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 September 30, 2012
 
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
x
Non-accelerated filer
¨
Smaller reporting company
¨
(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 November 7, 2012, there were 89,817,547 shares of Common Stock, $0.001 par value per share, issued and outstanding.
 
 
 

 
 
JBI Inc.
 
Index Page
     
       
Part I Financial Information
       
Item 1
Financial Statements
  2
       
 
Condensed Consolidated Balance Sheets – September 30, 2012 (Unaudited) and December 31, 2011 
  2
       
 
Condensed Consolidated Statements of Operations – Three and Nine Month Periods Ended September 30, 2012 and 2011 (Unaudited) 
  3
       
 
Condensed Consolidated Statements of Changes in Stockholders’ Equity – Nine Month Period Ended September 30, 2012 (Unaudited) 
  4
       
 
Condensed Consolidated Statements of Cash Flows – Nine Month Periods Ended September 30, 2012 and 2011 (Unaudited) 
  5
       
 
Notes to Condensed Consolidated Financial Statements (Unaudited) 
  6
       
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  22
       
Item 3
Quantitative and Qualitative Disclosures about Market Risk
  31
       
Item 4
Controls and Procedures
  32
       
Part II  Other Information
       
Item 1
Legal Proceedings
  33
       
Item 1a
Risk Factors
  33
       
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
  33
       
Item 6
Exhibits
  34
       
Signatures
  35

 
 

 
 
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 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 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 Report to “JBI” the “Company,” “we,” “our” or “us” means JBI, Inc., a Nevada corporation.
 
 
1

 
 
PART I – FINANCIAL INFORMATION
 
Item 1
Financial Statements
 
JBI, Inc. and Subsidiaries
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
September 30,
2012
(Unaudited)
   
December 31,
2011
(Audited)
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
 
$
2,763,962
   
$
2,511,469
 
Cash held in attorney trust (Note 2)
   
48,693
     
-
 
Accounts receivable, net of allowance for doubtful accounts of $67,325 (2011 - $331,695) (Note 2)
   
226,526
     
286,174
 
Inventories , net (Note 4)
   
157,862
     
101,885
 
Assets held for sale (Note 16)
   
-
     
1,087,006
 
Short-term note receivable (Notes 6 and 16)
   
481,582
     
-
 
Prepaid expenses and other current assets
   
628,292
     
515,820
 
TOTAL CURRENT ASSETS
   
4,306,917
     
4,502,354
 
                 
PROPERTY, PLANT AND EQUIPMENT, NET (Note 5)
   
6,361,671
     
4,099,500
 
DEPOSITS AND OTHER ASSETS (Notes, 2, 10 and 18)
   
661,416
     
31,897
 
TOTAL ASSETS
 
$
11,330,004
   
$
8,633,751
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES
               
Accounts payable
 
$
626,761
   
$
1,987,573
 
Accrued expenses
   
866,395
     
815,273
 
Short-term loans (Note 7)
   
-
     
230,000
 
Stock subscriptions payable
   
-
     
3,026,000
 
Customer advances
   
26,120
     
125,245
 
Capital lease – current portion (Note 9)
   
17,898
     
13,798
 
TOTAL CURRENT LIABILITIES
   
1,537,174
     
6,197,889
 
                 
LONG-TERM LIABILITIES
               
Other long-term liabilities
   
29,209
     
28,566
 
Mortgages payable and capital lease (Note 9)
   
306,848
     
295,684
 
TOTAL LIABILITIES
   
1,873,231
     
6,522,139
 
Subsequent Events (Note 18)
               
Commitments and Contingencies (Note 10)
               
                 
STOCKHOLDERS' EQUITY (Note 11)
               
Common Stock, par $0.001; 150,000,000 authorized, 89,776,148 shares at September 30, 2012 and 68,615,379 shares at
December 31, 2011 
   
89,777
     
68,616
 
Common Stock Subscribed, 116,399 shares at cost at September 30, 2012 and 811,538 shares at cost at December 31, 2011  
   
119,111
     
839,062
 
Common Stock Warrants to purchase shares of Common Stock for $2.00 per share, 1,997,500 Warrants at September 30, 2012
   
2,037,450
     
-
 
Preferred stock, par $0.001; 5,000,000 authorized, 1,000,000 shares  issued and outstanding at September 30, 2012 and
December 31, 2011
   
1,000
     
1,000
 
Additional paid in capital
   
51,647,952
     
35,748,538
 
Accumulated deficit
   
(44,438,517
)
   
(34,545,604
)
TOTAL STOCKHOLDERS' EQUITY
   
9,456,773
     
2,111,612
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
11,330,004
   
$
8,633,751
 
 The accompanying notes are an integral part of the condensed consolidated financial statements. 
 
