|• QUARTERLY REPORT • CERTIFICATE OF AMENDMENT • CERTIFICATE OF AMENDMENT • CERTIFICATE OF DESIGNATION • AMENDMENT TO CERTIFICATE OF DESIGNATION • CERTIFICATE OF AMENDMENT • CERTIFICATE OF CORRECTION • FORM OF COMMON STOCK CERTIFICATE • CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 • CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 • CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002 • CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION LABELS LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number: 000-52444
(Exact name of registrant as specified in its charter)
1783 Allanport Road
Thorold Ontario L0S 1K0
(Address of principal executive offices) (Zip Code)
( Registrant’s telephone number, including area code)
(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.
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 August 7, 2012, there were 89,565,755 shares of Common Stock, $0.001 par value per share, issued and outstanding.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q (“Report”) contains “forward looking information” 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 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; 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 information 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 information, 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 information include risks associated with general business, economic, competitive, political and social uncertainties; risks associated with changes in project parameters as plans continue to be refined; risks associated with failure of plant, equipment or processes to operate as anticipated; risks associated with accidents or labour 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 information are discussed in more detail in the section entitled “Risk Factors” in the Company’s most recent Annual Reports, as may be supplemented or amended from time to time and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 in this Report.
Some of the forward-looking information may be considered to be financial outlooks for purposes of applicable securities legislation including, but not limited to, statements concerning capital expenditures. These financial outlooks are presented to allow the Company to benchmark the results of the Plastic2Oil business. These financial outlooks may not be appropriate for other purposes and readers should not assume they will be achieved.
The Company does not intend to, and the Company disclaims any obligation to, update any forward-looking information (including any financial outlooks), whether written or oral, or whether as a result of new information, future events or otherwise, except as required by law.
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
JBI, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the condensed consolidated financial statements.
JBI, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Month Periods Ended June 30,
The accompanying notes are an integral part of the condensed consolidated financial statements
JBI, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six Month Period Ended June 30, 2012 (Unaudited)
The accompanying notes are an integral part of the condensed consolidated financial statements.
JBI, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Month Periods Ended June 30,
The accompanying notes are an integral part of the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND GOING CONCERN
JBI, Inc. (the “Company” or “JBI”) was originally incorporated as 310 Holdings, Inc. (“310”) in the State of Nevada on April 20, 2006. 310 had no significant activity from inception through 2009. In April 2009, John Bordynuik purchased 63% of the issued and outstanding shares of 310, and subsequently was appointed President and CEO of the Company. During 2009, the Company changed its name to JBI, Inc. and began operations of its main business operation, Plastic2Oil® (or “P2O®”). Plastic2Oil is a combination of proprietary technologies and processes developed by JBI which convert waste plastics into fuel. JBI currently, as of the date of this filing, operates two processors at its Niagara Falls, NY, facility (the “Niagara Falls Facility”).
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), which contemplates continuation of the Company as a going concern which assumes the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has experienced negative cash flows from operations since inception and has an accumulated deficit of $41,428,977 at June 30, 2012. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has funded its activities to date almost exclusively from equity financings.
The Company will continue to require substantial funds to continue development of its core business of Plastic2Oil to achieve permitted commercial productions, and to commence sales and marketing efforts, if full regulatory approvals are obtained. Management’s plans in order to meet its operating cash flow requirements include potentially any of the following financing activities such as private placements of its common stock, issuances of debt and convertible debt instruments.
While the Company believes that it will be successful in obtaining the necessary financing to fund its operations, meet regulatory requirements and achieve commercial production goals, there are no assurances that such additional funding will be achieved and that it will succeed in its future operations. These 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.
The Company completed three business acquisitions since April 2009:
In June 2009, the Company purchased certain assets from John Bordynuik, Inc., a corporation founded by John Bordynuik, the Company’s founder. The assets acquired from John Bordynuik, Inc. included tape drives, computer hardware, servers and a mobile data recovery container to read and transfer data from magnetic tapes and these assets are used in the Company’s Data Recovery & Migration business. The Company process for data recovery was developed by the Company’s founder, John Bordynuik, and continues to be highly dependent on Mr. Bordynuik to interpret the data. This was an impediment to the Data Recovery & Migration Business achieving revenue in 2010 and 2011. As of June 30, 2012, all assets related to the Data Recovery & Migration had been impaired and fully written-off.
In August 2009, the Company acquired Javaco, Inc. (“Javaco”) a distributor of electronic components, including home theater and audio video products. Subsequent to June 30, 2012, the Company shut-down the operations of Javaco and liquidated the inventory and fixed assets. The operations of Javaco have been shown 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 as a result, the operations of Pak-It have been classified as discontinued operations for all periods presented (Note 15). In February 2012, the sale of Pak-It was finalized with an effective date of January 1, 2012.
