UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the quarterly period ended March 31, 2014 |
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from _____________to ______________ |
Commission
File Number: 000-52444
JBI,
INC.
(Exact
name of registrant as specified in its charter)
Nevada |
|
90-0822950 |
(State
or other jurisdiction of incorporation or organization) |
|
(I.R.S.
Employer Identification No.) |
20
Iroquois Street
Niagara
Falls, NY 14303
(Address
of principal executive offices) (Zip Code)
(716)
278-0015
(Registrant’s
telephone number, including area code)
Not Applicable
(Former
name, former address and former fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer |
¨ |
Accelerated
filer |
¨ |
Non-accelerated filer |
¨ |
Smaller reporting
company |
x |
(Do not check if
a smaller reporting company) |
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o
No x
As of July
30, 2014, there were 114,500,943 shares of Common Stock, $0.001 par value per share, issued and outstanding.
JBI
Inc.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q (the “Report”) contains “forward looking statements” within the meaning
of applicable securities laws. Such statements include, but are not limited to, statements with respect to the Company’s
beliefs, plans, strategies, objectives, goals and expectations, including expectations about the future financial or operating
performance of the Company and its projects, capital expenditures, capital needs, government regulation of the industry, environmental
risks, limitations of insurance coverage, and the timing and possible outcome of regulatory matters, including the granting of
patents and permits. Words such as “expect”, “anticipate”, “intend”, “attempt”,
“may”, “will”, “plan”, “believe”, “seek”, “estimate”,
and variations of such words and similar expressions are intended to identify such forward looking statements. These statements
are not guarantees of future performance and involve assumptions, risks and uncertainties that are difficult to predict.
These
statements are based on and were developed using a number of factors and assumptions including, but not limited to: stability
in the U.S. and other foreign economies; stability in the availability and pricing of raw materials, energy and supplies; stability
in the competitive environment; the continued ability of the Company to access cost effective capital when needed; and no unexpected
or unforeseen events occurring that would materially alter the Company’s current plans. All of these assumptions
have been derived from statements currently available to the Company including information obtained by the Company from third
party sources. Although management believes that these assumptions are reasonable, these assumptions may prove to be incorrect
in whole or in part. As a result of these and other factors, actual results may differ materially from those expressed, implied
or forecasted in such forward looking statements, which reflect the Company’s expectations only as of the date hereof.
Factors
that could cause actual results or outcomes to differ materially from the results expressed, implied or forecasted by the forward looking
statements include risks associated with general business, economic, competitive, political and social uncertainties; risks associated
with changes in project parameters as plans continue to be refined; risks associated with failure of plant, equipment or processes
to operate as anticipated; risks associated with accidents or labor disputes; risks associated in delays in obtaining governmental
approvals or financing, or in the completion of development or construction activities; risks associated with financial leverage
and the availability of capital; risks associated with the price of commodities and the inability of the Company to control commodity
prices; risks associated with the regulatory environment within which the Company operates; risks associated with litigation including
the availability of insurance; and risks posed by competition. These and other factors that could cause actual results or outcomes
to differ materially from the results expressed, implied or forecasted by the forward looking statements are discussed in more
detail in the section entitled “Risk Factors” in Part IA of the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2013 as filed with the Securities and Exchange Commission on June 4, 2014.
The Company
does 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.
Unless
otherwise noted, references in this registration statement to “JBI” the “Company,” “we,” “our”
or “us” means JBI, Inc., a Nevada corporation.
PART I – FINANCIAL INFORMATION
Item
1. |
Financial
Statements |
JBI, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED BALANCE SHEETS |
AS OF MARCH 31, 2014 AND DECEMBER 31, 2013 |
| |
| |
|
ASSETS | |
| |
|
| |
March 31, 2014 | |
December 31, 2013 |
| |
(UNAUDITED) | |
|
| |
| |
|
CURRENT ASSETS | |
| |
|
Cash and cash equivalents | |
$ | 86,663 | | |
$ | 203,949 | |
Cash held in attorney trust (Note 2) | |
| 11,974 | | |
| 12,637 | |
Restricted cash (Note 2) | |
| 100,147 | | |
| 100,122 | |
Accounts receivable, net of allowance of $91,710 (2013 - $91,710) | |
| 20,426 | | |
| 80,814 | |
Inventories, net (Note 4) | |
| 140,183 | | |
| 147,120 | |
Prepaid expenses and other current assets | |
| 138,633 | | |
| 76,305 | |
TOTAL CURRENT ASSETS | |
| 498,026 | | |
| 620,947 | |
| |
| | | |
| | |
PROPERTY, PLANT AND EQUIPMENT, NET | |
| 6,961,240 | | |
| 7,184,008 | |
| |
| | | |
| | |
Deposits (Note 2) | |
| 1,484,908 | | |
| 1,484,453 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 8,944,174 | | |
$ | 9,289,408 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable | |
$ | 1,583,897 | | |
$ | 1,510,611 | |
Accrued expenses | |
| 944,817 | | |
| 851,532 | |
Customer advances | |
| 26,120 | | |
| 26,120 | |
Accrued lease obligation – current (Note 10) | |
| 79,428 | | |
| 83,466 | |
Long-Term Debt, mortgage payable and capital leases – current (Note 9) | |
| 22,034 | | |
| 23,618 | |
TOTAL CURRENT LIABILITIES | |
| 2,656,296 | | |
| 2,495,347 | |
| |
| | | |
| | |
LONG-TERM LIABILITIES | |
| | | |
| | |
Asset retirement obligations (Note 2) | |
| 30,533 | | |
| 30,306 | |
Accrued lease obligation (Note 10) | |
| 364,982 | | |
| 383,388 | |
Long-Term Debt, mortgage payable and capital leases (Note 9) | |
| 2,668,576 | | |
| 2,532,079 | |
TOTAL LONG-TERM LIABILITIES | |
| 3,064,091 | | |
| 2,945,773 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 5,720,387 | | |
| 5,441,120 | |
| |
| | | |
| | |
STOCKHOLDERS' EQUITY | |
| | | |
| | |
Preferred stock, Series B, par $0.001; 2,300,000 shares authorized, convertible into 16,100,000 shares of Common Stock, 2,204,100 shares issued and outstanding | |
| 2,204 | | |
| 2,204 | |
| |
| | | |
| | |
Common stock, par $0.001; 150,000,000 authorized, 94,592,243 shares issued and outstanding (2013 – 90,692,243) | |
| 94,493 | | |
| 90,692 | |
Common stock subscribed not issued, 4,100,000 shares | |
| 4,100 | | |
| — | |
| |
| | | |
| | |
Preferred stock, Series A, par $0.001; 1,000,000 authorized, 1,000,000 shares issued and outstanding | |
| 1,000 | | |
| 1,000 | |
Additional paid in capital | |
| 65,993,817 | | |
| 64,872,659 | |
Accumulated deficit | |
| (62,871,837 | ) | |
| (61,118,267 | ) |
TOTAL STOCKHOLDERS' EQUITY | |
| 3,223,787 | | |
| 3,848,288 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | |
$ | 8,944,174 | | |
$ | 9,289,408 | |
| |
| | | |
| | |
| |
| | | |
| | |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
JBI, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 |
(UNAUDITED) |
| |
| |
|
| |
For the Three Months Ended |
| |
March 31, 2014 | |
March 31, 2013 |
| |
| |
|
| |
| |
|
Sales | |
| |
|
P2O | |
$ | 18,718 | | |
$ | 129,888 | |
Other | |
| — | | |
| 14,920 | |
Total sales | |
| 18,718 | | |
| 144,808 | |
| |
| | | |
| | |
Cost of sales | |
| | | |
| | |
P2O | |
| 23,804 | | |
| 128,864 | |
Other | |
| 129 | | |
| 8,460 | |
Total cost of sales | |
| 23,933 | | |
| 137,324 | |
| |
| | | |
| | |
Gross profit (loss) | |
| (5,215 | ) | |
| 7,485 | |
| |
| | | |
| | |
Operating expenses | |
| | | |
| | |
Selling general and administrative expenses | |
| | | |
| | |
Selling general and administrative- Professional Fees | |
| 613,348 | | |
| 425,543 | |
Selling general and administrative- Compensation | |
| 408,776 | | |
| 692,346 | |
Selling general and administrative- Other | |
| 535,681 | | |
| 1,049,260 | |
Depreciation of property, plant and equipment and accretion of long-term liability | |
| 268,526 | | |
| 184,755 | |
Research and development expenses | |
| 9,084 | | |
| 109,046 | |
Total operating expenses | |
| 1,835,415 | | |
| 2,460,950 | |
| |
| | | |
| | |
Loss from operations | |
| (1,840,630 | ) | |
| (2,453,465 | ) |
| |
| | | |
| | |
Other expenses | |
| | | |
| | |
Loss from disposal of assets | |
| 22 | | |
| — | |
Interest income (expense), net | |
| (101,802 | ) | |
| 2,076 | |
Other income, net | |
| — | | |
| 1,338 | |
Total other expenses | |
| (101,780 | ) | |
| 3,414 | |
| |
| | | |
| | |
Loss before income taxes | |
| (1,942,410 | ) | |
| (2,450,051 | ) |
| |
| | | |
| | |
Current and future income tax expense (Note 8) | |
| — | | |
| — | |
| |
| | | |
| | |
Net loss from continuing operations | |
| (1,942,410 | ) | |
| (2,450,051 | ) |
Net income (loss) from discontinued operations (note 15) | |
| 188,840 | | |
| (264,470 | ) |
| |
| | | |
| | |
Net loss | |
$ | (1,753,570 | ) | |
$ | (2,714,521 | ) |
| |
| | | |
| | |
Deemed Dividends | |
| 851,826 | | |
| — | |
Net loss attributable to common stockholders | |
| (2,605,396 | ) | |
| (2,714,521 | ) |
| |
| | | |
| | |
Earnings (loss) per share | |
| | | |
| | |
Basic and dilutive - from continuing operations | |
$ | (0.02 | ) | |
$ | (0.03 | ) |
Basic and dilutive - from discontinued operations | |
| ** | | |
| N/A | |
| |
| | | |
| | |
Weighted average number of shares outstanding | |
| | | |
| | |
Basic and dilutive (Note 2) | |
| 91,528,243 | | |
| 89,873,320 | |
| |
| | | |
| | |
** Less than $.01 | |
| | | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
JBI, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 |
(UNAUDITED) |
| |
For the Three Months Ended |
| |
March 31, 2014 | |
March 31, 2013 |
| |
| |
|
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| |
|
Net loss from continuing operations | |
$ | (1,942,410 | ) | |
$ | (2,450,051 | ) |
Net income (loss) from discontinued operations | |
| 188,840 | | |
| (264,470 | ) |
Items not affecting cash: | |
| | | |
| | |
Depreciation of property plant and equipment and accretion of long-term liability | |
| 268,525 | | |
| 184,755 | |
Other income | |
| (480 | ) | |
| (6,164 | ) |
Accrued interest expense | |
| 90,000 | | |
| — | |
Non-cash stock based compensation | |
| 719,090 | | |
| 260,745 | |
Non-cash items impacting discontinued operations | |
| 967 | | |
| — | |
Working capital changes: | |
| | | |
| | |
Cash held in attorney trust | |
| 663 | | |
| 168,456 | |
Accounts receivable | |
| 60,388 | | |
| 95,567 | |
Inventories | |
| 6,937 | | |
| (49,797 | ) |
Prepaid expenses and other current assets | |
| (62,328 | ) | |
| 52,448 | |
Accounts payable | |
| 73,284 | | |
| (921,075 | ) |
Accrued expenses | |
| 93,285 | | |
| (46,286 | ) |
Other long-term liabilities and customer advances | |
| — | | |
| (57 | ) |
| |
| | | |
| | |
NET CASH USED IN OPERATING ACTIVITIES | |
| (503,239 | ) | |
| (2,976,015 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
Property, plant and equipment additions | |
| (18,405 | ) | |
| (285,330 | ) |
Deposits for property, plant and equipment | |
| — | | |
| (739,177 | ) |
Changes attributable to discontinued operations | |
| (5,622 | ) | |
| — | |
| |
| | | |
| | |
NET CASH USED IN INVESTING ACTIVITIES | |
| (24,027 | ) | |
| (1,024,507 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Preferred Stock – Series B proceeds, net | |
| — | | |
| 3,998,292 | |
Proceeds from sale of common stock and warrants | |
| 409,980 | | |
| — | |
| |
| | | |
| | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | |
| 409,980 | | |
| 3,998,292 | |
| |
| | | |
| | |
NET DECREASE IN CASH AND CASH EQUIVALENTS | |
| (117,286 | ) | |
| (2,230 | ) |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | |
| 203,949 | | |
| 3,965,720 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | |
| 86,663 | | |
| 3,963,490 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information | |
| | | |
| | |
Cash paid for income taxes | |
$ | — | | |
$ | — | |
Cash paid for interest | |
$ | 5,602 | | |
$ | 5,602 | |
| |
| | | |
| | |
| |
| | | |
| | |
The accompanying notes are an integral part of the 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, the Company’s former CEO and current Chief of Technology, 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 and waste oil into fuel. As of the date of this Report, JBI has built three processors
which are located 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 its inventory and fixed
assets. The operations of Javaco have been classified as discontinued operations for all periods presented (Note 15).