 
2

 
 
JBI, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Month Periods Ended September 30,
(Unaudited)
 
   
Nine Months 
Ended
September 30,
2012
   
 
Nine Months 
Ended
September 30,
2011
   
Three Months
Ended
September 30,
2012
   
Three Months
Ended
September 30,
2011
 
SALES (Note 14)
                       
P2O Sales
 
$
595,516
   
$
221,653
   
$
189,634
   
$
140,552
 
OTHER Sales
   
70,381
     
-
     
70,381
     
-
 
TOTAL SALES 
   
  665,897
     
221,653
     
260,015
     
140,552
 
                                 
COST OF SALES (Note 14)
                               
P2O Cost of Sales
   
493,136
     
50,539
     
188,958
     
23,010
 
OTHER Cost of Sales
   
52,097
     
-
     
51,217
     
-
 
TOTAL COST OF SALES 
   
545,233
     
50,539
     
240,175
     
  23,010
 
                                 
GROSS PROFIT
   
120,664
     
171,114
     
19,840
     
117,542
 
OPERATING EXPENSES
                               
Selling, general and administrative expenses
   
9,666,901
     
9,113,296
     
2,822,486
     
2,978,680
 
Depreciation of property, plant and equipment
   
446,021
     
269,525
     
170,207
     
103,617
 
    Accretion of other long-term obligations
   
516
     
-
     
88
     
-
 
Research and development expenses
   
2,095
     
896,836
     
-
     
390,350
 
Impairment loss (Note 2)
   
192,831
     
-
     
-
     
-
 
TOTAL OPERATING EXPENSE
   
10,308,364
     
10,279,657
     
2,992,781
     
3,472,647
 
LOSS FROM OPERATIONS
   
(10,187,700
)
   
(10,108,543
)
   
(2,972,941
)
   
(3,355,105
)
OTHER INCOME (EXPENSE)
                               
Gain on fair value measurement of equity derivative liability (Note 11)
   
305,798
     
-
     
-
     
-
 
Interest (expense), income, net
   
(3,014)
     
(32,395)
     
905
     
(20,867)
 
Other income, net
   
101,279
     
38,225
     
3,829
     
-
 
     
404,063
     
5,830
     
4,734
     
(20,867)
 
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
   
(9,783,637
)
   
(10,102,713
)
   
(2,968,207
)
   
(3,375,972
)
INCOME TAXES FROM CONTINUING OPERATIONS (Note 8)
                               
Future income tax recovery
   
-
     
-
     
-
     
-
 
NET LOSS FROM CONTINUING OPERATIONS
   
(9,783,637
)
   
(10,102,713
)
   
(2,968,207
)
   
(3,375,972
)
                                 
LOSS FROM DISCONTINUED OPERATIONS, NET OF
   INCOME TAX (Note 16)
   
(109,276
)
   
(2,880,591
)
   
(28,137)
     
(343,391
)
NET LOSS
 
$
(9,892,913
)
 
$
(12,983,304
)
 
$
( 2,996,344
)
 
$
(3,719,363
)
Basic & diluted loss per share for continuing operations
 
$
(0.12
)
 
$
(0.17
)
 
$
(0.03
)
 
$
(0.05
)
                                 
Basic & diluted loss per share for discontinued operations
 
$
(0.00
)
 
$
(0.05
)
 
$
(0.00
)
 
$
(0.01
)
Basic & diluted loss per share from Net Loss
 
$
(0.12
)  
$
(0.22
 
$
(0.03
)  
$
(0.06
)
Basic & diluted weighted average number of common shares outstanding
   
79,406,788
     
58,507,805
     
89,540,484
     
66,598,399
 
 
The accompanying notes are an integral part of the condensed consolidated financial statements

 
3

 
 
JBI, Inc. and Subsidiaries
 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Month Period Ended September 30, 2012 (Unaudited)
                                                                                    
   
Common Stock
$0.0001 Par Value
   
Common Stock
Subscribed
   
Common Stock Warrants
   
Preferred Stock $0.0001 Par Value
   
Additional
Paid in
   
Accumulated
   
Total
Stockholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Warrants
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Equity
 
BALANCE, DECEMBER 31, 2011
   
68,615,379
   
$
68,616
     
811,538
   
$
839,062
     
-
   
 $
-
     
1,000,000
   
$
1,000
   
$
35,748,538
   
$
(34,545,604
)
 
