)
|
During the quarter ended June 30, 2013, we completed reconfiguring the programming of the processors to primarily produce Fuel Oil No. 2, as opposed to Fuel Oil No. 6, as there is a significantly higher price per gallon that we are able to obtain from this product. We expect that this will continue in the future as we focus our processors on making the most profitable fuels. In addition, although Naphtha will always be a fuel made through the conversion process, we are working to minimize the relative production of Naphtha, as its sale price per gallon is significantly lower than that of our other fuels.
Revenues from the Data Business were driven by the completion of open and outstanding purchase orders. During the first quarter of 2013, we were able to complete certain open orders and ship them to the customer and recognize the related revenue.
Cost of Goods Sold
Our costs of goods sold consist of feedstock procurement costs, overhead incurred at both our recycling facility in Thorold, Ontario and our Niagara Falls, NY facility as well as the freight associated with the shipments of our plastics and fuels. The costs incurred at our recycling facility are directly proportional to the amount of plastic that is processed at this facility as well as the costs incurred to process waste paper fiber. Our feedstock procurement strategy is geared towards obtaining significant amounts of high quality feedstock at the lowest pricing available. The following table provides a breakdown of the costs of goods sold:
Cost of Goods Sold
|
|
Quarter ended
June 30,
2013
|
|
|
Quarter ended
June 30,
2012
|
|
|
% Change
|
|
P2O COGS
|
|
|
|
|
|
|
|
|
|
Fuels
|
|
$
|
113,046
|
|
|
|
79,388
|
|
|
|
42.4
|
|
Waste paper fiber
|
|
|
16,205
|
|
|
|
46,941
|
|
|
|
(65.5
|
)
|
Total P2O COGS
|
|
|
129,251
|
|
|
$
|
126,329
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Business
|
|
|
9,716
|
|
|
|
-
|
|
|
|
N/A
|
|
TOTAL COGS
|
|
$
|
138,967
|
|
|
$
|
126,329
|
|
|
|
10.0
|
|
Fuel cost of goods sold increased 42.4% in the quarter ended June 30, 2013 as compared to the quarter ended June 30, 2012 while total fuel gallons sold decrease 28.2%. The increase in cost of goods sold and cost per gallon was due to the following factors:
●
|
Increased costs to procure optimal feedstock for the processors. We have identified a number of significant sources of optimal feedstock which can be delivered directly to our Niagara Falls plant, without the need for pre-processing at our recycling center. During the quarter, we processed a significant amount of this feedstock, which is at a higher cost than that which requires pre-processing.
|
●
|
Increased freight costs to receive feedstock. Much of the optimal feedstock discussed above came from suppliers that are not in close proximity to our Niagara Falls plant. As a result of this, we incurred significantly higher transportation costs.
|
The following is a detail of the cost per gallon of fuel as well as the individual components that make-up the cost per gallon.
Fuel Type
|
|
Quarter ended June 30, 2013 Average
Cost per
Gallon
|
|
|
Quarter ended June 30, 2012 Average
Cost per
Gallon
|
|
|
% Change
|
|
Fuel Oil No. 6
|
|
$
|
2.43
|
|
|
$
|
1.23
|
|
|
|
98.2
|
|
Fuel Oil No. 2
|
|
$
|
2.43
|
|
|
$
|
1.23
|
|
|
|
98.2
|
|
Naphtha
|
|
$
|
2.43
|
|
|
$
|
1.23
|
|
|
|
98.2
|
|
Cost of Goods Sold Components
|
|
Quarter ended June 30, 2013
Percentage
Cost per
Gallon (%)
|
|
|
Quarter ended June 30, 2012
Percentage
Cost per
Gallon (%)
|
|
|
% Change
|
|
Feedstock Costs
|
|
|
61.7
|
|
|
|
32.6
|
|
|
|
89.2
|
|
Preprocessing Costs
|
|
|
23.9
|
|
|
|
47.3
|
|
|
|
(49.6
|
)
|
P2O Plant Costs
|
|
|
6.6
|
|
|
|
17.9
|
|
|
|
(63.3)
|
|
Freight
|
|
|
7.8
|
|
|
|
2.4
|
|
|
|
219.5
|
|
The costs of goods related to waste paper fiber are comprised primarily of the direct material costs to acquire the material prior to processing and selling the recycled material.
