JBI, Inc. (OTC:OTCQB:JBII) is in the business of converting waste plastic into fuel, ever since its founder John Bordynuik "found the solution to a process involving breaking down plastic molecules" while mining through a research archive. The basic science behind pyrolysis is sound, and the concept of reducing waste plastic while recovering useful fuels is certainly appealing. However, I believe that this particular company has little prospect of turning a profit, and that investors should be wary of this ongoing meltdown.
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As of its latest quarterly report for the period ending 9/30/13, the company was down to $2,727,481 in total current assets, with total operating expenses of $3,121,045 in that quarter. SG&A had increased to $2,728,889, up from $2,202,504 in the previous quarter. This comes after reducing about 25% of its workforce back in July, which was followed by the closing of its recycling facility in August, both actions classified by the company as "cost reduction measures".
After relying on a steady stream of PIPEs for funding, JBI recently crafted a deal with its new CEO, Mr. Richard Heddle, who received a 12% Secured Promissory Note due in 2018 for his $3 million investment. These notes have security because the "Company's obligations under the Note are secured by a lien on substantially all of the assets of the Company and Plastic2Oil of NY#1, LLC and JBI RE #1, Inc., each a subsidiary of the Company." With little assets remaining to negotiate with, the company must immediately find more funds or begin to operate profitably. The former would most likely indicate incoming dilution, and the latter is unlikely for reasons I will explain.
History Keeps Repeating
JBI has a short history that is fraught with mistakes. Its discontinued operations include its 2009 acquisitions Javaco, a distributor of electronic components, and Pak-It, a chemical delivery system, as well as the aforementioned recycling facility. JBI and Mr. Bordynuik were each fined by the SEC as part of a settlement over accounting fraud. And overall, the company had an accumulated deficit of $57,690,975 as of its latest filing, with little to show for it.
One positive event this year was a new partner, Crayola, who began to ship its markers to JBI to be recycled. Early last year, Crayola was facing a PR crisis when a class of students organized a popular petition on Change.org, which stated "We want Crayola to 'make their mark' by starting a 'take-back' recycling program for their markers." Crayola responded with the Colorcycle program, which gave JBI shareholders a glimmer of hope that free, abundant waste plastic was becoming a reality.
According to Mr. Bordynuik's comments during the latest conference call, in addition to Crayola plastic "the company has other significant plastic resources and does not foresee feedstock becoming a bottleneck moving through the end of 2013." Assuming that the company does indeed have a strong supply of plastic, the big question for JBI still looms: why are they producing so little fuel?
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The company produced 170,725 total gallons of fuel in the third quarter of 2013, which was its most productive quarter to date. However, that number pales in comparison to what the company should be capable of producing, assuming an ample supply of plastic and functioning machines. When SAIC analyzed JBI's technology back in 2012, JBI was limited to 2,000lbs of plastic per hour due to permitting constraints that no longer apply. SAIC's report indicated that JBI should have been able to run its first two machines at up to 4,000lbs/hour each; according to the latest conference call, JBI is looking to run machine #3 at roughly 3,000lbs/hour. If the company could run its first two machines at just 2,500lbs/hour each, that would give the company 8,000lbs/hour of total production, or 1,000 gallons an hour, which would be 168,000 gallons in just a week. Instead, the company produces about that much in an entire quarter; clearly something is wrong!
Although the company started its current fiscal quarter with $144,044 in finished goods inventory, it only had sales of $277,276 in the latest quarter for its P2O division, $13,686 of which was profit. Assume that fuel production increased by a factor of 13, a level I've argued the company should reach. Were its margins able to double to around 10%, the company would still only be profiting about $500,000 from these P2O machines quarterly, a best-case scenario which would still leave the company deep in the red every quarter at its current rate of spending.
That might explain why the CEO Heddle stated in the latest conference call that JBI's "business plan has shifted once again with a focus back on joint ventures and machine sales." However, JBI has had many years to demonstrate that it can keep a machine operational for significant periods, and the company has yet to come close to a fully productive quarter. Until JBI can prove that its technology works consistently, I can not imagine that any other company will be finalizing deals for these P2O machines.
Conclusion
JBI seems to be continually enhancing its technology and increasing its partnerships, yet its bottom line keeps failing to improve. Management and plans keep changing, and a supposedly highly-profitable technology has been long under-utilized for reasons kept mysterious from shareholders. At best, JBI can be seen as an ongoing science experiment; at worst, it is an outright scam that is living on borrowed time. Either way, JBI is running out of excuses and money, and I believe that potential investors should wait for serious confirmation of this technology before moving forward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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