$
2,111,612
 
                                                                                         
Common stock issued for services in the prior year, ranging from $0.60 to $2.38 per share
   
731,538
     
732
     
(731,538
)
   
(799,062
)
           
-
     
-
     
-
     
798,330
     
-
     
-
 
                                                                                         
Common stock issued for purchase of equipment in the prior year
   
80,000
     
80
     
(80,000
)
   
(40,000
)
                   
-
     
-
     
39,920
     
-
     
-
 
                                                                                         
Common stock issued in connection with private placement, $1.00 per unit,
   
3,421,000
     
3,421
     
-
             
1,710,500
     
1,744,710
     
-
     
-
     
458,414
     
-
     
2,206,545
 
                                                                                         
Common stock subscribed for advisory fee
   
-
     
-
     
287,000
     
287
     
287,000
     
292,740
     
-
     
-
     
(293,027
           
-
 
                                                                                         
Common stock issued for repayment of loan, $1.00 per share
   
200,000
     
200
     
-
     
-
             
-
     
-
     
-
     
199,800
     
-
     
200,000
 
                                                                                         
Common stock subscribed for services, ranging from $0.60 to $1.48 per share.
   
-
     
-
     
715,198
     
783,878
             
-
     
-
     
-
     
-
     
-
     
783,878
 
                                                                                         
Common stock subscribed for equipment, $1.48 per share
   
-
     
-
     
30,786
     
35,120
             
-
     
-
     
-
     
-
     
-
     
35,120
 
                                                                                         
Common stock issued for services, subscribed in Q1-2012, ranging from $0.60 to $1.48 per share
   
715,198
     
715
     
(715,198
   
(783,878
   
     
     
     
     
783,163
     
     
  -
 
                                                                                         
Common stock issued for purchase of equipment, subscribed in Q1-2012, $1.48 per share
   
30,786
     
31
     
(30,786
   
(35,120
   
     
     
     
     
35,089
     
     
 
                                                                                         
Common stock issued in relation to the private placement in January 2012, relating to the price protection clause (Note 11)
   
880,250
     
880
     
     
     
     
     
     
     
907,778
     
     
908,658
 
                                                                                         
Common stock issued in connection with private placement, $0.80 per share (net of advisory fee of $657 and legal and offering costs of $135,169)
   
14,153,750
     
14,154
     
-
     
-
     
-
     
-
     
-
     
-
     
11,189,912
     
-
     
11,204,066
 
                                                                                         
Common stock subscribed as an advisory fee in relation to May private placement
   
-
     
-
     
657,188
     
657
     
-
     
-
     
-
     
-
     
(657
   
-
     
-
 
                                                                                         
Common stock subscribed for services, ranging from $0.60 to $1.28 per share
   
-
     
-
     
439,333
     
440,528
     
-
     
-
     
-
     
-
     
-
     
-
     
440,528
 
                                                                                         
Common stock issued for services, subscribed in Q2-2012, ranging from $0.60 to $1.28 per share
   
364,333
     
364
     
(364,333
   
(355,778
   
 
-
     
 
-
     
 
-
     
 
-
     
355,414
     
 
-
     
 
-
 
                                                                                         
Common stock issued as an advisory fee in connection with the January private placement, subscribed in Q1-2012
   
287,000
     
287
     
(287,000
   
(287
   
 
-
     
 
-
     
 
-
     
 
-
     
 
-
     
 
-
     
 
-
 
                                                                                         
Common stock issued as an advisory fee in relation to the private placement in January 2012, relating to the price protection clause (Note 11)
   
71,750
     
72
     
 
-
     
 
-
     
 
-
     
 
-
     
 
-
     
 
-
     
(72
   
 
-
     
 
-
 
                                                                                         
Common stock issued as an advisory fee in connection with the May private placement, subscribed in Q2-2012
   
657,188
     
657
     
(657,188
   
(657
   
 
-
     
 
-
     
 
-
     
 
-
     
 
-
     
 
-
     
 
-
 
                                                                                         
Common stock returned and retired previously issued as an advisory fee in connection with the May private placement.
   
(601,250
   
(601
   
-
     
-
     
 
-
     
 
-
     
 
-
     
 
-
     
601
     
 
-
     
 
-
 
                                                                                         
Common stock issued for services, ranging from $1.04 to $1.42 per share
   
169,226
     
169
     
-
     
-
     
 
-
     
 
-
     
 
-
     
 
-
     
203,829
     
 
-
     
203,998
 
                                                                                         
Common stock subscribed for services at $0.83 per share
   
-
     
-
     
41,399
     
34,361
     
 
-
     
 
-
     
 
-
     
 
-
     
 
-
     
 
-
     
34,361
 
                                                                                         
Stock compensation expense related to granting of stock options.
   