The cost of goods sold related to the Data Business relate to the direct labor incurred in the reading and interpreting of the magnetic tape data.
Total Gross Profit
Gross Profit
|
|
Quarter
ended
June 30,
2013
|
|
|
Gross Profit % - Quarter ended
June 30,
2013
|
|
|
Quarter ended June 30
2012
|
|
|
Gross Profit % - Quarter ended
June 30,
2012
|
|
P2O
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuels
|
|
$
|
(43,143)
|
|
|
|
(61.7)
|
|
|
$
|
19,813
|
|
|
|
28.9
|
|
Waste paper fiber
|
|
|
6,583
|
|
|
|
28.9
|
|
|
|
33,278
|
|
|
|
41.5
|
|
Total P2O Gross Profit
|
|
|
(36,560)
|
|
|
|
(39.4)
|
|
|
|
53,091
|
|
|
|
29.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Business
|
|
|
25,596
|
|
|
|
72.5
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL GROSS PROFIT
|
|
|
(10,964)
|
|
|
|
(8.6)
|
|
|
|
53,091
|
|
|
|
29.6
|
|
For the quarter ended June 30, 2013, we recorded a negative gross profit of 10,964 as compared to a gross profit of 53,091 for the quarter ended June 30, 2012.
The gross profit related to our fuel sales for the three months ended June 30, 2013 was negatively impacted by our decision to secure optimal feedstock, albeit at higher pricing, in addition to increased costs to transport the feedstock to our Niagara Falls facility, as compared to the same period of 2012.
Our gross profit of $6,583 related to waste paper fiber was mainly driven by the commodities markets for the product. The decrease in gross profit as compared to the quarter ended June 30, 2012 is mainly due to the focus on processing and stockpiling feedstock for our processors as opposed to collecting and baling cardboard. We are generally able to procure waste paper fiber at low costs and then bale the raw materials for sales to local paper mills. Additionally, we use the waste paper fiber markets to gain access to other feedstock waste streams.
The gross profit of $25,596 in the Data Business was mainly due to the low operating costs associated with this business segment.
Operating Expenses
We incurred operating expenses of $ 2,554,071 during the quarter ended June 30, 2013, compared to $4,230,616 for the quarter ended June 30, 2012. This is a decrease in the current period, mainly driven by a decrease in accounting and legal fees, the recovery of $700,000 of insurance reimbursements related to previous legal costs and a reduction in stock compensation expense. These decreases were partially offset by increases in payroll as we continue to execute on the construction of the third processor, and insurance costs, which are related to the Company’s expansion and need for additional coverage. A breakdown of the components of operating expenses for the quarters ended June 30, 2013 and 2012 are as follows:
Operating Expenses
|
|
Quarter ended
June 30,
2013
($)
|
|
|
Quarter ended June 30,
2012
($)
|
|
Selling, General and Administrative expenses
|
|
|
2,202,501
|
|
|
|
3,826,751
|
|
Depreciation & Accretion
|
|
|
203,868
|
|
|
|
139,047
|
|
Research & Development
|
|
|
147,699
|
|
|
|
108,487
|
|
Impairment Loss
|
|
|
-
|
|
|
|
156,331
|
|
Total Operating Expenses
|
|
|
2,554,071
|
|
|
|
4,230,616
|
|
Non-Operating Expenses
Interest Expenses
For the quarters ended June 30, 2013 and 2012, we had net interest income of $1,833 and 2,967, respectively, mainly from the recognition of interest on the note receivable from the sale of PakIt offset by interest payments on the mortgage on our facility in Canada as well as interest payments on our capital leases.
Gain on Fair Value Measurement of Equity Derivative Liability
For the quarter ended June 30, 2012 we recorded a gain of $91,986 on the fair value measurement of the price protection clause contained in the Private Placement that occurred in January 2012. This gain was based on the difference between the closing price of our common stock on the valuation date (January 6, 2012) when we closed the private placement and the closing price of our common stock when the price protection clause was triggered (June 7, 2012) and subsequently paid to the requisite investors. There was no such clause in any future private placement and thus, no similar amount in the quarter ended June 30, 2013.
Income Tax Expenses
For the quarters ended June 30, 2013 and 2012, we had no federal taxable income due to net losses and have recorded a deferred tax asset and a valuation allowance to the extent that those assets are attributable to net operating losses. We recognized the valuation allowance because we are unsure as to the ability to use these assets in the near future due to continued operating losses.