NOTE 2 – SUMMARY OF ACCOUNTING POLICIES
Basis of Consolidation
These condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Javaco, Pak-it, JBI (Canada) Inc., JBI CDE Inc., JBI Re One Inc., JBI Re#1 Inc., Plastic2Oil of NY#1, Plastic2Oil Marine Inc. and Plastic2Oil Land Inc. (dissolved in 2011). All intercompany transactions and balances have been eliminated on consolidation. Amounts in the consolidated financial statements are expressed in US dollars. Pak-It and Javaco have also been consolidated; however, as mentioned in Note 1 their operations for all periods presented are classified as discontinued operations (Note 15).
The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include amounts for impairment of property, plant and equipment and intangible assets, share based compensation, asset retirement obligations, inventory obsolescence, accrued liabilities and accounts receivable exposures and the valuation of stock warrants.
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.
Cash Held in Attorney Trust
The amount held in trust represents retained funds for legal services to be provided to the Company.
Accounts receivable represent unsecured obligations due from customers under terms requesting payments upon receipt of invoice up to 90 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.
The allowance for uncollectible accounts reflects management’s best estimate of amounts that may not be collected based on an analysis of the age of receivables and the credit standing of individual customers. Accounts receivable determined to be uncollectible are recognized using the allowance method. The allowance for uncollectible accounts for the period ended June 30, 2012 and the year ended December 31, 2011 was $44,397 and $331,695, respectively.
Inventories, which consist primarily of plastics and processed fuel at P2O, 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.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of prepayments for services and prepaid insurance coverages. As of June 30, 2012, $162,000 relates to advances to an advisor that represent prepayment for services to be rendered in conjunction with the December/ January private issuance of securities and the sale of Pak-It. The advisor agreed to refund the fee to the Company in exchange for the opportunity to participate in the private placement. The gross amount of this advance was $180,000 and is reduced by $18,000, the amount of the transaction fee paid to the advisor for locating the buyer for Pak-It. This advance bears no interest and is due to be repaid to the Company during the third quarter.
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 as follows:
Gains and losses on depreciable assets retired or sold are recognized in the statements of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred and expenditures that increase the value or useful life of the asset are capitalized.
Construction in Process
The Company capitalizes customized equipment built to be used in the future day to day operations at cost. Once complete and available for use, the cost for accounting purposes is transferred to property, plant and equipment, where normal depreciation rates are applied.
Impairment of Long-Lived Assets
The Company reviews for impairment of long-lived assets on an asset by asset basis. Impairment is recognized on properties held for use when the expected undiscounted cash flows for a property are less than its carrying amount at which time the property is written-down to fair value. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. The sale or disposal of a “component of an entity” is treated as discontinued operations. The operating properties sold by the Company typically meet the definition of a component of an entity and as such the revenues and expenses associated with sold properties are reclassified to discontinued operations for all periods presented.
As of March 31, 2012, the Company determined that due to the time constraints placed on our founder, John Bordynuik, the Data Recovery & Migration Business was no longer viable. With the growth of the P2O business being Mr. Bordynuik’s nearly sole focus and where the vast majority of his time is spent, the Company is unable to determine when this business will begin producing revenues again. Therefore, the Company cannot justify the value of the assets on the books of the Company. As such, the Company determined that these assets no longer had value to the Company and recorded an impairment charge of $36,500 in the period ended March 31, 2012, to write the assets down to $Nil.
During the period ended June 30, 2012, the reactor on the initial P2O Processor was determined to no longer be viable due to excessive wear and tear during significant amounts of research and development testing. As a result, the Company impaired the reactor for its full carrying value and recorded an impairment charge of $156,331 during the period.
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 costs, equal to the estimated fair value of the asset retirement obligations, are capitalized as part of the cost of the related long-lived asset. The asset retirement costs are depreciated over the asset’s estimated useful life and are included in amortization expense on the consolidated statements of income. Increases in the asset retirement obligations resulting from the passage of time are recorded as accretion of other long-term liabilities in the consolidated statements of operations. Actual expenditures incurred are charged against the accumulated obligations. The balance of such asset retirement obligations is included in other long-term liabilities with balances of $28,300 and $28,566 as of June 30, 2012 and December 31, 2011, respectively.