-
     
-
     
-
     
-
     
 
-
     
 
-
     
 
-
     
 
-
     
1,220,920
     
-
     
1,220,920
 
                                                                                         
Net loss
   
-
     
-
     
-
     
-
             
-
     
-
     
-
     
-
     
(9,892,913
)
   
(9,892,913
)
                                                                                         
BALANCE, SEPTEMBER 30, 2012
   
89,776,148
   
$
89,777
     
116,399
   
$
119,111
     
1,997,500
   
$
2,037,450
     
1,000,000
   
$
1,000
   
$
51,647,952
   
$
(44,438,517
)
 
$
9,456,773
 
 
  The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
4

 
 
JBI, Inc. and Subsidiaries
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Month Periods Ended September 30,
(Unaudited)
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss from continuing operations
 
$
(9,783,637
)
 
$
(10,102,713
)
Net loss from discontinued operations
   
(109,276
)
   
(2,880,591
Items not affecting cash:
               
Depreciation of property plant and equipment
   
451,056
     
152,983
 
Accretion of other long-term obligations
   
516
     
-
 
Other Income
   
(18,139
)
   
-
 
Impairment charges
   
192,831
     
-
 
Foreign exchange loss
   
-
     
(28,967)
 
Gain on equity derivative liability
   
(305,798
)
   
-
 
Provision for uncollectible accounts
   
34,962
     
-
 
    Receivable from insurance carrier
   
(247,603
)
   
-
 
    Stock issued for services and stock based compensation
   
2,618,687
     
4,541,393
 
Total items not affecting cash from continuing operations
   
2,726,512
     
4,665,409
 
   Items not affecting cash attributable to discontinued operations
   
5,591
     
2,580,278
 
Working capital changes:
               
Accounts receivable
   
24,686
     
237,079
 
Recovery of uncollectible accounts
   
-
     
(67,240
)
Inventories
   
(49,180
)
   
61,083
 
Short-term note receivable
   
(475,443)
     
-
 
Prepaid expenses and other current assets
   
200,130
     
68,644
 
Assets held for sale
   
1,080,210
     
-
 
Deposits & other assets
   
(22,299
)
   
-
 
Accounts payable
   
(1,360,812
)
   
381,785
 
Accrued expenses
   
63,122
     
(191,461
Income taxes payable
   
  -
     
(5,781
)
Other long-term liabilities and customer advances
   
(98,998
)
   
-
 
Total working capital changes
   
(638,584
)
   
484,109
 
Changes attributable to discontinued operations
   
(5,592
   
(91,375
)
                 
NET CASH USED IN OPERATING ACTIVITIES
   
(7,804,986
)
   
(5,344,883
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Property, plant and equipment additions
   
(2,855,674
)
   
(1,612,280
Deposits for purchases of property, plant and equipment
   
(607,220
)
   
-
 
Decrease in restricted cash
   
-
     
144,500
 
(Increase) decrease in cash held in attorney trust
   
(48,693
)
   
197,291
 
                 
                 
NET CASH USED IN INVESTING ACTIVITIES
   
(3,511,587
)
   
(1,270,489
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Stock proceeds, net
   
11,699,066
     
8,381,280
 
Repayments of long term debt
   
-
     
(7,426
)
Repayments of note payable
   
(105,000
)
   
(75,000
)
Repayment of stock subscriptions payable advances
   
(100,000
)
   
-
 
Proceeds from short term loans
   
75,000
     
  -
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
11,569,066
     
8,298,854
 
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
252,493
     
1,683,482
 
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
2,511,469
     
724,156
 
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
2,763,962
   
$
2,407,638
 
                 
Supplemental disclosure of cash flow information (Note 15)
               
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
5

 
 
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 condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. 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 $44,438,517 at September 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 P2O as it continues the transition to full-scale commercial production and implements its sales and marketing strategy, 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 as a going concern.
 
The Company has 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’s 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. The time constraints on Mr. Bordynuik were an impediment to the Data Recovery & Migration Business achieving revenue in 2010 and 2011.  As a result of this, all assets related to the Data Recovery & Migration were determined to be impaired and fully written-off.  During the third quarter of 2012, Mr. Bordynuik was able to focus a portion of his time on the interpretation of this data, which allowed the Company to achieve revenues related to the Data Recovery & Migration business.