In September
2009, the Company acquired Pak-It, LLC (“Pak-It”). Pak-It operated a bulk chemical processing, mixing,
and packaging facility. It also developed and patented a delivery system that packages condensed cleaners in small
water-soluble packages. During 2011, the Company initiated a plan to sell certain operating assets of Pak-It and subsequently
sold Pak-It in February 2012, with an effective date of January 1, 2012. The operations of Pak-It have been classified
as discontinued operations for all periods presented (see Note 15).
In December
2010, the Company entered into a twenty year lease for a recycling facility in Thorold, Ontario. During the period,
the Company determined that it would no longer operate the facility and shut down all operations. The assets and operations
related to the recycling facility have been reclassified as discontinued operations for all periods presented (Note 15).
The Company
had to shut down its fuel production late in the fourth quarter of 2013 due to severe cold weather that caused damage to condensers
and other components of it’s processors. Management estimates that the repair of the processors will require
the expenditure of between $175,000 and $200,000. As of the date of this report the Company lacked the working capital or access
to bank credit to make these repairs. The Company is reviewing our financing options, including the sale of shares of its
common stock or other securities, in order to allow us to obtain sufficient funds to make the required repairs and resume operation
of its processors. Management currently anticipates that the processors will remain idle at least until the third quarter
of 2014. During the idle period, we significantly reduced our headcount by furloughing its operations personnel but retained
a small team to perform general repairs and maintenance on the processors. Once the processors are repaired, we expect a small
increase in its headcount in order to resume normal operations.
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 a working capital deficiency of
$2,158,270 and an accumulated deficit of $62,871,837 as of March 31, 2014. Management’s assessment of potential
liquidity problems, working capital issues and negative cash flows from operations raise substantial doubt about its ability
to continue as a going concern and to operate in the normal course of business. To date, the Company has funded
its activities primarily from equity financings and, to a much lesser extent, debt financing and cash from operations. A
portion of such financings was funded by officers and directors of the Company. (See Note 13).
The Company
will continue to require substantial funds to resume fuel production and to continue the expansion of its P2O business in order
to achieve significant commercial production, 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/
or preferred stock and issuances of debt and/ or 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 the Company will be successful in obtaining such financing
or that the Company 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 the Company be unable to continue in existence.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial
Statements
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting
Principles (“GAAP”) in the United States of America (“U.S.”) as promulgated by the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and with the rules and regulations
of the U.S Securities and Exchange Commission (“SEC”) for interim financial information. The unaudited condensed consolidated
financial statements reflect all normal recurring adjustments, which, in the opinion of management, are considered necessary for
a fair presentation of the results for the periods shown. The results of operations for the periods presented are not necessarily
indicative of the results expected for the full fiscal year or for any future period. The information included in these unaudited
condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis and
Results of Operations contained in this report and the audited consolidated financial statements and accompanying notes included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
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., 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 and Pak-It have also been consolidated; however,
as mentioned their operations are classified as discontinued operations (Note 15).
Estimates
The preparation
of financial statements in conformity with generally accepted accounting principles of the United States (“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 these estimates. Significant estimates include amounts for impairment
of property, plant and equipment, estimating reserves and determining accruals related to discontinued operations, projecting
future cash flows from property, plant and equipment, carrying value of inventory, share based compensation, asset retirement
obligations, inventory obsolescence, accrued liabilities, accounts receivable exposures, discount rate used in the determination
of the fair value of the senior secured notes for purposes of performing the relative fair value calculation to allocate the proceeds
between the notes and the warrants included in the subscription for the Notes, and the discount rate used to calculate the present
value of the accrued lease liability.
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 has made to law firms which were being held on its 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 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 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 allowances for uncollectible
accounts as of March 31, 2014 and December 31, 2013 was $91,710.
Inventories
Inventories,
which consist primarily of plastics, costs to process the plastic and processed fuel are stated at the lower of cost or market. The
Company uses 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 period 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 when events or circumstances change in the business or
the use of the long-lived asset that indicate that the carrying value of such assets may not be recoverable. 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 15).
Asset
Retirement Obligation
The fair
value of the estimated asset retirement obligation is recognized in the consolidated balance sheets when identified and a reasonable
estimate of fair value can be made. The asset retirement cost, equal to the estimated fair value of the asset retirement
obligation, is capitalized as part of the cost of the related long-lived asset. The balance of the asset retirement obligation
is determined through an assessment made by the Company’s engineers of the total costs expected to be incurred by the Company
when closing a facility. The total estimated cost is then discounted using the current market rates to determine the
present value of the asset as of the date of this valuation of the asset retirement obligation. As of the date of the
creation of the asset retirement obligation, the Company determined the present value of the obligation using a discount rate
equal to 2.96%. The present value of the asset retirement obligation is then capitalized on the balance sheet and is
depreciated over the asset’s estimated useful life and is included in depreciation and accretion expense on the condensed
consolidated statements of operations. Increases in the asset retirement obligation resulting from the passage of time are recorded
as accretion of asset retirement obligation in the condensed consolidated statements of operations. Actual expenditures incurred
are charged against the accumulated obligation. As of March 31, 2014 and December 31, 2013, the Company recorded asset
retirement obligations of $30,533 and $30,306, respectively. These costs include disposal of plastic and other non-hazardous
waste, site closing labor and testing and sampling of the site upon closure.
Environmental
Contingencies
The Company
records environmental liabilities at their undiscounted amounts on the condensed consolidated balance sheets as other current
or long-term liabilities when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably
estimated. These costs may be discounted to reflect the time value of money if the timing of the cash payments is fixed or reliably
determinable and extends beyond a current period. Estimates of our liabilities are based on currently available facts, existing
technology and presently enacted laws and regulations, taking into consideration the likely effects of other societal and economic
factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating contaminated
sites, other companies’ clean-up experience and data released by the Environmental Protection Agency (EPA) or other organizations.
The Company’s estimates are subject to revision in future periods based on actual costs or new circumstances. The Company
capitalizes costs that benefit future periods and recognizes a current period charge in operation and maintenance expense when
clean-up efforts do not benefit future periods.
The Company
evaluates any amounts paid directly or reimbursed by government sponsored programs and potential recoveries or reimbursements
of remediation costs from third parties including insurance coverage separately from the Company’s liability. Recovery is
evaluated based on the creditworthiness or solvency of the third party, among other factors. When recovery is assured, the Company
records and reports an asset separately from the associated liability on the condensed consolidated 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 the Company has
possession of the equipment, all payments made to these vendors are classified as deposits on assets. Deposits were
$1,484,908 and $1,484,453 as of March 31, 2014 and December 31, 2013, respectively.
Leases
The Company
has entered into various leases for 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.
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 a customer takes 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 the customer has arranged for transportation of the fuel and the sales
price either has been set in its 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 (e.g.. Naphtha, Fuel Oil No. 6 or Fuel Oil No. 2).
Shipping
and Handling Costs
The Company’s
shipping and handling costs were $11,204 and $13,357 for the three-month periods ended March 31, 2014 and 2013, respectively. Shipping
and handling costs are capitalized to inventory and expensed to cost of sales when the related inventory is sold for all periods
presented.
Advertising
costs
The Company
expenses advertising costs as incurred. Advertising costs were $490 and $2,865 for the three-month periods ended March 31, 2014
and 2013, respectively. These expenses are included in selling, general and administrative expenses in the condensed consolidated
statements of operations.
Research
and Development
The Company
is engaged in research and development activities. Research and development costs are charged as an operating expense of the Company
as incurred. For the three month periods ended March 31, 2014 and 2013, the Company expensed $9,084 and $109,046, respectively,
for 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 condensed consolidated statement of operations have been translated
using the average exchange rate for the periods. For the three months ended March 31, 2014 and 2013, the Company recognized foreign
exchange gains of $967 and losses of $11,657, respectively. These amounts are included as selling, general and administrative
expenses in the condensed consolidated statements of operations.
Accounting for Uncertainty
in Income Taxes
The
Company applies the provisions of ASC Topic 740-10-25, Income Taxes – Overall – Recognition (“ASC
Topic 740-10-25”) with respect to the accounting for uncertainty of income tax positions. ASC Topic 740-10-25 clarifies
the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. ASC Topic 740-10-25 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. As of March 31, 2014, tax years since December 31, 2008 remain open
for IRS audit. The Company has received no notice of audit from the Internal Revenue Service for any of the open tax years.
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 three month periods ended March 31, 2014 and 2013,
potential dilutive common stock equivalents consisted of 16,100,000 shares underlying preferred stock Series B, 11,150,100
shares underlying common stock warrants, and 6,511,334 shares underlying stock options, which were not included in
the calculation of the diluted loss per share,.