The Company records environmental liabilities at their undiscounted amounts on our balance sheet as other current or long-term liabilities when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. These costs may be discounted to reflect the time value of money if the timing of the cash payments is fixed or reliably determinable and extends beyond a current period. Estimates of our liabilities are based on currently available facts, existing technology and presently enacted laws and regulations, taking into consideration the likely effects of other societal and economic factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by the Environmental Protection Agency (EPA) or other organizations. Our estimates are subject to revision in future periods based on actual costs or new circumstances. We capitalize costs that benefit future periods and we recognize a current period charge in operation and maintenance expense when clean-up efforts do not benefit future periods.
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 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.
Assets Held for Sale
An asset or business is classified as held for sale when (i) management commits to a plan to sell or otherwise dispose of and it is actively marketed; (ii) it is available for immediate sale and the sale is expected to be completed within one year; and (iii) that it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. Upon being classified as held for sale, the recoverability of the carrying value must be assessed. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill and other assets are assessed. After the valuation process is completed, the assets held for sale are reported at the lower of the carrying value or fair value less costs to sell, and the assets are no longer depreciated or amortized. The assets and related liabilities are aggregated and reported on separate lines of the balance sheet.
The Company has entered into various leases for buildings and equipment. At the inception of a lease, the Company evaluates whether it is operating or capital in nature. Operating leases are recorded as expense in the appropriate periods of the lease. Capital leases are classified as property, plant and equipment and the related depreciation is recorded on the assets. Also, the debt related to the capital lease is included in the Company’s short- and long-term debt obligations, in accordance with the lease agreement.
Lease inducements are recognized for periods of reduced rent or for larger than usual rent escalations over the term of the lease. The benefit of a rent free period and the cost of future rent escalations are recognized on a straight-line basis over the term of the lease.
The Company recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
P2O sales are recognized when the customers take possession of the fuel since at that stage the customer has completed all prior testing necessary for their acceptance of the fuel. At the time of possession they have arranged for transportation to pick it up and the sales price has either been set in contract or negotiated prior to the time of pick up. The Company negotiates the pricing of the fuel based on the quality of the product and the type of fuel being sold (i.e. Naphtha, Fuel Oil No.6 or Fuel Oil No. 2).
Stock Based Compensation
The Company accounts for stock-based compensation under the provisions of ASC Topic 718, “Compensation—Stock Compensation.” The Company recognizes compensation cost in its financial statements for all share based payments granted, modified, or settled during the period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the related vesting period.
Shipping and Handling Costs
The Company’s shipping and handling costs of $22,627 and $26,553 for the three and six month periods ending June 30, 2012 respectively, are included in cost of goods sold for all periods presented. There were no costs in the three and six month periods ending June 30, 2011.
The Company expenses advertising costs as incurred. Advertising costs approximated $13,845 and $19,601 during the three and six month periods ended June 30, 2012 and $Nil and $Nil during the three and six month periods ended June 30, 2011, respectively. Such expenses are included in Selling, General and Administrative Expenses in the Statement of Operations.
Research and Development
The Company is engaged in research and development activities. Research and development costs are charged as operating expense of the Company as incurred. For the six month periods ending June 30, 2012 and 2011 the Company expensed $2,095 and $508,417, respectively, towards research and development costs. For the three periods ending June 30, 2012 and 2011 the Company expensed $2,095 and $220,462, respectively, towards research and development costs.
Foreign Currency Transactions
The Company’s functional and reporting currencies are the US Dollar. The Company occasionally enters into transactions denominated in foreign currencies, which are translated at the prevailing exchange rate at the date of the transaction. All monetary assets and liabilities denominated in currencies other than the US Dollar are remeasured using the exchange rates in effect at the balance sheet date resulting in a translation gain or loss. Foreign exchange gains and losses are included in the consolidated statements of operations.
The Company utilizes the asset and liability method to measure and record deferred income tax assets and liabilities. Deferred tax assets and liabilities reflect the future income tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company files tax returns in the U.S federal and state jurisdictions as well as a foreign country. The years ending December 31, 2008 through December 31, 2011 are tax years open to IRS review.
Loss Per Share
These condensed consolidated 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.
Prior to the sale of Pak-It and closure of Javaco, the Company operated in three reportable segments as defined by ASC 280-10, ("Disclosures about Segments of an Enterprise and Related Information"), which establishes standards for the way that public business enterprises report information about operating segments in their annual consolidated financial statements. Operating segments are components of an enterprise 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. Subsequent to this sale and closure, the Company no longer has any reportable segments as the entire Company’s focus and direction is dedicated to the Plastic2Oil business. The Company’s Chief Operating Decision Maker is the Company’s Chief Executive Officer.