In August 2009, the Company acquired Javaco, Inc. (“Javaco”) a distributor of electronic components, including home theater and audio video products.  During the quarter ended September 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 (see Note 16).

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 16). 
 
 
6

 
 
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 condensed 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 (see Note 16).
 
Estimates
 
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 expenses and uncollectible 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
 
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 doubtful 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 as allowance for uncollectible accounts. The allowance for uncollectible accounts for the period ended September 30, 2012 and the year ended December 31, 2011 was $67,325 and $331,695, respectively.
 
Inventories
 
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 (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 insurance premiums as well as payments of Canadian sales taxes in excess of the amounts we have collected and are required to remit.  Additionally, the Company has recorded a receivable in the amount of $247,603 from its insurance carrier related to a legal claim in which the insurance carrier has agreed to reimburse the Company for out of pocket legal expenses.  Subsequent to September 30, 2012, the Company received this amount from the insurance carrier.
 
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:
 
Leasehold improvements 
lesser of useful life or term of the lease
Machinery and office equipment  
3-15 years
Vehicles
5 years
Furniture and fixtures
7 years
Office and industrial buildings
25 years
 
 
7

 
 
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 useful life of the asset are capitalized.
 
Capital leases are classified as property, plant and equipment and the related depreciation is recorded on the assets and included as depreciation in the statement of operations.

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 depreciation is recognized in accordance with the class of the fixed asset.
 
Deposits and Other Assets
 
The Company classifies amounts paid for property, plant and equipment in installment payments or amounts paid prior to the receipt of such assets as deposits.  As of September 30, 2012, the Company had paid $661,416 in installment payments on property, plant and equipment related to new processors.  As of December 31, 2011, the Company had paid $31,897 related to deposits on assets for the second processor. As of September 30, 2012, the Company is obligated to pay the final installment payment of approximately $307,000 in regards to property, plant and equipment related to new processors once delivered to the Company .
 
Impairment of Long-Lived Assets
 
The Company reviews long-lived assets 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.
 
During the first quarter of 2012, the Company determined that due to the time constraints placed on the Company’s 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, at that time, the Company could not justify the carrying value of the Data Recovery & Migration assets.  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 recorded an impairment charge for the carrying value of the reactor in the amount of $156,331 during the second quarter.
 
Asset Retirement Obligations
 
The fair value of the estimated asset retirement obligations is recognized in the condensed 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 condensed 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 condensed 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 $29,209 and $28,566 as of September 30, 2012 and December 31, 2011, respectively.
 
Environmental Contingencies

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. 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 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, the Company records and report an asset separately from the associated liability on its 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 such asset or business 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.
 
 
8

 
 
Leases

The Company has entered into various leases for buildings and equipment. At the inception of a lease, the Company evaluates whether it is operating or capital in nature.  Operating leases are recorded as expense in the appropriate periods of the lease.  Capital leases are classified as property, plant and equipment and the related depreciation is recorded on the assets.  Also, the debt related to the capital lease is included in the Company’s short- and long-term debt obligations, in accordance with the lease agreement.

Lease inducements are recognized for periods of reduced rent or for larger than usual rent escalations over the term of the lease. The benefit of a rent free period and the cost of future rent escalations are recognized on a straight-line basis over the term of the lease.

Revenue Recognition
 
The Company recognizes revenue when 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).

Data Recovery & Migration Sales are recognized when the terms of the recovery agreement are completed and the migrated data is returned to the customer in a readable format.  Pricing for these services is agreed to prior to the consummation of the work and invoiced subsequent to completion.
 
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 condensed consolidated financial statements for all stock-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 $11,848 and $33,334, were included in the cost of goods sold for the three and nine month periods ended September 30, 2012, respectively.  For the three and nine month periods ended September 30, 2011, the costs were $5,181 and $11,804, respectively, and were included in cost of goods sold for these periods as well.
 
Advertising Costs
 
The Company expenses advertising costs as incurred. Advertising costs were approximately $5,571 and $25,173 during the three and nine month periods ended September 30, 2012 and $8,503 and $18,955 during the three and nine month periods ended September 30, 2011, respectively.  These expenses are included in selling, general and administrative expenses in the condensed consolidated statement 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 and nine month periods ended September 30, 2012 and 2011 the Company expensed $Nil and $2,095, respectively. For the three and nine month periods ended September 30, 2011, the Company expensed $390,350 and $896,836 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 condensed consolidated statements of operations.
 