Segment
Reporting
The Company
operates in two reportable segments. ASC 280-10, "Disclosures about Segments of an Enterprise and Related Information",
establishes standards for the way that public business enterprises report information about operating segments in their 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, and Data Recovery and Migration,
our magnetic tape reading segment. Our chief operating decision maker is the Company’s Chief Executive Officer. (See Note
14)
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. The Company also routinely
makes an assessment of the collectability of the short term note receivable and determines its exposure for non-performance based
on the specific holder and other pertinent information.
Fair
Value of Financial Instruments
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, and current portion of mortgage and capital leases approximate their fair values because of the short-term nature of
these items.
Summary
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
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
In
April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"). ASU 2014-08 limits the requirement
to report discontinued operations to disposals of components of an entity that represents strategic shifts that have (or will
have) a major effect on an entity's operations and financial results. The amendments also require expanded disclosures concerning
discontinued operations and disclosures of certain financial results attributable to a disposal of a significant components of
an entity that does not qualify for discontinued operations reporting. The amendments in this ASU are effective prospectively
for reporting periods beginning on or after December 15, 2014, with early adoption permitted. The impact on our Financial Statements
of adopting ASU 2014-08 is being assessed by management.
On
May 28, 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The standard outlines
a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance. The accounting standard is effective for annual reporting periods (including interim
reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. The impact on the
Company’s Financial Statements of adopting ASU 2014-09 is being assessed by management.
Management
does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying consolidated financial statements.
NOTE
4 – INVENTORIES, NET
Inventories
consist of the following:
| |
March 31, 2014 | |
December 31, 2013 |
| |
| |
|
Raw materials | |
$ | 399,007 | | |
$ | 392,147 | |
Finished goods | |
| 67,702 | | |
| 81,499 | |
Obsolescence reserve | |
| (326,526 | ) | |
| (326,526 | ) |
| |
| | | |
| | |
Total inventories | |
$ | 140,183 | | |
$ | 147,120 | |
NOTE 5 - PROPERTY,
PLANT AND EQUIPMENT, NET
March 31, 2014 | |
|
| Cost | | |
| Accumulated Depreciation | | |
Net Book Value |
| |
|
| | | |
| | | |
|
Leasehold improvements | |
|
$ | 218,053 | | |
| (7,068 | ) | |
210,985 |
Machinery and office equipment | |
|
| 6,590,755 | | |
| (1,770,217 | ) | |
4,820,538 |
Furniture and fixtures | |
|
| 16,368 | | |
| (13,696 | ) | |
2,672 |
Land | |
|
| 273,118 | | |
| — | | |
273,118 |
Asset retirement obligation | |
|
| 27,745 | | |
| (3,607 | ) | |
24,138 |
Office and industrial buildings | |
|
| 650,660 | | |
| (89,965 | ) | |
560,695 |
Fixed assets under capital lease | |
|
| 64,918 | | |
| (23,148 | ) | |
41,770 |
Construction in process | |
|
| 1,027,323 | | |
| | | |
1,027,323 |
| |
|
$ | 8,868,941 | | |
| (1,907,701 | ) | |
6,961,240 |
December 31, 2013 | |
Cost | |
Accumulated Depreciation | |
Net Book Value |
| |
| | | |
| | | |
| | |
Leasehold improvements | |
$ | 218,053 | | |
| (5,251 | ) | |
| 212,802 | |
Machinery and office equipment | |
| 6,590,755 | | |
| (1,558,597 | ) | |
| 5,032,158 | |
Furniture and fixtures | |
| 16,368 | | |
| (13,148 | ) | |
| 3,220 | |
Land | |
| 273,118 | | |
| — | | |
| 273,118 | |
Asset retirement obligation | |
| 27,745 | | |
| (3,329 | ) | |
| 24,416 | |
Office and industrial buildings | |
| 650,660 | | |
| (83,459 | ) | |
| 567,201 | |
Fixed assets under capital lease | |
| 64,918 | | |
| (21,149 | ) | |
| 43,769 | |
Construction in process | |
| 1,027,323 | | |
| — | | |
| 1,027,323 | |
| |
| | | |
| | | |
| | |
| |
$ | 8,868,941 | | |
| (1,684,933 | ) | |
| 7,184,008 | |
At March
31, 2014 and 2013, machinery and equipment with a cost of $64,918, and accumulated amortization of $23,148 and $17,094, respectively,
were under capital lease.
For the
three-month period ended March 31, 2014, total depreciation expense consists of $Nil included in Cost of Sales and depreciation
of property, plant and equipment and accretion of long-term liability of $222,996, which is separately disclosed in the operating
expenses.
For the
three-month period ended March 31, 2013, total depreciation expense consists of $7,646 included in Cost of Sales and depreciation
of property, plant and equipment and accretion of long-term liability of $184,755, which is separately disclosed in the operating
expenses.
Depreciation
expense recognized in the condensed consolidated statements of operations was included in the following captions:
| |
For the three months periods ended |
| |
March 31, | |
March 31, |
Depreciation Expense | |
2014 | |
2013 |
| |
| |
|
Depreciation expense and accretion of the asset retirement obligation included in operating expenses | |
$ | 222,719 | | |
| 177,109 | |
Depreciation expense included in cost of sales | |
| — | | |
| 7,646 | |
Depreciation expense included in net loss from discontinued operations | |
| — | | |
| 4,572 | |
Total depreciation of property, plant and equipment and accretion of the asset retirement obligation | |
$ | 222,719 | | |
| 189,329 | |
| |
| | | |
| | |
NOTE
6 – SHORT-TERM NOTE 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 was due on July 1, 2013. Interest income recognized on the Note for the three-month periods ended
March 31, 2014 and 2013 was $Nil and $6,139, respectively.
Cancellation
of Promissory note
On February
7, 2014, the Company accepted a cash payment of $200,000 in settlement of the $500,000 promissory note dated February 14, 2012
(the “Note”) that was originally issued by Big 3 Packaging LLC (the “Buyer”) in connection with the Company’s
sale to Buyer of substantially all of the assets of Pak-It on February 14, 2012. In connection with the termination of the Note,
the Company and the Buyer executed a mutual general release of claims.
The Note
matured on July 1, 2013 but remained unpaid by the Buyer. The Company fully reserved for the full value of the note and included
the amount of $500,000 as a loss contributable to discontinued operations (Note 15). The final termination payment of $200,000
was recorded as a bad debt recovery and included in income from discontinued operations for the three month period ended March
31, 2014.
NOTE 7 – RESTRICTED
CASH AND LETTER OF CREDIT
| |
| March 31, 2014 | | |
| December
31, 2013 | |
| |
| | | |
| | |
Restricted Cash securing $100,000 Letter of Credit | |
$ | 100,147 | | |
| 100,122 | |
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, 2014. 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, 2014 and 2013, 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 $1,942,410 pre-tax loss from continuing operations for the three months ended March 31,
2014.
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 selling, general and administrative expenses. As of March 31, 2014, 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
ended December 31, 2008 through December 31, 2013 are open tax years.
NOTE 9
– LONG-TERM DEBT, MORTGAGE PAYABLE AND CAPITAL LEASES
| |
March 31, 2014 | |
December 31, 2013 |
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. | |
| 4,542 | | |
| 5,556 | |
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. | |
| 9,810 | | |
| 11,201 | |
Equipment capital lease (provided by a related party) bears interest at 3.9% per annum, secured by the equipment and matures on May 10, 2015, repayable in monthly installments starting January 2015 approximately $3,800. | |
| 19,928 | | |
| 18,140 | |
Secured Promissory Notes (provided by a related party) bearing interest of 12% per annum compounded annually and payable upon maturity in 2018 and secured by a security interest in substantially all of the assets of the Company and its subsidiaries. (Note 13) | |
| 2,375,630 | | |
| 2,240,100 | |
| |
| 2,690,610 | | |
| 2,555,697 | |
| |
| | | |
| | |
Less: current portion | |
| 22,034 | | |
| 23,618 | |
| |
$ | 2,668,576 | | |
$ | 2,532,079 | |
Continuity of Secured Promissory Notes | |
March 31, 2014 | |
December 31, 2013 |
Face value of August 29, 2013 secured note payable | |
$ | 1,000,000 | | |
$ | 1,000,000 | |
Face value of September 30, 2013 secured note payable | |
| 2,000,000 | | |
| 2,000,000 | |
Total face value of promissory notes payable | |
| 3,000,000 | | |
| 3,000,000 | |
Discount on August 29, 2013 secured note payable | |
| (310,200 | ) | |
| (310,200 | ) |
Discount on September 30, 2013 secured note payable | |
| (600,400 | ) | |
| (600,400 | ) |
Accretion of discount on secured notes payable | |
| 96,230 | | |
| 50,700 | |
Interest on secured notes payable | |
| 190,000 | | |
| 100,000 | |
Carrying value of Secured Promissory Notes | |
$ | 2,375,630 | | |
$ | 2,240,100 | |
The following
annual payments of principal are required over the next five years in respect of these mortgages and capital leases:
Twelve Months Ended March 31, | |
Annual Payments |
| 2015 | | |
$ | 22,034 | |
| 2016 | | |
| 292,946 | |
| 2017 | | |
| — | |
| 2018 | | |
| — | |
| 2019 | | |
| 2,375,630 | |
| Total repayments | | |
$ | 2,690,610 | |
NOTE 10
– COMMITMENTS AND CONTINGENCIES
Commitments
Plastic2Oil
Marine, Inc., one of the Company’s subsidiaries, which is currently not operating, is a party to a consulting services contract
entered into in 2010 with a company owned by Mr. Richard Heddle, who was appointed CEO of the Company in August 2013. The contract
provides the related company with a share of the operating income earned from Plastic2Oil technology installed on marine vessels
which are owned by the related company. The contract provides a minimum future payment equal to fifty percent of the operating
income generated from the operations of two of the most profitable marine vessel processors and 10% from all other marine vessel
processors. As of March 31, 2014, there was no currently installed marine vessel processors as per the terms of the contract.
As of
March 31, 2014, the Company has committed to purchase certain pieces of key machinery from vendors related to the future expansion
of our operations. In addition to the payments made to these vendors classified as deposits on assets, the Company
will be required to pay approximately $495,000 upon the delivery of these assets.
The Company
leases its premises in Thorold, Ontario, which was previously used in the operation JBI (Canada), Inc. doing business as Regional
Recycling of Niagara ("RRON"). As of March 31, 2014, the remaining lease term was almost 17 years. During the third
quarter of 2013, the Company determined that it would shut down the operations of RRON (see Note 15). The employees of RRON were
given notice of the shut down in the first week of September, after which point the Company approached the landlord about terminating
the lease; however, there was no formal termination as an agreement to terminate the lease was not reached. During September of
2013, the Company assessed its options with the facility, including potential sublease, but determined that a sublease of the
facility was not permitted by the lease and officially decided to cease use of the premises as of September 30, 2013. Accordingly,
the Company applied September 30, 2013 as the cease-use-date in recognizing the liability for the contract termination costs.