Concentrations and Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk consist principally of operating demand deposit accounts and accounts receivable. The Company’s policy is to place its operating demand deposit accounts with high credit quality financial institutions that are insured by the FDIC, however, account balances may at times exceed insured limits. The Company extends limited credit to its customers based upon their creditworthiness and establishes an allowance for doubtful accounts based upon the credit risk of specific customers, historical trends and other pertinent information.
Fair Value of Financial Instruments
Fair value is defined under FASB ASC Topic 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for an asset or liability in an orderly transaction between participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The levels are as follows:
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, mortgage payable, customer advances, stock subscriptions payable, and short-term loans approximate fair value because of the short-term nature of these items. Per ASC Topic 820 framework these are considered Level 2 inputs where estimates are unobservable by market participants outside of the Company and must be estimated using assumptions developed by the Company.
To conform to the basis of presentation adopted in the current year, certain figures previously reported have been reclassified.
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
In September 2011, the FASB issued ASU No. 2011-08 to simplify how entities, both public and non-public, test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. These changes are effective for interim and annual periods that begin after December 15, 2011. As the Company has fully provided for the goodwill as of December 31, 2010, this guidance did not have a significant impact on these condensed consolidated financial statements.
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 condensed consolidated financial statements.
NOTE 4 – INVENTORIES, NET
Inventories consist of the following:
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
NOTE 6 – LONG-TERM NOTES RECEIVABLE
Upon consummation of the sale of Pak-It, the Company entered into a long-term note receivable (the “Note”) with the buyer of Pak-It in the amount of $500,000, non-interest bearing and due on July 1, 2013. 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.
NOTE 7 – SHORT-TERM LOANS
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 June 30, 2012 and 2011, 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 $6,800,270 and $83,103 pre-tax losses from continuing and discontinued operations, respectively for the six months ended June 30, 2012. The Company had no income tax expense on its $4,028,390 and $23,483 pre-tax losses from continuing and discontinued operations, respectively for the three months ended June 30, 2012. The Company recognized no income tax expense based on its $6,720,415 pre-tax loss from continuing operations and $2,543,474 pre-tax loss from discontinued operations for the six months ended June 30, 2011. The Company recognized no income tax expense based on its $4,370,983 pre-tax loss from continuing operations and $2,125,071 pre-tax loss from discontinued operations for the three months ended June 30, 2011.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest accrued on uncertain tax positions as well as interest received from favorable tax settlements within interest expense. The Company recognizes penalties accrued on unrecognized tax benefits within general and administrative expenses. As of June 30, 2012 and 2011, the Company had no uncertain tax positions.
The Company does not anticipate any significant changes to the total amounts of unrecognized tax benefits in the next twelve months.
The years ending December 31, 2008 through December 31, 2011 are tax years open to IRS review.
NOTE 9 – LONG TERM DEBT & MORTGAGE PAYABLE
The following annual payments of principal are required over the next five years in respect of these mortgages:
NOTE 10 – COMMITMENTS AND CONTINGENCIES
One of the Company’s subsidiaries entered into a consulting service contract with a stockholder. The minimum future payment is equal to fifty percent of the operating income generated from the operations of two of the most profitable devices and 10% from all the other devices. This agreement relates to Plastic2Oil Marine, Inc, which the Company is currently not operating.
The Company leases facilities and equipment under leases with terms remaining of up to 20 years. The leases include the JBI recycling facility and various large pieces of equipment.
The lease at the recycling facility contained both a rent free period as well as rent escalations. In order to recognize these items on a straight-line basis over the term of the lease the Company has recorded a deferred rent liability of $54,431 and $48,622, which is included in accrued liabilities at both June 30, 2012 and December 31, 2011, respectively.
All future payments required under various agreements are summarized below:
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 and an estimated settlement of $26,000 was accrued in the consolidated financial statements. 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 will recognize these receipts as recoveries when realized. As of June 30, 2012, approximately $42,000 has been received.
In September 2010, an investor filed a lawsuit against the Company for failure to timely remove restrictive legends from his shares in the Company. In their complaint, the plaintiffs allege having suffered “millions of dollars of damages,” however, no specific amount of damages is alleged. The Company is vigorously defending the suit. The outcome of this claim is not determinable at the time of issue of these condensed consolidated financial statements and the costs, if any, will be charged to income in the period(s) in which they are reasonably determinable.
In March 2011, a former employee filed a complaint against the Company and its subsidiaries alleging wrongful dismissal and seeking compensatory damages. During the first quarter of 2012, the Company settled with the former employee for $150,000 and disbursed payment to the employee.