 
9

 
 
Income Taxes
 
The Company utilizes the asset and liability method to measure and record deferred income tax assets and liabilities. Deferred tax assets and liabilities reflect the future income tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
 
The Company 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.
 
Segment Reporting
 
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 for 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 the sale of Pak-It and closure of Javaco, the Company began to solely focus on the Plastic2Oil business and, accordingly, during the second quarter of 2012, did not report segmented revenue as all revenue was derived from the P2O business.  During the quarter ended September 30, 2012, the Company has two reportable segments, Plastic2Oil and the Data Recovery & Migration Business.  Due to the significance of the revenue generated in the third quarter from the Data Recovery & Migration Business, the Company has determined that these revenues would be reported as an individual segment.  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:
 
Level 1 - Quoted prices in active markets for identical assets or liabilities
 
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities
 
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities
 
The carrying amounts of cash and cash equivalents, cash held in attorney trust, accounts receivable, short-term notes receivable, accounts payable, accrued expenses, customer advances, stock subscriptions payable, capital leases and short-term loans approximate fair value because of the short-term nature of these items. The carrying amount of the mortgage payable and other long-term liabilities approximate fair value, based on the market rate of interest used to discount the liabilities.  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.
 
Reclassifications
 
To conform to the basis of presentation adopted in the current period, certain figures previously reported have been reclassified.
 
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.
   
 
10

 
 
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:
 
   
September 30,
2012
   
December 31,
2011
 
             
Raw materials
 
$
81,971
   
$
64,191
 
                 
Finished goods
   
75,891
     
37,694
 
                 
Total inventories
 
$
157,862
   
$
101,885
 
 
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
 
September 30, 2012
 
Cost
   
Accumulated Amortization
   
Net Book
Value
 
                   
Leasehold improvements
 
$
51,671
   
$
(10,573
)
 
$
41,098
 
Machinery and office equipment
   
4,451,135
     
(1,030,688
)
   
3,420,447
 
Furniture and fixtures
   
24,918
     
(11,478
)
   
13,440
 
Land
   
273,118
     
-
     
273,118
 
Office and industrial buildings
   
1,154,267
     
(56,270
)
   
1,097,997
 
Fixed assets under capital lease
   
  62,043
     
(17,996)
     
44,047
 
Construction in process
   
1,471,524
     
-
     
1,471,524
 
                         
   
$
7,488,676
   
$
(1,127,005
)
 
$
6,361,671
 
 
 
11

 
 
December 31, 2011
 
Cost
   
Accumulated Amortization
   
Net Book
Value
 
                   
Leasehold improvements
 
$
42,217
   
$
(7,121
)
 
$
35,096
 
Machinery and office equipment
   
3,000,663
     
(603,778
)
   
2,396,885
 
Furniture and fixtures
   
24,918
     
(9,318
)
   
15,600
 
Land
   
273,118
     
-
     
273,118
 
Office and industrial buildings
   
656,278
     
(32,541
)
   
623,737
 
Fixed assets under capital lease
   
  50,042
     
(7,137)
     
42,905
 
Construction in process
   
712,159
     
-
     
712,159
 
                         
   
$
4,759,395
   
$
(659,895
)
 
$
4,099,500
 
 
NOTE 6 – SHORT-TERM NOTE RECEIVABLE
 
Upon consummation of the sale of Pak-It, the Company entered into a 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 a 7% discount rate, based on factors considered by the Company at the time of recording the Note.  Interest income is amortized into the value of the Note over the life of the Note and is recognized as interest income throughout the term of the Note.
 
NOTE 7 – SHORT-TERM LOANS
 
   
September 30,
2012
   
December 31,
2011
 
On October 15, 2010, the Company entered into an unsecured short-term loan agreement with an existing stockholder. The loan, in the amount of $200,000 Canadian dollars, bore interest at an annual rate of 6%. The entire principal of the loan, together with all accrued interest was due and payable on October 15, 2011. The loan was used for working capital purposes.  The loan was repaid in stock in January 2012 in conjunction with the December/ January private placement.
 
$
 -
   
$
200,000
 
                 
In February 2012, a member of the Board of Directors entered into an unsecured short-term loan agreement with the Company in the amount of $75,000. The loan bears no interest and was to be due on November 22, 2012. The loan was used for working capital purposes.  This loan was repaid in cash during the quarter ended September 30, 2012.
   
-
     
-
 
                 
In November 2010, a member of the Board of Directors entered into an unsecured short-term loan agreement with the Company in the amount of $30,000. The loan bore no interest and was to be due on November 22, 2012. The loan was used for working capital purposes.  This loan was repaid in cash during the quarter ended June 30, 2012.
   