In measuring the liability, the Company calculated all remaining contracted lease payments, being $1,872,650 ($1,926,000 CAD),
and performed a present value calculation using a discount rate of 20%. The present value calculation resulted in an accrued lease
liability of $505,747, of which $79,428 is due within the next 12 months and has been presented as a current liability. The
total accrued lease liability expense was reduced by $68,818 of the deferred rent liability which was being amortized over the
period of the lease. The total expense included in loss from discontinued operations in the consolidated statements
of operations is $11,165 for the three-month period ended March 31, 2014 (Note 17).
All future
payments required under various agreements are summarized below:
Fiscal year ending December
31, 2014 |
|
$ |
95,900 |
|
2015 |
|
|
95,900 |
|
2016 |
|
|
95,900 |
|
2017 |
|
|
95,900 |
|
2018 |
|
|
101,542 |
|
Thereafter |
|
|
1,303,117 |
|
Total |
|
$ |
1,788,259 |
|
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, 2014, the Company has received $118,250 of repayments. This is
a cumulative amount from 2012 and 2013. These recoveries of bad debt are included in selling, general and administrative
expenses.
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
stockholders sought to represent such purchasers during the period from August 28, 2009 through 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 Company made false or misleading statements or failed
to disclose material information, or a combination thereof regarding: (1) that certain media credits (“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; and (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 Company’s’ answer to the amended complaint was filed during the fourth quarter of 2012.
On
August 8, 2013, JBI, Inc., 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 share, 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. On September 10, 2013, that
agreement was submitted to the Court, and class counsel moved for entry of an order granting 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. On April 1, 2014, the Court issued
an Order denying that motion. It is anticipated that additional briefing will be submitted to the Court in support
of the motion, and that the Court will then reconsider its Order. The Company cannot predict the outcome of the class action
litigation at this time.
On April
25, 2013, plaintiffs ASPTO LLC, Plastic2Oil of Clearwater 1 LLC, and ES Resources LLC filed suit against the Company in the Circuit
Court of Pinellas County, Florida, alleging breaches of certain contracts and seeking unspecified damages. The Company
thereafter removed the case to the United States District Court for the Middle District of Florida, and filed a motion to dismiss
certain counts of the Complaint. On November 12, 2013, the Court issued an Order transferring the case to the United
States District Court for the District of Massachusetts. On June 12, 2014, the parties stipulated to a dismissal of
the case without prejudice, and the case has been dismissed.
On
August 9, 2013, a purported shareholder derivative suit was filed in the United States District Court for the District of Massachusetts
against John Bordynuik, former Chief Executive Officer of the Company and a former member of the Company’s Board of Directors,
and Ronald C. Baldwin, former Chief Financial Officer of the Company. The Complaint was filed by Erwin Grampp, allegedly
acting on behalf of the Company, and it names the Company as a nominal defendant. This is the second purported shareholder
derivative suit that Mr. Grampp has filed in which the Company has been named as a nominal defendant. As previously
reported, the first such suit by Mr. Grampp was dismissed by the court. This recent Complaint (“Grampp II”)
alleges, inter alia, that defendants Bordynuik and Baldwin breached fiduciary duties owed to the Company by causing the Company
to erroneously book certain media credits in 2009. Grampp II alleges that this conduct resulted in two lawsuits against
the Company, one an action brought by the Securities and Exchange Commission (“SEC Action”) and the other a purported
class action by Ellisa Pancoe and Howard Howell (“Class Action”). Grampp II alleges that the Company has
settled the SEC Action, and that the Company is in the process of settling the Class Action, but that the Company has been damaged
as a result of these two lawsuits. Grampp II seeks to recover damages on behalf of the Company from defendants Bordynuik
and Baldwin in an unspecified amount. It also seeks unspecified equitable relief, and costs and attorneys’ fees
incurred in the action. On October 11, 2013, defendants Bordynuik and Baldwin filed a motion to dismiss this action. Thereafter,
the Court granted plaintiff leave to amend his Complaint, and defendants Bordynuik and Baldwin have renewed their motion to dismiss.
The motion thus renewed is pending and the Court has not ruled upon it. Pursuant to the Company’s By-Laws, the
Company has an obligation to indemnify defendants Bordynuik and Baldwin to the fullest extent permitted by Nevada law.
On August
20, 2013, plaintiff Stephen Seneca filed suit against the Company and John Bordynuik, former Chief Executive Officer of the Company
and a former member of its Board of Directors, alleging claims against the Company for fraud, negligence, civil conspiracy, and
breach of contract, as well as a breach of Section 678.4011, Florida Statutes. The claims allege wrongdoing by the
Company in connection with a Unit Purchase and Exchange Agreement dated September 30, 2009, and certain shares of the Company’s
stock issued pursuant thereto. On September 17, 2013, plaintiff caused a Summons to be issued on the Complaint, and
on September 26, 2013, plaintiff caused the Complaint to be served on the Company. Plaintiff seeks damages “in
excess of one million dollars.” On October 31, 2013, the Company and Mr. Bordynuik filed a motion to dismiss
this Complaint. On May 14, 2014, the Court issued an Order granting the motion in part. The Court dismissed
one of the claims made against the Company, and struck another from the Complaint. Mr. Bordynuik and the Company thereafter
filed their Answer to the complaint. The Company cannot predict the outcome of this matter at this time.
On August
14, 2013, John Bordynuik, Inc. aka 310 Holdings, Inc. brought suit against the Company in the United States District Court for
the District of Nevada, alleging damages for breach of contract, conversion, fraud and fraud in the inducement in connection with
an alleged 2009 Asset Purchase Agreement. In September of 2013 and October of 2013, the Company brought motions to
dismiss the complaint and for summary judgment. Those motions are pending before the Court. The Company
cannot predict the outcome of this matter at this time.
As
of March 31, 2014, 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 consolidated
financial statements of the Company.
NOTE 11 – STOCKHOLDERS’
EQUITY
Common Stock and Additional
Paid in Capital
The
Company issued 3,900,000 additional shares of Common Stock during the three-month period ended March 31, 2014.
On February
19, 2014, the Company entered into Subscription Agreements with three investors in connection with a private placement of shares
of the Company’s common stock and warrants to purchase shares of common stock. The Company agreed to sell and issue to the
Purchasers an aggregate of 2.4 million shares of its common stock and warrants to purchase up to an additional 2.4 million shares
of its common stock. The closings occurred between February 19 and 24, 2014. The purchase price per share was $0.05 and the gross
proceeds to the Company were $120,000. The warrants have a three year term, and an exercise price of $0.10 per share of common
stock. Concurrent with these subscriptions the Company entered into a consulting agreement with the investors and a fourth arm’s
length party under which the Company would issue 1,500,000 shares upon commencement of the contract, and 1,000,000 shares on each
of May 15, 2014, August 15, 2014 and January 15, 2015, respectively, for a total of 4,000,000 shares. Along with each of the forgoing
share issuances, the Company is required to issue a commensurate number of warrants with a three year term and an exercise price
of $0.10.. Additionally, under the terms of the consulting agreement the Company is committed to issue 1,000,000 additional shares
if the Company becomes listed on the AMEX division of the New York Stock Exchange or NASDAQ. The consulting agreement also specifies
contingent fees of 5% of the gross transaction amount for introducing a merger or acquisition candidate and 3% of fees earned
from the introduction of a strategic or business partner.
On March
26, 2014, the Company entered into Subscription Agreements with eleven investors in connection with a private placement of shares
of the Company’s common stock and warrants to purchase shares of common stock. The Company agreed to sell and issue to the
Purchasers an aggregate of 3.2 million shares of its common stock and warrants to purchase up to an additional 3.2 million shares
of its common stock. The closings occurred between March 17 and April 8, 2014. The purchase price per share was $0.10 and the
gross proceeds to the Company were $384,960, of which $289,980 was received as of March 31, 2014. The warrants have a three year
term, and an exercise price of $0.10 per share of common stock.
Warrants
| |
| |
| |
Weighted |
| |
Warrants | |
Warrants | |
Average |
Details | |
Number | |
Amount | |
Exercise Price |
OUTSTANDING, DECEMBER 31, 2013 (i) | |
| 3,143,500 | | |
$ | 1,056,970 | | |
$ | 0.61 | |
Issued (ii) | |
| 8,150,000 | | |
| 646,420 | | |
| 0.10 | |
Expired (i) | |
| (143,500 | ) | |
| — | | |
| (2.00 | ) |
OUTSTANDING, MARCH 31, 2014 | |
| 11,150,000 | | |
$ | 1,703,390 | | |
$ | 0.22 | |
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/ January 2012 private placements. The
warrants have an eighteen month term from the date of issuance, such issuance dates ranged from January 6, 2012 through August
29, 2012. As of December 31,2013, 1,854,000 warrants had expired. The remaining 143,500 outstanding warrants
expired on February, 26, 2014.
Pursuant
to two separate secured debt issuances on August 29, 2013 and September 30, 2013, the Company issued 1,000,000 and 2,000,000 warrants,
respectively, to purchase shares of common stock for $0.54 per share to the holder of the secured debt (see Note 13). The
warrants have a five year term from the date of issuance, as such the corresponding expiry dates are August 29, 2018 and September
30, 2018.
As of
August 29, 2013, the 1,000,000 warrants issued were determined to each have a fair value of $0.3102, totaling a fair value of
$310,200. The Company determined this valuation through use of a binomial pricing model. The assumptions in valuing
these Warrants consisted of:
● |
Volatility
– 141.929%, based on the Company’s Historical Stock Price |
|
|
● |
Risk Free Rate –
1.36%, based on the long-term US Treasury rate |
As of
September 30, 2013, the 2,000,000 warrants issued were determined to each have a fair value of $0.3002, totaling a fair value
of $600,400. The Company determined this valuation through use of a binomial pricing model. The assumptions in valuing
these Warrants consisted of:
● |
Volatility
– 141.028%, based on the Company’s Historical Stock Price |
|
|
● |
Risk Free Rate –
1.36%, based on the long-term US Treasury rate |
(ii)
As of March 31, 2014, the 8,150,000 warrants issued were determined to each have a fair value of $0.0793, totaling a fair value
of $646,420. The Company determined this valuation through use of a binomial pricing model. The assumptions in valuing
these Warrants consisted of:
● |
Volatility
– between 185.54,% and 176.81%, based on the Company’s historical stock price |
|
|
● |
Risk Free Rate –
between 1.02% and 1.05% based on the long-term US Treasury rate |
Preferred Stock
Series
A Preferred Stock
At March
31, 2014, Mr. John Bordynuik, the Company’s founder and current Chief of Technology, held 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.
Mr. Bordynuik was a party to a letter agreement (the “Letter Agreement”) with certain investors (the “Investors”)
in our May 2012 private placement, which Letter Agreement contained certain restrictions on Mr. Bordynuik’s ability to vote
his shares of Series A Preferred Stock (see Note 17).
Series
B Preferred 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 (“Common Stock”), 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 remained outstanding on June 30, 2014 were automatically converted into Common Stock pursuant to the terms of the Series
B Designation (see Note 17).