On July 28, 2011, one 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 between August 28, 2009 and July 20, 2011. The complaint in that case, filed in federal court in Nevada, alleges that the defendants made false or misleading statements, or both, and failed to disclose material adverse facts about our business, operations, and prospects in press releases and filings made with the SEC. Specifically, the lawsuit alleges that the defendants made false or misleading statements or failed to disclose material information, or a combination thereof regarding: (1) that the media credits were substantially overvalued; (2) that the Company improperly accounted for acquisitions; (3) that, as such, the Company's financial results were not prepared in accordance with Generally Accepted Accounting Principles; (4) that the Company lacked adequate internal and financial controls; and (5) that, as a result of the above, the Company's financial statements were materially false and misleading at all relevant times. During the quarter ended June 30, 2012, a lead plaintiff was appointed in the case and an amended complaint was filed. The defendants’ answer to the amended complaint is due on October 5, 2012. The Company cannot predict the outcome of the class action litigation at this time.
On January 4, 2012, the Securities and Exchange Commission filed a civil complaint in federal court in Massachusetts against the Company. The complaint alleges that the Company reported materially false and inaccurate financial information in its financial statements (which were later restated) for the third quarter of 2009 and the year end 2009 by overvaluing media credits on its balance sheet, in violation of, among other things, the antifraud, reporting, books and records, internal controls and periodic report certification provisions of the U.S. securities laws. The Complaint names the Company’s former Chief Executive Officer, John Bordynuik, and its former Chief Financial Officer, Ronald Baldwin, Jr., as co-defendants. Among other relief requested, the complaint seeks an order requiring the defendants to pay unspecified disgorgement and civil penalty amounts. he Company cannot predict the outcome of the SEC litigation at this time.
On March 16, 2012, a stockholder derivative suit was filed in the U.S. District Court in the State of Massachusetts, naming the Company as a nominal defendant and naming as defendants each member of the Board of Directors (the “Board”) of the Company, including current director Mr. John Wesson, former director Mr. John Bordynuik and other former directors. The complaint alleges that the individual members of the Board breached their fiduciary duties to the Company in connection with the alleged improper accounting treatment of certain media credits acquired that were reported in certain 2009 financial statements of the Company, and public disclosures regarding the status of its Plastic2Oil, or P2O, process. The individual defendants recently filed a motion to dismiss the complaint arguing, among other things, that the plaintiff stockholder failed to allege sufficient facts demonstrating that presenting a demand to the Company’s board of directors prior to filing suit would have been futile. However, the Company cannot predict the outcome of the litigation at this time.
At June 30, 2012, 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, any liability that may arise from such contingencies would not have a material adverse effect on the condensed consolidated financial statements of the Company.
NOTE 11 – STOCKHOLDERS’ EQUITY
Common Stock and Additional Paid in Capital
Between December 30, 2011 and January 6, 2012, JBI, Inc. (the “Company”) entered into separate Subscription Agreements (the “Purchase Agreements”) with 13 investors (the “Purchasers”) in connection with a private placement of units consisting of one share of common stock and a warrant (the “Warrants”) to purchase shares of common stock for $2.00. The Company received proceeds from these Purchase Agreements in the amount of $3,421,000, of which $3,026,000 were received prior to the termination of the offering and classified as Stock Subscriptions Payable in the Current Liabilities Section of the Balance Sheet at December 31, 2011. During January 2012, the Company issued these units to the Purchasers in the amount of $3,421,000. In addition to the units sold, the Purchasers were provided a price protection clause in which all of the Purchasers would be made whole should the Company consummate another private placement with an offering price of less than $1.00 per share (the “Make Whole Provision”). This provision was valid for up to a total offering price of $5,000,000, at which time the Purchasers would be made whole and then the Make Whole Provision would be terminated.