-
     
30,000
 
   
$
-
   
$
230,000
 
 
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 September 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 $9,783,637 pre-tax losses from continuing operations and $109,276 pre-tax losses from discontinued operations for the nine months ended September 30, 2012.   The Company had no income tax expense on its $2,968,207 pre-tax loss from continuing operations and $28,137 pre-tax loss from discontinued operations, for the three months ended September 30, 2012.
  
The Company recognized no income tax expense based on its $10,102,713 pre-tax loss from continuing operations and $2,880,591 pre-tax loss from discontinued operations for the nine months ended September 30, 2011.  The Company recognized no income tax expense based on its $3,375,972 pre-tax loss from continuing operations and $343,391 pre-tax loss from discontinued operations for the three months ended September 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 September 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 Internal Revenue Service and Canada Revenue Agency review.
 
 
12

 
 
NOTE 9 – MORTGAGE PAYABLE & CAPITAL LEASES
 
   
September 30,
2012
   
December 31,
2011
 
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
   
$
266,577
 
Equipment capital lease bears interest at 7.9% per annum, secured by the equipment and matures in April 2015, repayable in monthly installments of approximately $378.
   
10,291
     
-
 
Equipment capital lease bears interest at 3.9% per annum, secured by the equipment and matures on May 10, 2015, repayable in monthly installments of approximately $1,194.
   
    33,755
     
42,905
 
     
324,746
     
309,482
 
Less: current portion
   
17,898
     
13,798
 
   
$
306,848
   
$
295,684
 
 
The following annual payments of principal are required over the next three years in respect of these mortgages and capital leases:
 
   
Annual Payments
 
To September 30, 2013
 
$
17,898
 
To September 30, 2014
   
17,898
 
To September 30, 2015
   
288,930
 
Total repayments
 
$
324,726
 
 
Interest payments of $17,321 and $5,235 for the nine and three month periods ended September 30, 2012 and $Nil and $Nil for the nine and three month periods ended September 30, 2011 are included as interest expense in the statement of operations.
 
NOTE 10 – COMMITMENTS AND CONTINGENCIES

Commitments

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.
 
Upon the delivery of the kilns ordered for future processor production, the Company is obligated to pay the remaining approximately $307,000 related to a purchase contract for these components.
 
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 $57,336 and $48,622, which is included in accrued liabilities at September 30, 2012 and December 31, 2011, respectively.
 
All future payments required under various agreements are summarized below:
 
To September 30, 2013
 
$
96,000
 
To September 30, 2014
   
101,000
 
To September 30, 2015
   
102,000
 
To September 30, 2016
   
102,000
 
To September 30, 2017
   
102,000
 
Thereafter
   
1,519,500
 
Total
 
$
2,022,500
 
 
 
13

 
 
Contingencies
 
In August 2010, a former employee filed a complaint against a subsidiary of the Company alleging wrongful dismissal and seeking compensatory damages. The Company denied the validity of the contract which was signed by the former employee as an employee and the 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 September 30, 2012, approximately $42,000 has been received and recorded as other income in the condensed consolidated Statement of Operations.
   
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 were alleged.  During the quarter, the Company settled this lawsuit.  The Company’s settlement amount was fully indemnified by the Company’s insurance carrier and the full amount of the settlement was paid by the insurance carrier to the plaintiff within the quarter.  Additionally, the Company’s insurance carrier has agreed to reimburse the Company for certain legal fees incurred in relation to this lawsuit.  A receivable in the amount of $247,603 has been recorded by the Company as of September 30, 2012.  Subsequent to the end of the quarter ended September, 30, 2012, the Company received this amount paid by the insurance carrier.  The recovery of these fees has been recorded as a reduction of selling, general and administrative costs in the quarter ended September 30, 2012.
 
In March 2011, a former employee filed a complaint against the Company and its subsidiaries alleging wrongful dismissal and seeking compensatory damages. During the quarter ended March 31, 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 the Company’s business, operations, and prospects in press releases and filings made with the SEC. Specifically, the lawsuit alleges that the defendants made false or misleading statements or failed to disclose material information, or a combination thereof regarding: (1) that the media credits were substantially overvalued; (2) that the Company improperly accounted for acquisitions; (3) that, as such, the Company's financial results were not prepared in accordance with Generally Accepted Accounting Principles; (4) that the Company lacked adequate internal and financial controls; 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 was filed subsequent to the end of the quarter ended September 30, 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.  The 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.  The plaintiff has filed a motion opposing this motion.  The Company cannot predict the outcome of the litigation at this time.
 