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 share 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 are 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
Company recognized a beneficial conversion feature related to the Series B Preferred Shares, to the extent that the conversion
feature, based on the proceeds allocated to the Series B Preferred Shares, was in-the-money at the time they were issued. Such
beneficial conversion feature amounted to approximately $2,467,571. Because the Series B Preferred Shares have a stated
conversion date and may be converted by the holder at any time, the beneficial conversion feature will be recognized ratably over
the eighteen months in which the holders of the Series B Preferred Shares may exercise their conversion option. Additionally,
as the beneficial conversion feature is amortized, a deemed distribution is included in the computation of loss per share with
no impact on net loss or stockholders ‘equity. No actual cash is paid out in relation to this transaction.
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. The
Plan was enacted in July 2012, and prior to this time, no plan and consequently, no stock options or shares of restricted stock
were granted under an equity compensation plan.
Valuation
of Awards
Stock Options
There were no options granted
during the three months ended March 31, 2014.
A summary of stock option
activity for the quarter ended March 31, 2014 is as follows:
| |
Options
Outstanding Stock Options | |
Weighted-
Average Exercise Price | |
Aggregate
Intrinsic Value (1) |
| Balance
outstanding as of December 31, 2013 | | |
| 6,806,000 | | |
$ | 1.21 | | |
$ | — | |
| Cancelled | | |
| (294,666 | ) | |
$ | 0.38 | | |
$ | — | |
| Balance
outstanding as of March 31, 2014 | | |
| 6,511,334 | | |
$ | 1.16 | | |
$ | — | |
| Exercisable
as of March 31, 2014 | | |
| 2,895,334 | | |
$ | 1.25 | | |
$ | — | |
For the quarter ended March
31, 2014 and year ended December 31, 2013, the Company recorded compensation expense (included in selling, general and administrative
expense) of $190,090, and $1,859,799, respectively, related to stock options and restricted stock.
NOTE
13 – RELATED PARTY TRANSACTIONS AND BALANCES
In August
29, 2013, the Company entered into a Subscription Agreement with Mr. Richard Heddle, the Company’s Chief Executive Officer
and a member of the Company’s board of directors, whereby, Mr. Heddle purchased a $1 million principal amount 12% secured
promissory note, together with a five-year warrant to purchase up to one million shares of the Company’s common stock at
an exercise price of $0.54 per share. The gross proceeds to the Company were $1 million. In September 30, 2013, the Company entered
into second subscription agreement with Mr. Heddle, for the purchase of a second note (a $2 million principal amount Note), and
the issuance of warrant to purchase up to two million shares of the Company’s common stock at an exercise price of $0.54
per share. The gross proceeds to the Company were $2 million. The Notes bear interest of 12% per annum compounded annually and
interest is payable upon maturity. The notes mature on August 31, 2018 and September 30, 2018, respectively. Repayment
of the notes is secured by a security interest in substantially all of the assets of the Company and its subsidiaries.
In June
and July, 2014, the Company’s Chief Executive Officer made seven individual loans to the Company totaling $156,275 to be used
for working capital purposes.
In June
and July, 2014, the Company’s Chief Technology Officer John Bordynuik made payments in behalf of the Company totaling $15,750
for critical operating services.
In March
2013, the Company’s Chief of Technology, as personal guarantor of a capital lease from Roynat Lease Finance, paid the outstanding
obligation in the amount of $19,928 and assumed the lease.
NOTE
14 – SEGMENT 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 Significant Accounting Policies.”
Intersegment sales are accounted for at fair value as if sales were to third parties. The following tables show the operations
of the Company’s reportable segments:
Three Months
Ended March 31, 2014 |
| |
| Data Recovery & Migration | | |
| Plastic2Oil | | |
| Total | |
Sales | |
$ | — | | |
$ | 18,718 | | |
$ | 18,718 | |
Cost of Sales | |
| | | |
$ | 23,804 | | |
$ | 23,933 | |
Total Operating Expenses | |
$ | — | | |
$ | 676,301 | | |
$ | 676,301 | |
Income (Loss) from Operations | |
| | | |
$ | (676,301 | ) | |
$ | (676,301 | ) |
Other Income (Expense) | |
$ | — | | |
$ | 5,316 | | |
$ | 5,316 | |
Net Income (Loss) from Continuing Operations | |
| | | |
$ | (681,617 | ) | |
$ | (681,617 | ) |
Total Assets | |
$ | — | | |
$ | 9,918,127 | | |
$ | 9,918,127 | |
Accounts Receivable | |
$ | — | | |
$ | 20,426 | | |
$ | 20,426 | |
Inventories | |
$ | — | | |
$ | 140,183 | | |
$ | 140,183 | |
Three Months Ended March 31, 2013 |
| |
Data Recovery & Migration | |
Plastic2Oil | |
Total |
Sales | |
$ | 14,920 | | |
$ | 129,873 | | |
$ | 144,793 | |
Cost of Sales | |
$ | 8,460 | | |
$ | 128,864 | | |
$ | 137,324 | |
Total Operating Expenses | |
$ | — | | |
$ | 2,460,950 | | |
$ | 2,460,950 | |
Net Income (Loss) | |
$ | 6,460 | | |
$ | (2,720,981 | ) | |
$ | (2,714,521 | ) |
Total Assets | |
$ | 58,930 | | |
$ | 14,108,775 | | |
$ | 14,167,705 | |
Accounts Receivable | |
$ | 58,930 | | |
$ | 85,642 | | |
$ | 144,572 | |
Inventories | |
$ | — | | |
$ | 289,893 | | |
$ | 289,893 | |
(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. |
(2) |
P2O assets include
the Company headquarters and various machinery and equipment used at the aforementioned sites and at the Niagara Falls Facility. As
of March 31, 2014, total long-lived assets of $5,924,530 and $510,069 were located in the United States and Canada, respectively. |
NOTE 15 – DISCONTINUED
OPERATIONS
| |
Three Months Ended March 31, |
| |
2014 | |
2013 |
Javaco | |
$ | — | | |
| — | |
Pak-It - Reserve for Note Receivable | |
| (200,000 | ) | |
| — | |
Regional Recycling of Niagara | |
| (11,165 | ) | |
| (264,470 | ) |
Total Income (loss) from discontinued operations | |
$ | 188,840 | | |
| (264,470 | ) |
Pak-It and Javaco
During
the period ended June 30, 2013, the Company made an assessment of the collectability of the note receivable from the buyer of
Pak-It. It was determined that due to the lack of a payment within forty days of the due date that collectability was
not assured and the Company has reserved for the full amount of the note receivable, $500,000 which has been recorded in the discontinued
operations in the condensed consolidated statements of 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 30, 2014 and December 31, 2014, no assets related to Javaco remained.
There
are no operations of Javaco included in the condensed consolidated financial statements as of March 30, 2014.
Regional Recycling of
Niagara
During the third quarter of
2013, the Company determined that due to the significant losses incurred by Regional Recycling of Niagara, and the continuous
need to fund their operations through the Company’s Plastic2Oil operations, that it would shut down the operations of the
facility. The decision to do this was based on the following factors:
● |
The
inventory processed over the prior months at Regional Recycling of Niagara was comingled with contaminated materials that
made the significant majority of their inventory worthless without significant additional processing and labor (see Note 4); |
● |
The fixed assets
utilized at the facility were old and beginning to become in need of significant repairs, which would have been a significant
cost to maintain (see Note 5); |
● |
The pre-processing
cost of plastic at Regional Recycling of Niagara was significant and was a hindrance in the Company becoming profitable on
a cost per gallon of fuel basis. |
● |
The Company leases
the JBI Recycling Facility in Thorold, Ontario, Canada with terms remaining of up to 17 years (see Note 11). |
The results of operations
from Regional Recycling of Niagara for three months ended March 30, 2014 and 2013 have been classified as discontinued operations and
are as follows:
Condensed Statements of
Operations
| |
Three Months Ended March 31, |
| |
2014 | |
2013 |
Revenue | |
$ | — | | |
| 52,009 | |
Cost of Sales | |
| — | | |
| 22,652 | |
Gross Profit | |
| — | | |
| 29,357 | |
Operating Expenses | |
| 11,165 | | |
| 264,768 | |
Other (Income) Expense | |
| (200,000 | ) | |
| 298 | |
Inventory reserve (Note 4) | |
| — | | |
| — | |
| |
| | | |
| | |
| |
| | | |
| | |
Income (Loss) before Income Taxes | |
| 188,835 | | |
| (264,470 | ) |
Future income tax recovery | |
| | | |
| — | |
Income (Loss)from discontinued operations, net of tax | |
$ | 188,835 | | |
| (264,470 | )) |
NOTE 16 – RISK MANAGEMENT
Concentration
of Credit Risk
The Company
maintains cash balances, at times, with financial institutions in excess of amounts insured by the Canada Deposit Insurance Corporation
and the U.S. Federal Deposit Insurance Corporation. Management monitors the soundness of these institutions and has
not experienced any collection losses with these financial institutions.
During
the three months ended March 31, 2014 and 2013, 100%%, and 93.0%, respectively, of total net revenues were generated from one
customer and three customers. As of March 31, 2014, and 2013 one, and four customers, respectively, accounted
for 100.0%, and 90.5% of accounts receivable.
During
the three months ended March 31, 2013 19.1%, of total net purchases were made from one vendor.
NOTE
17 – SUBSEQUENT EVENTS
The Company
has evaluated subsequent events occurring after the balance sheet date and has identified the following:
Name
Change and increase in total number of shares authorized
On May
16, 2014, the Company’s board of directors and certain stockholders holding a majority of the voting power of our outstanding
common stock and preferred stock approved resolutions authorizing an amendment to its Articles of Incorporation to (i) change its name to “Plastic2Oil, Inc.” and (ii) increase the total number of authorized
shares of common stock, par value $0.001 per share, of our Company from 150,000,000 shares to 250,000,000 shares. A charter
amendment to increase the authorized shares of common stock was filed in the State of Nevada on June 24, 2014. The charter amendment
to effect the name change is expected to be filed in August 2014.
Series
A Preferred Stock
On May
30, 2014, Mr. John Bordynuik, the Company’s founder and current Chief of Technology, returned to the Company for cancellation
1,000,000 shares of the Company’s issued and outstanding Series A Preferred Stock. On June 2, 2014, the company filed
an amendment to its Article of Incorporation to terminate the Series A Preferred Stock. Mr. Bordynuik was a party to a letter
agreement (the “Letter Agreement”) with certain investors (the “Investors”) in our May 2012 private placement,
which Letter Agreement contained certain restrictions on Mr. Bordynuik’s ability to vote his 1 million shares of Series
A Preferred Stock. In the second quarter of 2014, the Letter Agreement was terminated upon the receipt of waiver/rescission notices
from the requisite number of Investors required under the Letter Agreement’s terms. On May 30, 2014, all of the
issued and outstanding shares of Series A Preferred Stock were cancelled and, on June 3, 2014, a Certificate of Withdrawal relating
to the Series A Preferred Stock was filed with the Secretary of State of Nevada.
Series B Preferred Stock
In accordance
with the Certificate of Designation relating to the Company’s shares of Series B Convertible Preferred Stock, effective
as of June 30, 2014, all of the 2,182,600 outstanding shares of Series B Convertible Preferred Stock of the Company were automatically
converted into an aggregate of 15,278,200 shares of common stock. On July 29, 2014, certificate of withdrawal relating to the
Series B Convertible Preferred stock was filed with the Secretary of State of Nevada.