For the quarters ended June 30, 2013 and 2012, we incurred $Nil current income tax and future income tax expenses from continuing operations.
Net Loss
We incurred a net loss of $3,055,716 for the quarter ended June 30, 2013 compared to a net loss of $4,051,873 in the quarter ended June 30, 2012. These losses consisted of losses from continuing operations of $2,555,716 and $4,028,390 for the quarters ended June 30, 2013 and 2012, respectively, and losses from discontinued operations of $500,000 and $23,483 for the quarters ended June 30, 2013 and 2012, respectively. The increase in net loss for the six months ended June 30, 2013 was driven by the impairment recorded on the note receivable from the sale of PakIt when management determine that collectability was not reasonably ensured with regards to the balance.
Liquidity and Capital Resources
As of June 30, 2013, the Company had cash and cash equivalents of $1,078,073 on hand. The Company does not currently have a formal cash management policy in place.
The Company’s cash flows for the six month periods ended June 30, 2013 and 2012 are summarized below
|
|
2013
|
|
|
2012
|
|
Net loss from continuing operations
|
|
$
|
( 5,270,236
|
)
|
|
$
|
(6,800,270
|
)
|
Net loss from discontinued operations
|
|
|
(500,000
|
)
|
|
|
(83,103
|
)
|
Items not affecting cash
|
|
|
1,667,391
|
|
|
|
2,321,569
|
|
Working capital changes
|
|
|
(673,982
|
)
|
|
|
(899,612
|
)
|
Investing activities
|
|
|
(2,109,112
|
)
|
|
|
(2,737,638
|
)
|
Financing activities
|
|
|
3,998,292
|
|
|
|
11,643,780
|
|
Decrease in cash
|
|
$
|
(2,887,647
|
)
|
|
$
|
(3,918,231
|
)
|
We do not generate sufficient cash to fund our operations and we have limited capital resources. To fund operations during our development, we have primarily relied on net proceeds from the sale of equity securities in private placement transactions. If we fail to raise additional capital as and when needed, then we may be forced to severely curtail or cease operations. There can be no assurance that financing will be available on favorable terms or at all. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities will result in dilution to existing stockholders.
Our limited capital resources and recurring losses from operations raise substantial doubt about our ability to continue as a going concern and may adversely affect the ability to raise additional capital. The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the year ended December 31, 2012 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
In the six month periods ended June 30, 2013 and 2012, we had significant charges included in the reported Net Loss that had no effect on cash flows. In both periods, these charges included depreciation of property, plant and equipment, allowances for uncollectible amounts, and stock based compensation and stock issued for services. In addition, in the prior period ended June 30, 2012, the Company recorded an adjustment for the mark-to-market adjustment of the Company’s derivative equity liability related to the price protection clause issued to investors in the Company’s December 2011/ January 2012 private offering. There were no such clauses in recent placements and therefore, no corresponding amounts arose in the six or three month periods ended June 30, 2013. Additionally, as we have continued to cut our costs, subsequent to June 30, 2013, we reduced our workforce by approximately 25%.
Investing activities include the Company’s cash investment in property, plant and equipment which amounted to $2,109,112 in the six months ended June 30, 2013, as compared to $2,737,638 in the six months ended June 30, 2012. As we continue to grow and expand the number of processors, potential P2O plant locations and make any necessary modifications to the processors, buildings housing the processors and other enhancements, we expect to continue to make significant investment in property, plant and equipment in future periods.
Financing activities in the six months ended June 30, 2013 represented the cash received upon the issuance of Series B Preferred Stock during the period as compared to the six months ended June 30, 2012, cash from financing activities represented cash received from stock issuances and stock subscription advances as well as short term loans, offset by repayments of stock subscription advances. We expect to rely upon proceeds from future private placements of equity and debt securities to implement our growth and construction plans and meet our liquidity needs going forward.
Subsequent to June 30, 2013, we entered into subscription agreements with certain accredited investors to provide $3,000,000 of funding for us in the form of Senior Secured Debt. Without these funds, we would continue to experience significant liquidity problems that could have a potential adverse impact on our ability to continue to run our business.