At September 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.
 
 
14

 
 
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 was determined that the 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 the Make Whole Provision and be required to perform under the 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 the 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:
 
The market price of the Company’s common stock at January 6, 2012 ($1.42 per share);
Shares to be issued upon occurrence – 880,250 shares of Common Stock (based on an offering price of $0.80);
Probability of occurrence – 100%, based on the expectation and discussions the Company held with additional investors during and after the consummation of this private placement.
   
 
15

 
 
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 the valuation of the Make Whole Provision for the re-measurement:
 
The market price of the Company’s common stock at March 31, 2012 ($1.17 per share);
Shares to be issued upon occurrence – 880,250 shares of Common Stock (based on an offering price of $0.80);
Probability of occurrence – 100%, based on the expectation and discussions the Company held with additional investors during and after the consummation of this private placement.
 
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 effected, 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 per 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 date of 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, at $1.48 per share.  During the second quarter of 2012, the aforementioned 30,786 shares of common stock were issued.
 
On May 15, 2012, 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 issued 14,153,750 shares of common stock in this private placement and 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 third quarter of 2012, the aforementioned shares of common stock were issued at par value.

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 date of the consulting agreement which they were issued pursuant to, and had values ranging from $0.60 to $1.28 per share.  During the third quarter of 2012, a total of 364,333 of these shares were issued.
 
During the third quarter of 2012, the Company reached an agreement with one of the advisors involved in the May 15, 2012 private placement.  In exchange for the return of the advisor’s 601,250 shares issued in connection with the May private placement, the Company converted the $162,000 short term loan provided to this advisor into a payment for general services and stock advisory services performed by the advisor on behalf of the Company.  The short term loan, which had been previously classified as other current assets, was recorded as consulting expense, classified as a Selling, General and Administrative Expense for the three and nine months ended September 30, 2012.

During the third quarter of 2012, the Company issued 287,000 shares of common stock and 287,000 warrants, previously subscribed, to an advisor as payment for services performed in the private placement during December 2011 and January 2012.  In addition, this advisor was entitled to and was issued an additional 71,750 shares of common stock in connection with the Make Whole Provision enacted related to the aforementioned private placement.  

During the third quarter of 2012, the Company issued 169,226 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 $1.04 to $1.42 per share.  
 
During the third quarter of 2012, the Company authorized the issuance of 41,399 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 date of the consulting agreement which they were issued pursuant to, and had a value of $0.83 per share.  These shares were issued subsequent to September 30, 2012. 
 
 
16

 
 
Warrants

Pursuant to the aforementioned private placement in December 2011 through January 2012, the Company issued 1,997,500 Warrants to purchase shares of common stock for $2.00 to the subscribers of the December 2011 through January 2012 private 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:
 
Volatility – 163.67%, based on the Company’s Historical Stock Price
Probability of Occurrence – 100%, based on the expectation and discussions the Company held with additional investors during and after the consummation of this private placement ; and
Risk Free Rate – 2.70%, based on the long-term U.S. Treasury rate
 
Preferred Stock

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 to members of management and key employees. The 2012 Plan is administered by the compensation committee of the board of directors of the Company, or in the absence of a committee, the full board of directors of the Company.
 
Valuation of Awards
 
The per-share fair value of each stock option with a service period condition was determined on the date of grant using the Black-Scholes option pricing model using the following assumptions:
 
   
Nine - and
Three - Months
Ended
September 30,
 
   
2012
   
2011
 
Expected life (in years)
   
5.0
     
-
 
Risk-free interest rate
   
0.77%-0.78
%
   
-
 
Expected volatility
   
154.30%-157.14
%
   
-
 
Expected dividend yield
   
0
%
   
0
 
Stock Options
 
A summary of stock option activity for the nine months ended September 30, 2012 is as follows:
 
   
Options
Outstanding
Stock
Options
   
Weighted-
Average
Exercise
Price
   
Aggregate (1)
Intrinsic
Value
 
Balance as of December 31, 2011
   
-
   
$
-
   
$
-
 
                         
Granted
   
5,240,000
     
1.50
         
Exercised
   
-
     
-
         
Cancelled
   
-
     
-
         
                         
Balance as of September 30, 2012
   
5,240,000
   
$
1.50
   
$
-
 
                         
Equity awards available for grant at September 30, 2012
   
4,685,000
                 
 
Restricted Stock