From
April 2014 through July 30, 2014 the Company issued 4,100,000 shares of common stock for cash proceeds of $410,000, which was
received during the three months ended March 31, 2014, and 60,000 shares of common stock for services rendered.
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, 2013 as filed with the Securities and Exchange Commission on June 4, 2014.
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,
and our Data Recovery & Migration Business. Previously, we operated an electronic and video equipment distribution
business, conducted by Javaco, Inc. (“Javaco”). As of March 31, 2014, no assets related to Javaco remained
on the books. For the three month period ended March 31, 2014, 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 2014
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
We
manufacture processors which produce fuel products mainly from unsorted, unwashed waste plastics for distribution across a number
of markets. We continue to execute on our business strategy with the goal of becoming a leading North American company that transforms
waste plastic into ultra-clean, ultra-low sulphur fuel.
Currently,
we provide environmentally-friendly solutions through our processors and technologies. Our primary offering is our Plastic2Oil®,
or P2O®, solution, which is our proprietary process that converts waste plastic into fuel through a series of chemical reactions
(our “P2O business”). We collect mainly mixed plastics from commercial and industrial enterprises that generate large
amounts of waste plastic for use in our process.
Generally,
this waste plastic would otherwise be sent to landfills and its disposal potentially can be quite costly for companies. We use
this waste plastic as feedstock to produce Fuel Oil No. 2, Naphtha, and Fuel Oil No. 6 for various uses by our customers. We own
and operate our P2O processors and have the capability to produce and store the fuels at, and ship from, our facilities in Niagara
Falls, NY. We sell the fuels we produce to customers through two main distribution channels, fuel wholesalers and directly to
commercial and industrial end-users.
Our
P2O processors have evolved into a modular solution with the completion of processor #3 in 2013. We use third party contract manufacturers
for the manufacture of many of the key modular components of our processors, including the kilns and distillation towers as well
as certain other key components that require specialized machining and fabrication.
Our P2O
process is proprietary and converts waste plastic into fuel through a series of chemical reactions. We developed this
process in 2009 and began very limited commercial production in 2010 following our receipt of a consent order from the New York
State Department of Environmental Conservation (“NYSDEC”) allowing us to commercially operate our first large-scale
P2O processor at our Niagara Falls, New York facility. Currently, we have three fully-permitted operational P2O processors,
which are capable of producing Naphtha, Fuel Oil No. 2 and Fuel Oil No. 6, all of which are fuels produced to the specifications
published by ASTM. The fully-permitted P2O processor is dedicated to Research & Development activities. We have
two additional processors in the process of assembly offsite. Our P2O process is capable of producing two by-products, an off-gas
similar to natural gas and a petcoke carbon residue. We primarily use our off-gas product in our operations to fuel
the burners in our P2O processors. We sell our fuel products through two main distribution channels comprised of fuel
wholesalers and directly to commercial and industrial end-users.
The Company
had to shut down its production late in the fourth quarter of 2013 due to severe cold weather that caused damage to condensers
and other components of our processors. Management estimates that the repair of the processors will require the expenditure
of between $175,000 and $200,000. At July 28, 2014, we lacked the working capital or access to bank credit to make these repairs.
We are reviewing our financing options, including the sale of shares of our common stock or other securities, in order to allow
us to obtain sufficient funds to make the required repairs and resume operation of our processors. Management currently anticipates
that the processors will remain idle at least until the third quarter of 2014. During the idle period, we significantly reduced
our headcount by furloughing our operations personnel but retained a small team to perform general repairs and maintenance on
the processors. Once the processors are repaired, we expect a small increase in our headcount in order to resume normal operations.
Our P2O
process accepts mainly unsorted, unwashed waste plastics. Although many sources of plastic waste are available, we
have focused our feedstock sources on primarily post-commercial and industrial waste plastic. Generally, we believe
that this waste stream is more costly for companies to dispose of, making it more readily available in large quantities and cheaper
for us to acquire than other potential types of feedstock. We believe our P2O process offers a cost-effective
solution for businesses that currently have to pay to dispose of these types of waste.
Currently,
we understand that there are several plastic-to-oil processes operational globally. These facilities employ a wide range of technologies
and yield varying purities of fuel output. We believe that our process has many advantages over other commercially available processes
in that our P2O solution requires a comparatively lesser initial capital investment and yields high-quality, ultra-low sulphur
fuel, with no need for further refinement. Additionally, our process uses comparatively little energy and physical space, which,
in our view, makes it better suited for high-volume production and expansion to multiple sites.
Processor
Output
We are
currently permitted to feed two tons, or 4,000 pounds, of waste plastic per hour into each processor by a continuous conveyor
belt where it is heated by a burner that mainly burns off-gases produced from the P2O process. Plastic hydrocarbons are cracked
into various shorter hydrocarbon chains and exit in a gaseous state. Any residue, metals and or non-usable substances remain in
the reactor and are periodically removed. Through our proprietary process Fuel Oil No. 6, Fuel Oil No. 2, and Naphtha are condensed
from the reactor through the remainder of the process. The fuel output is then transferred to storage tanks automatically by the
system. Our process is mainly operated by an automated computer system that controls the conveyor feed rate, system temperatures,
off-gas systems and the pumping out of newly created fuel to storage tanks. The plastic to liquid fuel conversion is approximately
86% by weight. Therefore, 20 tons of plastic would be processed into approximately 4,100 gallons of fuel. At June 3, 2014, we
had three operational processors at our Niagara Falls, NY facility. One processor was dedicated to Research & Development.
Fuel
Produced: The fuel produced in our processors is ultra-low sulfur fuel and is ready for end-users without the need
for further refinement.
Off-gas: Approximately
8-10% of waste plastics fed into the processors are converted to a mixture of hydrogen, methane, ethane, butane and propane gas
(“off-gas”). Once our processors are in a state to begin the P2O process, they use their own off-gas to
fuel the burners in the process.
Residue:
There is approximately 2-4% residue from our process, which is petroleum coke or carbon black (“petcoke”) that needs
to be removed on a periodic basis.
Feedstock
Our P2O
process primarily uses post-commercial and industrial waste plastic that might otherwise be sent to a landfill by the commercial
and industrial producers of such waste plastic. We believe that this can be costly for these producers due to the large
volumes of plastic waste that they generate. As such, our business model is premised on our ability to accept numerous types of
waste plastics from such sources at a relatively low cost. We believe that our ability to accept mainly mixed, unwashed
waste plastics is a significant advantage of our P2O process compared to similar operations in our industry.
Fuel
Products
Our P2O
process makes both light and heavy fuel products which are; specifically Naphtha, Fuel Oil No. 2 and Fuel Oil No. 6, as defined
by ASTM. Our process also generates two main by-products, an off-gas similar to natural gas and a carbon residue known
as petcoke.
Naphtha
is a very light fuel product that is used as a cutting component for both high and regular grade gasoline. Fuel Oil No. 2 is a
mid-range fuel commonly known as diesel and has numerous transportation, manufacturing and industrial uses. Fuel Oil
No. 6 is a heavy fuel generally used in industrial boilers and ships. Our process produces high quality, ultra-low
sulphur fuels, without the need for further refinement which enables us to sell our fuel directly from our processors to the end-user.
The off-gas
that is produced by the P2O process is used to fuel the burner that heats the entire processor.
P2O
Facilities
We currently
have one main operating facility that we use in our P2O business, our P2O plant, as well as a second facility, our fuel blending
site, for use in the future. These are briefly described below. Additional information on our properties can be found
in Item 2 of this report.
Niagara
Falls, NY facility: Our Niagara Falls, NY facility currently has two buildings used in fuel production operations,
a 10,000 square foot building that currently houses one commercial-scale P2O processors, one P2O processor devoted to research
& development activities, and a 7,200 square foot building housing the third commercial-scale P2O processor. Our
Niagara Falls operations are situated on eight acres which can accommodate expansion of our growing operations. This
facility also serves as the center of our research and development operations and our administrative offices.
Blending
Site: We own a 250,000 gallon fuel-blending facility in Thorold, Ontario, which, when in use, would allow us to blend
and self-certify certain fuels that are produced from our process to meet government specifications.
Sales
and Distribution
We sell
our fuel products through two main channels: fuel brokers and direct to end-users. We have no long-term contracts for
fuel sales; rather, we sell our fuel through the issuance of routine purchase orders.
Suppliers
The principal
goods that we require for our P2O business are the waste plastic that we use as feedstock for production of our fuels. We
collect waste plastics from commercial and industrial businesses that generate large amounts of this waste stream. As of July
28, 2014 we had approximately 46,892 pounds of waste plastic and approximately 25,548 gallons of Heat Transfer Fluid available
in inventory as feedstock, to support the resumption of operations upon the repairs, as mentioned above.
Licenses,
Permits and Testing
We maintain the following
permits and licenses in connection with the operation of our P2O business.
License/Permit | |
Issuing Authority | |
Registration Number | |
Issue/Expiration Date |
Air Permit | |
NYSDEC | |
9-2911-00348/00002 | |
06 /30/2014 |
Solid Waste Permit | |
NYSDEC | |
| 9-2911-00348/00003 | | |
06 /30/2014 |
Bulk Fuel Blending License | |
Ontario Technical Standards & Safety Authority | |
| 000184322 | | |
10/12/2014 |
Waste Disposal Site | |
Ontario Ministry of the Environment | |
| A121029 | | |
Perpetual (subject to annual reviews) |
In 2010,
our P2O process and processors were tested by IsleChem, LLC, an independent chemical firm providing contract research and development,
manufacturing and scale-up services, using two small prototypes of our P2O processor. The IsleChem test results indicated
that our process is both repeatable and scalable. Following this testing, we assembled a large-scale P2O processor capable of
processing at least 20 metric tons of plastic per day. In September 2010, we had a Stack Test performed by Conestoga-Rovers &
Associates (“CRA”), an independent engineering and consulting firm, which concluded that, with a feed rate of 2,000
pounds of plastic per hour, our processor’s emissions were below the maximum emissions levels allowed by the NYSDEC simple
air permit, which is needed to commercially operate the P2O processor at that location. We used the CRA test results
to apply for the required operating permits and in June 2011 we received an Air State Facility Permit (“Air Permit”)
and Solid Waste Management Permit (“Solid Waste Permit”) for up to three processors at the Niagara Falls, NY facility. In
December 2011, we had a second stack test performed by CRA for an increased rate of 4,000 pounds per hour. In January
2012, we received a final emissions report from CRA confirming that emissions were considerably decreased with an increased feed
rate. In December 2012, we had a stack test performed on the second processor.