While we have been successful in securing financing in sufficient amounts and suitable terms needed to meet our needs currently and in the past; there is no assurance that it will be able to do so in the future.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than those items listed in Note 10 to the condensed consolidated financial statements as Commitments.
Transactions with Related parties
There are no related party transactions to report.
Critical Accounting Policies, Estimates and Assumptions
The Company believes the following 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.
The Company has disclosed its accounting policies in “NOTE 2 – SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES” in the Notes to the Condensed Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The following accounting policies provide an update to those included under the same captions in the Company’s Annual Report on Form 10-K.
Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include amounts for impairment of property, plant and equipment, share based compensation, asset retirement obligations, inventory obsolescence, accrued liabilities, valuation of short-term note receivable and accounts receivable exposures.
Accounts Receivable
Accounts receivable represent unsecured obligations due from customers under terms requesting payments upon receipt of invoice up to thirty 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 beyond agreed upon terms are considered delinquent. Payments of accounts receivable are allocated to the specific invoices identified on the customer remittance, or if unspecified, are applied to the earliest unpaid invoice.
The allowance for uncollectible accounts reflects management’s best estimate of amounts that may not be collected based on an analysis of the age of receivables and the credit standing of individual customers. Accounts receivable determined to be uncollectible are recognized using the allowance method. The allowance for uncollectible accounts for the periods ending June 30, 2013 and December 31, 2012 was $27,810 and $57,991, respectively.
Inventories
Inventories consist of plastics, processing costs and processed fuels and are stated at the lower of cost or market. The Company uses an average costing method for determining cost (see Note 4). Inventories are periodically reviewed for use and obsolescence, and adjusted as necessary.
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.
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. The balance of such asset retirement obligation is included in other long-term liabilities with balances of $29,864 and $29,423 as of June 30, 2013 and December 31, 2012, respectively.
Environmental Contingencies
We record environmental liabilities at their undiscounted amounts on our balance sheet as other current or long-term liabilities when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. These costs may be discounted to reflect the time value of money if the timing of the cash payments is fixed or reliably determinable and extends beyond a current period. Estimates of our liabilities are based on currently available facts, existing technology and presently enacted laws and regulations, taking into consideration the likely effects of other societal and economic factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by the Environmental Protection Agency (EPA) or other organizations. Our estimates are subject to revision in future periods based on actual costs or new circumstances. We capitalize costs that benefit future periods and we recognize a current period charge in operation and maintenance expense when clean-up efforts do not benefit future periods.
We evaluate any amounts paid directly or reimbursed by government sponsored programs and potential recoveries or reimbursements of remediation costs from third parties including insurance coverage separately from our liability. Recovery is evaluated based on the creditworthiness or solvency of the third party, among other factors. When recovery is assured, we record and report an asset separately from the associated liability on our balance sheet. No amounts for recovery have been accrued to date.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and collection is reasonably assured. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
P2O 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 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).
Subsequent Events
On July 6, 2013, 1,741,500 warrants issued in conjunction with the private placement in December 2011/ January 2012 expired and $1,776,330 was reclassified as additional paid in capital on the condensed consolidated balance sheet.
On July 11, 2013, the Board of Directors of JBI, Inc. (the “Company”) approved a reduction in the labor force of approximately 15 employees, constituting approximately 25% of the Company’s workforce, whose employment was terminated as part of an overall plan to reduce the Company’s cost structure. The Company estimated it will incur approximately $40,000 in total restructuring expenses, all of which are expected to result in future cash expenditures. The Company expects to recognize these restructuring charges of approximately $40,000 in the quarter ending September 30, 2013. These costs consist of severance and other employee-related costs.
On July 29, 2013, holders of 74,400 shares of the Company’s Series B Preferred Stock exercised their conversion rights under the Certificate of Designations and converted the aforementioned shares into 520,800 shares of the Company’s Common Stock. All 520,800 of these shares were issued subsequent to June 30, 2013.