On January 6, 2012, the Company assessed the likelihood of enacting the Make Whole Provision contained in the Purchase Agreements. At that time, the Company had begun to discuss options for another private offering to be consummated near the end of the first quarter of 2012. It determined that that Company would perform an offering similar to the prior offering in which the Company would offer a share of Common Stock and a Warrant. Based on the expected value of the Warrants contemplated in this proposed new financing transaction, the Company determined that it was certain that it would trigger this Make Whole Provision and be required to perform under this Make Whole Provision. As such, a liability was recorded for the fair value of the Equity Derivative Liability in the amount of $1,214,455, based on the 100% probability of this Make Whole Provision being enacted at the market price of the Company’s common stock as of January 6, 2012. The following factors and assumptions were used by the Company in determining the value of the Make Whole Provision on initial measurement. The Company used the binomial pricing model to determine this valuation, using the following assumptions in the model:
At March 31, 2012, the Company again assessed the likelihood of enacting the Make Whole Provision. Based on current discussions with a number of investors, the Company determined that again, it was a certainty that this clause would be triggered based on the discussions of a possible private placement under the considerations outlined above. As such, the Company remeasured the Equity Derivative Liability at the fair value of $1,000,643 based on the market price of the Company’s common stock as of March 31, 2012, which resulted in a gain of $213,812. The following factors and assumptions were used by the Company in value of the Make Whole Provision on initial measurement:
On May 15, 2012, the Company consummated a Private Placement which offered shares of common stock at a price of $0.80 per share. As such, this Make Whole Provision was affected, resulting in the Company issuing an additional 880,250 shares of the Company’s common stock to these investors. These shares were issued at a market price of $1.13/ share. This resulted in an additional gain recorded on the Make Whole Provision of $91,986, recorded during the three months ended June 30, 2012.
On January 17, 2012, the Company issued 200,000 shares of common stock as repayment for a loan. These shares were valued at $1.00 and repaid the full $200,000 loan.
During the first quarter of 2012, the Company authorized the issuance of 715,198 shares of common stock to various parties for services rendered during the quarter. These shares were valued as of the date of approval or the consulting agreement which they were issued pursuant to, and had values ranging from $0.60 to $1.48 per share. During the second quarter of 2012, the aforementioned 715,198 shares of common stock were issued.
During the first quarter of 2012, the Company authorized the issuance of 30,786 shares of common stock for the purchase of equipment. These shares were valued as of the date of the vendor invoice, ranging from $1.43 to $1.48 per share. During the second quarter of 2012, the aforementioned 30,786 shares of common stock were issued.
On May 15, 2012, JBI, Inc. (the “Company”) entered into separate Subscription Agreements (the “Purchase Agreements”) with 30 investors (the “Purchasers”) in connection with a private placement to purchase shares of common stock for $0.80 per share. The Company received gross proceeds from these Purchase Agreements in the amount of $11,343,000.
During the second quarter of 2012, the Company authorized the issuance of 657,188 shares of common stock as an advisory fee related to the Company’s financing efforts.
During the second quarter of 2012, the Company authorized the issuance of 439,333 shares of common stock to various parties for services rendered during the quarter. These shares were valued as of the date of approval or the consulting agreement which they were issued pursuant to, and had values ranging from $0.60 to $1.28 per share.
Pursuant to the aforementioned private placement, the Company issued 1,710,500 Warrants to purchase shares of common stock for $2.00 to the subscribers of the private placement and an additional 287,000 Warrants have been subscribed related to the private placement. The Warrants have an eighteen month term from the date of issuance. As of the date of issuance of the Warrants, the Warrants were determined to have a fair value of $1.02. The Company determined this valuation through use of a binomial pricing model. Consistent with the model used in determining the Make Whole Provision above, the Company’s assumptions in valuing these Warrants consisted of:
The Company’s founder holds all outstanding 1,000,000 shares of 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.
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. The 2012 Plan is administered by the compensation committee of the board of directors of the Company, or in the absence of a committee, the full board of directors of the Company.
Valuation of Awards
The per-share fair value of each stock option with a service period condition was determined on the date of grant using the Black-Scholes option pricing model using the following assumptions:
A summary of stock option activity for the three months ended June 30, 2012 is as follows:
For the six months ended June 30, 2012 and 2011, the Company recorded compensation expense (included in selling, general and administrative expense) of $960,175 and $Nil, respectively, related to stock options.
During the six months ended June 30, 2012, 765,000 options vested and no stock options were exercised.
NOTE 13 – RELATED PARTY TRANSACTIONS AND BALANCES
In November 2010, a member of the Board of Directors entered into a short-term loan agreement with the Company in the amount of $30,000 (Note 7). This note was repaid in cash during the quarter.
In February 2012, a member of the Board of Directors entered into a short-term loan agreement with the Company in the amount of $75,000 (Note 7). This amount was repaid in cash in July 2012.
In May 2012, a member of the Board of Directors entered into a short-term loan agreement with the Company in the amount of $30,000 (Note 7). This note was repaid in cash during the quarter.
NOTE 14 – SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
NOTE 15 – DISCONTINUED OPERATIONS
Sale of Pak-It
On February 14, 2012, we completed the sale of substantially all of the assets of Pak-It, LLC and Dickler Chemical Company, Inc. (collectively “Pak-It”). The sale had an effective date of January 1, 2012, in which the new owners of Pak-It were responsible for the operations of the entity. The results of operations from Pak-It for the three- and six- months ended June 30, 2011 have been classified as discontinued operations. No operations for the three- and six- months ended June 30, 2012 have been included in condensed consolidated financial statements.