The emissions tests conducted
by CRA on our processors are summarized in the following table:
Emissions | |
Units | |
Original Stack Test (2010) – Processor #1 | |
Final Stack Test (Dec. 2011) – Processor #1 | |
Stack Test (Dec. 2012) – Processor #2 |
CO – Carbon Monoxide | |
| ppm | | |
| 3.16 | | |
| 3.1 | | |
| 3.7 | |
SO 2 - Sulphur Dioxide | |
| ppm | | |
| 0.23 | | |
| 0.02 | | |
| 0.39 | |
NOx – Oxides of Nitrogen | |
| ppm | | |
| 86.4 | | |
| 15.1 | | |
| 21.3 | |
TNMHC – Total Non-Methane Hydrocarbons | |
| ppm | | |
| 0.25 | | |
| 3.92 | | |
| 0.62 | |
PM – Particulate Matter | |
| Lbs./hr. | | |
| 0.016 | | |
| 0.002 | | |
| 0.012 | |
Hexane | |
| Lbs./hr. | | |
| Not tested | | |
| 0.00001 | | |
| 0.0013 | |
Data
Recovery & Migration Business
In June
2009, we purchased certain assets from John Bordynuik, Inc., a corporation founded by John Bordynuik, our former Chief Executive
Officer and current Chief of Technology. The assets acquired from John Bordynuik, Inc. included tape drives, computer hardware,
servers and a mobile data recovery lab to read and transfer data from magnetic tapes and these assets are used in our Data Recovery
& Migration business.
Magnetic
tapes were previously a primary media for data storage. Because of its cost effectiveness, magnetic tape was widely used by government,
scientific, educational and commercial organizations for decades. Over time, these tapes can become vulnerable to deterioration
when exposed to natural elements, which can render the tapes difficult to read or unreadable using the original tape-reading equipment. Our
Data Business involves reading old magnetic tapes, interpreting and restoring the data where necessary and transferring the recovered
data to storage formats used in current systems. The recovered data is verified for accuracy and returned to customers in the
media storage format of their choice. Our process gives customers the ability to conveniently catalogue and safely archive difficult-to-retrieve
data on readily accessible, contemporary storage media. Users of these services generally include businesses or organizations
that have historically stored information on magnetic tape, such as government agencies, oil and gas companies and academic institutions.
The process
for data recovery was developed and is very highly dependent on Mr. John Bordynuik. The Data Business’s reliance
on Mr. Bordynuik has been a key driver to achieving revenue in 2013 and 2012. In light of our business strategy focus on our P2O
business, we anticipate that revenues and profits generated from our Data Business operations will represent a decreasing share,
if any, of our total revenues and profits in future reporting periods.
Results of Operations
Three months ended March
31, 2014 compared to three months ended March 31, 2013
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 our Chief of Technology,
who possesses the relevant expertise. We generated $18,718 of revenues from P2O business during the three-month
period ended March 31, 2014, compared to revenues of $129,888 during the same period ended March 31, 2013. The following
table shows a breakdown of our revenues from these sources.
Revenue | |
| |
Quarter ended March 31, 2014 | |
Quarter ended March 31, 2013 | |
% Change |
| |
| |
| |
| |
|
P2O Revenue | |
| | | |
| | | |
| | | |
| | |
Fuels | |
| | | |
$ | 18,718- | | |
$ | 129,888 | | |
| (86 | %) |
Total P2O Revenue | |
| | | |
| 18,718 | | |
| 129,888 | | |
| (86 | %) |
| |
| | | |
| | | |
| | | |
| | |
Data Business | |
| | | |
| — | | |
| 14,920 | | |
| (100 | %) |
TOTAL REVENUE | |
| | | |
$ | 18,718 | | |
$ | 144,808 | | |
| (87 | %) |
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 revenue in the
first quarter of 2014 as compared to the same period in 2013 was mainly due to the Company’s decision to shut down its production
late in the fourth quarter of 2013 due to severe cold weather that caused damage to condensers and other components of our processors.
Revenues
from the Data Business were driven by the completion of open and outstanding purchase orders. We had no revenues generated from
the Data Business during the three-month period ended March 31, 2014, compared to revenues of $14,920 during the same period ended
March 31, 2013. The decrease was a result of the reduction of headcount by furloughing our operations personnel.
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 March 31, 2014 | |
Quarter ended March 31, 2013 | |
% Change |
P2O COGS | |
| |
| |
|
Fuels | |
$ | 23,933 | | |
| 128,864 | | |
| (81 | %) |
Total P2O COGS | |
| 23,933 | | |
$ | 128,864 | | |
| (81 | %) |
| |
| | | |
| | | |
| | |
Data Business | |
| | | |
| 8,460 | | |
| (100 | %) |
TOTAL COGS | |
$ | 23,933 | | |
$ | 137,324 | | |
| (83 | %) |
Cost
of goods sold decreased 83% in the first quarter of 2014 as compared to same period of 2013 as a result of the Company’s
decision to shut down its production late in the fourth quarter of 2013 due to severe cold weather that caused damage to condensers
and other components of our processors. 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 | |
2014 Average Cost per Gallon | |
2013 Average Cost per Gallon | |
% Change |
Fuel Oil No. 6 | |
$ | — | | |
$ | 1.73 | | |
| (100 | %) |
Fuel Oil No. 2 | |
$ | — | | |
$ | 1.73 | | |
| (100 | %) |
Naphtha | |
$ | — | | |
$ | 1.73 | | |
| (100 | %) |
Cost of Goods Sold Components | |
2014 Percentage Cost per Gallon (%) | |
2013 Percentage Cost per Gallon (%) | |
% Change |
Feedstock Costs | |
| — | | |
| 43.9 | | |
| (100 | %) |
Preprocessing Costs | |
| — | | |
| 37.0 | | |
| (100 | %) |
P2O Plant Costs | |
| — | | |
| 14.5 | | |
| (100 | %) |
Freight | |
| — | | |
| 4.6 | | |
| (100 | %) |
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 (Loss)
Gross Profit(Loss) | |
Three months ended March 31, 2014 | |
Gross Profit % - Three months ended March 31, 2014 | |
Three months ended March 31, 2013 | |
Gross Profit % - Three months ended March 31, 2013 |
P2O | |
| (5,215 | ) | |
| N/A | | |
| 1025 | | |
| 0.8 | % |
Data Business | |
| | | |
| N/A | | |
| 6,460 | | |
| 43.3 | % |
TOTAL GROSS PROFIT(LOSS) | |
$ | (5,215 | ) | |
| N/A | | |
$ | 7,485 | | |
| 5.2 | % |
For the
three months ended March 31, 2014, we recorded negative gross profit of $5,215, compared to gross profit of $7,485 for the three
months ended March 31, 2013.
The gross
profit related to our fuel sales for the three months ended March 31, 2014 was negatively impacted by to the Company’s decision
to shut down its production late in the fourth quarter of 2013 due to severe cold weather that caused damage to condensers and
other components of our processors. For the three months ended March 31, 2013, upon the closure of RRON, we 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. The Company was receiving this product at a lesser price than the cost of the plastic that needed significant
pre-processing.
Operating
Expenses
We incurred
operating expenses of $1,835,415 during the three months ended March 31, 2014, compared to $2,460,950 for the period ended March
31, 2013. The major decreases in the current period, mainly driven by a $332,000 in non-cash stock compensation decrease,
$340,00 legal Fees decrease offset by a $$528K non-cash professional fees increase and $100,000 decrease in repairs and maintenance
expenses.
Operating Expenses | |
Three months ended March 31, 2014 ($) | |
Three months ended March 31, 2013 ($) |
Selling, General and Administrative expenses- Professional Fees | |
$ | 613,348 | | |
$ | 425,543 | |
Selling, General and Administrative expenses- Compensation | |
| 408,776 | | |
| 692,346 | |
Selling, General and Administrative expenses- Other | |
| 535,681 | | |
| 1,049,260 | |
Depreciation & Accretion | |
| 268,526 | | |
| 184,755 | |
Research & Development | |
| 9,084 | | |
| 109,046 | |
Total Operating Expenses | |
$ | 1,835,415 | | |
$ | 2,460,950 | |
Non-Operating Expenses
Interest Expenses
For the
three months ended March 31, 2014, we had net interest expense of $101,802, mainly from the interest payments on the mortgage
on our facility in Canada, interest payments on our capital leases, and interest accrued on our long-term debt.. This
was compared to the three months ended March 31, 2013, where we recognized net interest income of $2,076, mainly through interest
payments on the mortgage on our facility in Canada as well as interest payments on our capital leases.
Income Tax Expenses
For the
three months ended March 31, 2014 and 2013, 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.
Net
Loss
We incurred
a net loss of $1,753,570 for the three months ended March 31, 2014 compared to a net loss of $2,714,521 in the three months ended
March 31, 2013. These losses consisted of losses from continuing operations of $1,942,410 and $2,450,051 for the three
months ended March 31, 2014 and 2013, respectively, and income of $188,840 and loss of $264,470 from discontinued operations for
the three months ended March 31, 2014 and 2013, respectively.
Liquidity and Capital Resources
As of
March 31, 2014, the Company had cash and cash equivalents of $86,663 on hand. The Company does not currently have a
formal cash management policy in place.
The Company’s cash flows
for the three months ended March 31, 2014 and 2013 are summarized below:
| |
2014 | |
2013 |
Net Loss from Continuing Operations | |
$ | (1,942,410 | ) | |
$ | (2,450,051 | ) |
Net Loss from Discontinued Operations | |
| 188,840 | | |
| 264,470 | |
Net Loss | |
| (1,753,570 | ) | |
| (2,714,521 | ) |
Net Cash Used in Operating Activities | |
| (503,239 | ) | |
| (2,976,015 | ) |
Cash Flows from Investing Activities | |
| | | |
| | |
Net Cash Used in Investing Activities | |
| (24,027 | ) | |
| (1,024,507 | ) |
Cash Flows from Financing Activities | |
| | | |
| | |
Net Cash Provided by Financing Activities | |
| 409,980 | | |
| 3,998,292 | |
| |
| | | |
| | |
Cash and Cash Equivalents at Beginning of Year | |
| 203,949 | | |
| 3,965,720 | |
Cash and Cash Equivalents at End of Year | |
| 86,663 | | |
| 3,963,490 | |
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 or debt securities in private placement transactions, including
investment by our officers and directors. 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.
In the
short term, we expect to need additional capital and will need to this raise additional capital in order to obtain cash flow positive
results from our P2O processors. We expect that we will attempt to raise capital through the issuance of long term
notes, through private placements of our common and/ or preferred stock or through other financing efforts in which we can obtain
substantial liquidity. Additionally, we could enter into transactions with third parties in which we sell and potentially
operate our P2O processors on their sites. We expect that this would generate additional needed cash.
In the
long term, we expect that we will be able to fund our daily operations through the generation of sales of our fuels and P2O Processors However,
we will require significant proceeds from the sale., of our common stock, preferred stock, debt securities in order to fund the
construction of multiple processors .
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, 2013 includes an explanatory
paragraph expressing substantial doubt about our ability to continue as a going concern.
In the
three months ended March 31, 2014 and 2013, 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.
Investing
activities include the Company’s cash investment in property, plant and equipment which amounted to $18,405 in the three
months ended March 31, 2014, as compared to $1,024,507 in the three months ended March 31, 2013. 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 three months ended March 31, 2014 represented the cash received upon the sale of shares of common stock in private
placement. during the period as compared to the three months ended March 31, 2013, cash from financing activities represented
cash received from the sale of Series B Preferred Stock. 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.