On August 8, 2013, JBI, Inc., (the “Company”) entered a stipulation agreement (the “Stipulation Agreement”) in potential settlement of the previously reported class action lawsuit filed by certain stockholders of the Company against the Company and Messrs. Bordynuik and Baldwin (both former officers of the Company) on behalf of a settlement class consisting of purchasers of the Company’s common stock during the period from August 28, 2009 through January 4, 2012 (the “Proposed Class Period”). Under the Stipulation Agreement, the Company would agree to issue shares of its common stock that will comprise a settlement fund. The number of shares to be issued will be dependent on the price per share of the Company’s common stock during a period preceding the date of the Court’s entry of final judgment in the case (the “Judgment Date”). If the price of the Company’s common stock is less than $0.50 per share based upon the average closing price for the 90 trading days preceding the Judgment Date, the Company would issue 3 million shares of its common stock. If the price of the Company’s common stock is between $0.50 and $0.70 per shares, based upon the same 90-day average closing price, the Company would issue 2.5 million shares of its common stock. If the price of the Company’s common stock is more than $0.70 per share based upon the same 90-day average closing price the Company will issue 1.75 million shares of its common stock. The shares will not be distributed to class members in kind. At any time after final approval by the Court, class counsel would have the option to sell all or any portion of such shares for the benefit of class members, subject to certain volume limitations. Plaintiff’s counsel’s attorneys’ fees, subject to Court approval, would be paid out of the settlement fund. The Company would also pay settlement-related costs up to a maximum of $200,000. The plaintiffs and each of the class members who purchased the Company’s common stock during the Proposed Class Period and alleged they were damaged would be deemed to have fully released all claims against the Company and other defendants upon entry of judgment. It is contemplated that the agreement will be submitted to the Court and that class counsel will apply for entry of an order requesting the preliminary approval of the settlement, including the mailing of a settlement notice that will include, among other things, the general terms of the settlement, proposed plan of allocation, and terms of plaintiff’s counsel’s fee application. It is further contemplated that a hearing will be requested at which the Court will be asked to finally approve the settlement of the litigation and pursuant to entry of judgment. The Company cannot predict the outcome of the class action litigation at this time. Any actual settlement is subject to risks and uncertainties concerning, among other things, objections from class members to the terms of the settlement and failure of the Court to approve the settlement.
On August 9, 2013, the previously reported stockholder derivative suit which was dismissed without prejudice on June 26, 2013 was re-filed in the U.S. District Court in the State of Massachusetts. Currently, the Company has not been able to assess the potential liability, if any, related to this matter, however, the Company plans to vigorously defend this matter.
On August 14, 2013, Richard Heddle and Philip Bradley were appointed to the Board of Directors of the Company . Mr. Heddle will serve as Chairman of the Board.
On August 14, 2013, Tony Bogolin informed the Board of Directors the Company of his resignation from his positions as the Company’s President and Chief Executive Officer and from the Board, effective the close of business August 14, 2013. In connection with Mr. Bogolin’s resignation, Mr. Bogolin and the Company executed a separation agreement (the "Bogolin Separation Agreement") on August 14, 2013. Pursuant to the terms of the Bogolin Separation Agreement, Mr. Bogolin will receive payment of the equivalent of four and one half months of his base salary and unused accrued vacation ($105,966) payable in three equal monthly payments and immediate accelerated vesting of options to purchase 370,000 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 Bogolin Separation Agreement. In addition, Mr. Bogolin will receive continued coverage under the Company's benefit plans or equivalent coverage through December 31, 2013.
Richard Heddle will serve in the capacity as Interim President and Chief Executive Officer for the foreseeable future.
On August 14, 2013, Matthew Ingham informed the Board of Directors the Company of his resignation from his positions as the Company’s Chief Financial Officer and from the Board, effective the close of business August 14, 2013. In connection with Mr. Ingham’s resignation, Mr. Ingham and the Company executed a separation agreement (the "Ingham Separation Agreement") on August 14, 2013. Pursuant to the terms of the Ingham Separation Agreement, Mr. Ingham will receive payment of the equivalent of four and one half months of his base salary and unused accrued vacation ($74,176) payable in three equal monthly payments 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 Ingham Separation Agreement. In addition, Mr. Ingham will receive continued coverage under the Company's benefit plans or equivalent coverage through December 31, 2013.
On August 14, 2013, the Company entered into a binding term sheet agreement with Richard Heddle to secure an investment in the Company of $3 million. The investment will consist of a proposed Senior Secured Debt Payment in Kind Note (“Senior Debt”) secured by the property, plant and equipment and intellectual property of the Company, bears an interest rate of 12.5%. The Senior Debt has a term of five years and has detachable warrants valued at 120% of the closing price of the stock on the date prior to funding.