The Company sold Pak-It for $900,000, in exchange for $400,000 cash at the closing of the sale and entry into a long-term note receivable for $500,000 due on July 1, 2013 (Note 6).
As of June 30, 2012, no assets related to Pak-It remained. The balances of the assets sold as of December 31, 2011were as follows:
The results of operations from these assets have been reclassified and presented as results of discontinued operations for all periods presented.
There are no operations of Pak-It included in the condensed consolidated financial statements as of June 30, 2012. Our statements of operations from discontinued operations related to Pak-it for June 30, 2011 is as follows:
Condensed Statements of Operations
Closure of Javaco
During the second quarter of 2012, the Company determined that the operations of Javaco no longer coincided with the strategy of the Company and that it would close down Javaco’s operations. In July 2012, the Company shut down the Javaco operations, including termination the five employees of Javaco, liquidation the inventory and fixed assets and termination the lease for the building. The results of operations from Javaco for the three- and six- months ended June 30, 2012 and 2011 have been classified as discontinued operations.
The Company accrued approximately $38,000 in severance and lease termination related expenses for the period ending June 30, 2012. Subsequent to June 30, 2012, the Company liquidated the inventory and fixed assets of Javaco for net proceeds of approximately $180,000.
As of June 30, 2012 and December 31, 2011, the assets liquidated at Javaco were as follows:
Our statements of operations from discontinued operations related to Javaco for the three- and six- month periods ended June 30, 2012 and 2011 are as follows:
Condensed Statements of Operations
NOTE 16 – RISK MANAGEMENT
Concentration of Credit Risk and Economic Dependence
The Company maintains cash balances, at times, with financial institutions in excess of amounts insured by the Canada Deposit Insurance Corporation and the U.S. Federal Deposit Insurance Corporation. Management monitors the soundness of these institutions and has not experienced any collection losses with these financial institutions.
During the three and six months periods ended June 30, 2012, 60% and 58% (June 30, 2011 – Nil and Nil) of total net revenues were generated from 2 (2011 – Nil) customers. As at June 30, 2012, 6 (December 31, 2011 – 5) customers accounted for 54% (December 31, 2011 – 54%) of accounts receivable.
As at June 30, 2012, 5(December 31, 2011 – Nil) vendors accounted for 55% (December 31, 2011 – Nil) of our total accounts payable.
NOTE 17 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events occurring after the balance sheet and has identified the following:
In July 2012, the Company repaid the loan made by a member of the Board of Directors of $75,000 in cash.
In July 2012, the Company issued 657,188 shares of common stock that had previously been subscribed as an advisory fee for the May private issuance and had been recorded in the Condensed Consolidated Statement of Stockholders’ Equity for the period ended June 30, 2012.
On July 23, 2012, during the Company’s Annual General Meeting, the Company’s stockholders approved the adoption of the JBI, Inc. 2012 Long-Term Incentive Plan, which formalized the Company’s issuances of various forms of stock based compensation. The full provisions of the plan are filed in the Company’s Definitive Proxy Statement on Schedule 14A, filed with the SEC on June 20, 2012.
During the second quarter of 2012, the Company determined that the operations of Javaco no longer coincided with the strategy of the Company and determined that it would close down Javaco’s operations. In July 2012, the Company completely shut down the Javaco operations, including termination the five employees of Javaco, liquidation the inventory and fixed assets and termination the lease for the building. The results of operations from Javaco for the three- and six- months periods ended June 30, 2012 and 2011 have been classified as discontinued operations. The Company liquidated the inventory and fixed assets of Javaco, details of which are included in Note 15, subsequent to the end of the quarter for net proceeds of approximately $180,000. As of June 30, 2012, approximately $38,000 was included in accrued expenses as severance and termination costs.
The following management’s discussion and analysis (the “MD&A”) of the results of operations should be read in conjunction with the unaudited condensed consolidated financial statements of the Company as at June 30, 2012, together with the accompanying notes. This discussion contains forward-looking statements that involve certain risks and uncertainties, and that reflect estimates and assumptions. See the section entitled “Cautionary Statement Regarding Forward-Looking Information” for more information on forward-looking statements. Our actual results may differ materially from those indicated in forward-looking statements. Factors that could cause our actual results to differ materially from our forward-looking statements are described in “Risk Factors” and elsewhere in this report.