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 11 to the condensed consolidated financial statements
as Commitments.
Transactions
with Related parties
On August
29, 2013, the Company entered into a Subscription Agreement (the “Purchase Agreement”) with Mr. Richard Heddle, the
Company’s Chief Executive Officer and a member of the Company board of directors, pursuant to which, on August 29, 2013,
the Company sold to the Purchaser in a private placement (the “Note Financing”) a $1 million principal amount 12%
Secured Promissory Note (the “Note”), together with a five-year warrant to purchase up to one million shares of the
Company’s common stock at an exercise price of $0.54 per share (the “Warrants”). The gross proceeds to the Company
were $1 million.
On March
31, 2014, the Company entered into a second Purchase Agreement with Mr. Heddle, pursuant to which, on March 30, 2013, the Company
sold to Mr. Heddle a second note (a $2 million principal amount Note), together with a Warrant to purchase up to two million shares
of the Company’s common stock at an exercise price of $0.54 per share. The gross proceeds to the Company were $2 million.
In June
and July, 2014, the Company’s Chief Executive Officer made seven individual loans to the Company totaling $156,275 to be used
for working capital purposes.
In June
and July, 2014, the Company’s Chief Technology Officer John Bordynuik made payments in behalf of the Company totaling $15,750
for critical operating services.
In March
2013, the Company’s Chief of Technology, as personal guarantor of a Capital Lease from Roynat Lease Finance paid the outstanding
obligation in the amount of $19,928 and assumed the lease.
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, 2013. 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 these estimates.
Significant estimates include amounts for impairment of property, plant and equipment, estimating reserves and determining accruals
related to discontinued operations, projecting future cash flows from property, plant and equipment, and carrying value of inventory,
share based compensation, asset retirement obligations, inventory obsolescence, accrued liabilities, valuation of the short term
note receivable, accounts receivable exposures, discount rate used in the determination of the fair value of the Senior Secured
Notes for purposes of performing the relative fair value calculation to allocate the proceeds between the Notes and the Warrants
included in the subscription for the Notes, and the discount rate used to calculate the present value of the accrued lease liability.
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 as of March 31, 2014
and December 31, 2013 was $91,710.
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 $30,533 and $30,306 as of March 31, 2014 and December 31, 2013, 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
We recognize
revenue when it is realized or realizable and collection is reasonably assured. We consider revenue realized or realizable
and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has
been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability
is reasonably assured.
P2O sales
are recognized when the customers take possession of the fuel since at that stage the customer has completed all prior testing
necessary for their acceptance of the fuel. At the time of possession they have arranged for transportation to pick it up and
the sales price has either been set in their purchase contract or negotiated prior to the time of pick up through issuance of
a purchase order. We negotiate the pricing of the fuel based on the quality of the product and the type of fuel being sold (i.e.
Naphtha, Fuel Oil No.6 or Fuel Oil No. 2).
Subsequent Events
Name
Change and increase in total number of shares authorized
On May
16, 2014, the Company’s board of directors and certain stockholders holding a majority of the voting power of our outstanding
common stock and preferred stock approved resolutions authorizing an amendment to it’s Articles of Incorporation (the “Charter
Amendment”) to (i) change it’s name to “Plastic2Oil, Inc.” and (ii) increase the total number of authorized
shares of common stock, par value $0.001 per share, of our Company from 150,000,000 shares to 250,000,000 shares. A charter
amendment to increase the authorized shares of common stock was filed in the State of Nevada on June 24, 2014. The charter amendment
to effect the name change is expected to be filed in August 2014.
Private
Placement
On February
19, 2014 the Company entered into Subscription Agreements with three investors in connection with a private placement of shares
of the Company’s common stock and warrants to purchase shares of common stock. The Company agreed to sell and issue to the
Purchasers an aggregate of 2.4 million shares of its common stock and Warrants to purchase up to an additional 2.4 million shares
of its common stock. The closings occurred between February 19 and 24, 2014. The purchase price per share was $0.05 and the gross
proceeds to the Company were $120,000. The Warrants have a three year term, and an exercise price of $0.10 per share of common
stock. Concurrent with these subscriptions the Company entered into a consulting agreement with the investors and a fourth arm’s
length party under which the Company would issue 1,500,000 shares upon commencement of the contract, and 1,000,000 shares on each
of May 15, 2014, August 15, 2014 and January 15, 2015, respectively, for a total of 4,000,000 shares. Along with each of the forgoing
share issuances, the Company will issue a commensurate number of warrants with a three year term and an exercise price of $0.10.
The shares and warrants specified by the consulting agreement have not been issued. Additionally, under the terms of the consulting
agreement the Company is committed to issue 1,000,000 additional shares if the Company becomes listed on the AMEX division of
the New York Stock Exchange or NASDAQ. The consulting agreement also specifies contingent fees of 5% of the gross transaction
amount for introducing a merger or acquisition candidate and 3% of fees earned from the introduction of a strategic or business
partner.
On March
26, 2014 the Company entered into Subscription Agreements with eleven investors in connection with a private placement of shares
of the Company’s common stock and warrants to purchase shares of common stock. The Company agreed to sell and issue to the
Purchasers an aggregate of 3.2 million shares of its common stock and Warrants to purchase up to an additional 3.2 million shares
of its common stock. The closings occurred between March 17 and April 8, 2014. The purchase price per share was $0.10 and the
gross proceeds to the Company were $335, 000. The Warrants have a three year term, and an exercise price of $0.10 per share of
common stock.
Series
A Preferred Stock
On May
30, 2014, Mr. John Bordynuik, the Company’s founder and current Chief of Technology, returned to the Company for cancellation
1,000,000 shares of the Company’s issued and outstanding Series A Preferred Stock. On June 2, 2014, the company filed
an amendment to its Article of Incorporation to terminate the Series A Preferred Stock. Mr. Bordynuik was a party to a letter
agreement (the “Letter Agreement”) with certain investors (the “Investors”) in our May 2012 private placement,
which Letter Agreement contained certain restrictions on Mr. Bordynuik’s ability to vote his 1 million shares of Series
A Preferred Stock. In the second quarter of 2014, the Letter Agreement was terminated upon the receipt of waiver/rescission notices
from the requisite number of Investors required under the Letter Agreement’s terms. On May 30, 2014, all of the
issued and outstanding shares of Series A Preferred Stock were cancelled and, on June 3, 2014, a Certificate of Withdrawal relating
to the Series A Preferred Stock was filed with the Secretary of State of Nevada.
Series B Preferred Stock
In accordance
with the Certificate of Designation relating to the Company’s shares of Series B Convertible Preferred Stock, effective
as of June 30, 2014, all of the 2,182,600 outstanding shares of Series B Convertible Preferred Stock of the Company were automatically
converted into an aggregate of 15,278,200 shares of common stock. On July 29, 2014, certificate of withdrawal relating to the
Series B Convertible Preferred stock was filed with the Secretary of State of Nevada.
From
April 2014 through July 30, 2014 the Company issued 4,100,000 shares of common stock for cash proceeds of $410,000, which was
received during the three months ended March 31, 2014, and 60,000 shares of common stock for services rendered.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
Disclosures
About Market Risk
We may
be exposed to changes in financial market conditions in the normal course of business. Market risk generally represents the risk
that losses may occur as a result of movements in interest rates and equity prices. We currently do not use financial instruments
in the normal course of business that are subject to changes in financial market conditions.
Currency
Fluctuations and Foreign Currency Risk
The Company
mainly operates in the United States and Canada. Due to the relative stability of the Canadian Dollar in comparison
to the U.S. Dollar, we do not have significant foreign currency risk.
Interest
Rate Risk
We deposit
surplus funds with banks earning daily interest. We do not invest in any instruments for trading purposes. All of our outstanding
debt instruments carry fixed rates of interests. The amount of current portion of capital leases outstanding as of March 31, 2014
and December 31, 2013 was $13,366 and $23,618, respectively. We are exposed to interest rate risk primarily with respect to our
capital leases and mortgage.
Management
monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances
relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest
rate risk.
Credit
Risk
We have
not experienced significant credit risk with our accounts receivable, as most of our customers are long-term customers with superior
payment records. Our receivables are monitored regularly by our credit managers. Currently, as noted in Note 6 to the
condensed consolidated financial statements, we have become aware of the uncertainty of the creditworthiness of the note holder
related to Pak-It and have accordingly reserved for the collectability of the note receivable related to that transaction.
During
the quarter ended March 31, 2014 and 2013, 100%, and 93.0%, respectively, of total net revenues were generated from one customer
and three customers. As of March 31, 2014, and 2013 one, and four customers, respectively, accounted for 100.0%,
and 90.5% of accounts receivable.
During
the quarter ended March 31, 2013, 19.1%, of total net purchases were made from one vendor.
Inflation
Risk
Inflationary
factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we
do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate
of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general
and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased
costs.
Item 4. Controls
and Procedures
Disclosure
Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer (CEO)
and chief financial officer (CFO), we conducted an evaluation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as of March 31, 2014. Based on this evaluation, our CEO and CFO concluded that
our disclosure controls and procedures are ineffective to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and
communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosure.
Changes
in Internal Controls over Financial Reporting
There
were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph
(d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. Management has reported to the Board of
Directors material weaknesses described under the heading Managements’s Report on Internal Control over Financial Reporting”
in Sect 9A of the Company’s Annual Report on Form 10-K for the year ended December 31,2013.
Item 5. Other Information
None.
PART II – OTHER INFORMATION
Management,
including our principal executive officer and our principle financial officer, concluded that the Company’s internal
controls over financial reporting were ineffective as of March 31, 2014 due to the material weakness discussed below.
Item
1. Legal Proceedings
For a
discussion of legal proceedings affecting the Company, see the information in Footnote 10, “Commitments and Contingencies”,
to the financial statements, included in Part I of this Report.
Item
1A. Risk Factors
In addition
to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A.
“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially
affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not
the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial condition and operating results.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item
3. Defaults upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not Applicable
Item
5. Other Information
Automatic Conversion of Series B Preferred Stock
In accordance with the Certificate of Designation
relating to the Company’s shares of Series B Convertible Preferred Stock, effective as of June 30, 2014, all of the 2,182,600
outstanding shares of Series B Convertible Preferred Stock of the Company were automatically converted into an aggregate of 15,278,200
shares of common stock. The issuance of the foregoing securities was exempt from registration under the Securities Act of 1933,
as amended, under Section 3(a)(9). On July 29, 2014, the Company filed a Certificate
of Withdrawal of its Certificate of Designation relating to the Company’s Series B Convertible Preferred Stock.
Item 6. Exhibits
(a) Exhibits
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
JBI,
INC. |
|
|
Date:
July 30, 2014 |
By: |
/s/
Richard Heddle |
|
|
Name:
Richard Heddle |
|
|
Title: President
and Chief Executive Officer
(Principal
Executive Officer) |
(37)
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