For financial reporting purposes, we operate one business segment, which is our fuel production business using our P2O solution,. Previously, we operated a chemical processing and cleaning business, known as Pak-It as well as an electronic and video equipment distribution business, conducted by Javaco, Inc. (“Javaco”). As of December 31, 2011, substantially all of the assets of Pak-It were held for sale, and in February 2012, we sold Pak-It, whose operations have been classified as discontinued for all periods reported. As of June 30, 2012, we determined that the business of Javaco was no longer a key component of our business and determined that it would be closed down. For all periods presented, the operations of Javaco have been shown as discontinued operations and the assets were classified as held for sale. Subsequent to June 30, 2012, we liquidated the inventory and fixed assets of Javaco for $180,000. Additionally, we had previously identified a corporate segment which contained the data storage and recovery business. However, in the first quarter of this year, we determined that due to time constraints of the Company’s founder John Bordynuik, this was no longer a viable business as he was unable to dedicate significant time to the business and all assets related to this business which had not generated revenues in the previous two years, were fully impaired.
Our P2O business has begun to operate as a commercial business. We anticipate that this line will continue to grow and ultimately reach the capabilities of a full commercial production facility and this line of business will account for a substantially all of our revenues for the remainder of 2012 and periods thereafter. Historically, however, our revenues had been derived primarily from our other lines of business and products, noted above as discontinued operations.
Our P2O solution is a proprietary process that converts waste plastic into fuel through a series of chemical reactions. We developed this process in 2009 and began limited commercial production in 2010 following our receipt of a consent order from the New York State Department of Environmental Conservation (“NYSDEC”) allowing us to commercially operate our first large-scale P2O processor located at our Niagara Falls, New York facility. Currently, we have one operational P2O processor, and one processor whose reactor is being rebuilt, which produce naphtha, Fuel Oil No. 2 and Fuel Oil No. 6, which are fuels produced to the specifications published by ASTM International, the organization that establishes the international technical standards for fuel products. Our process also produces two by-products, an off-gas similar to natural gas and a petcoke carbon residue, both of which have a potential market value. We currently have contracts to sell our fuel product through three distribution channels comprised of fuel wholesalers, fuel retailers and directly to commercial and industrial end-users. We primarily use our off-gas product in our processing operations to fuel the furnace in our P2O process.
Our P2O process accepts mixed, unwashed waste plastics and comingled materials. Although many sources of plastic waste are available, our feedstock sources primarily include post-commercial and industrial waste plastic. Generally, this waste stream is costly for companies to dispose of, which makes it readily available for us to acquire. We believe our P2O process offers a cost-effective solution for businesses that currently have to pay to dispose of this type of waste.
Currently, several plastic-to-oil processes are 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 relatively small 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.
Results of Operations - Six Month periods ended June 30, 2012 and June 30, 2011
For the six month periods ended June 30, 2012, we had revenues of $405,882. During the comparable six month period ending June 30, 2011, our revenues were $86,015. The revenues from both periods reflect sales of our No. 6 Fuel Oil, No. 2 Petroleum Distillate, Naphtha as well as sales of processed waste product (primarily paper fiber) from our Canadian Recycling Facility.
The revenues from all discontinued operations (Pak-It and Javaco) have been reclassified as such in all periods presented.
Cost of Sales
Cost of Sales consist primarily of costs of procuring and processing waste plastic at our Canadian Recycling Facility, the cost of the operations of our P2O Processors as well as the costs of procuring and processing waste product (primarily paper fiber). Cost of sales is driven by the amount of production and volumes that can be processed during the periods of up-times of the processor. We continue to refine our process and processing abilities in order to improve throughput and improve our cost structure.
The gross profit is as follows:
For the six months periods ending June 30, 2012, P2O gross profit was 25.1%, as compared to the same period in 2011, in which the gross profit was approximately 33.1%. The Company continues to refine the waste plastic processing at our Canadian recycling facility and fuel manufacturing processes as we transition from research and development to commercial roll-out. Additionally, during the second quarter of 2012, we continued to perform testing on the second processor, which resulted in additional costs related to up and downtime of the processor.
Operating Expenses from Continuing Operations
Operating expenses for the six month period ending June 30, 2012 were $7,301,304 as compared to $6,776,204 for the same periods of 2011. These expenses are comprised of the following elements:
Selling, general and administrative expenses consist primarily of personnel-related costs, legal costs, accounting costs and other professional, regulatory and administrative costs.
For the six month period ending June 30, 2012, selling, general and administrative expenses increased by $728,256 from the same period of the prior year. This increase was driven by the granting of stock options to key senior executives and the related compensation expense recorded in the current period, as well as other stock based compensation a