Plastic2Oil Inc (PTOI)

[the big guy]

Thoughts on Filing for Quarter ended September 30 2010

Just took a look at the recent filing for the first time. Much of this has been discussed, but I will try to add where it is new.

Financial

- they are obviously cash-poor, but their Current Ratio is not bad at all. Quick Ratio is horrible and I wonder if that will cause them a cash flow problem in the short term. They say they ae taking necessary steps to improve their cash management... but having 300k in the bank is exactly as bad as it sounds.
- They could improve on collecting on their A/R and reducing Inventory. They actually make a statement about this later on

"JBI Inc’s Javaco subsidiary had accounts receivable of over $2 Million in June of 2010. The Company uncovered inefficiencies in Javaco’s operations and consolidated some of the workforce at this subsidiary in order to improve performance and working capital turnover. Javaco is now being focused towards higher profit margin sales, and the Company is identifying these customers and tailoring an integrated sales approach that we expect will improve this subsidiary’s earnings."

- the A/R has actually been improving if I read the Statement of Cash Flows correctly. Reduced by 400k this year and a less amount in the preceding year.
- the 5M in GOodwill stands out. I assume this is the Media Credits.

I still think that the purchase of subs was not wise. At first glance they appear to be profitable, but not when you look at the Segment Reporting. They are not revenue-generating businesses according to that.

The other Operating Expenses stand out as well , and is detailed later on in the document. There is definitely room here to cut some fat. It is high as a percentage of revenues.

I know that much of it must be due to P2O. I know internally they must be doing that analysis to see how much of their expenses are P2O-related. It would be interesting for investors to know as well.

Permitting

I think this is the biggest issue facing them. This quote is from the document:

"Upon receipt of required permits, the Company expects to begin commercial operation of its Plastic2Oil processor at its Niagara Falls, New York facility in the fourth quarter, thereby initiating a new revenue stream from the sale of the output from the process.

There can be no guarantee that the Company will be successful in obtaining this permit. In the event that New York permit is not obtained in the near future, the Company has been reviewing the feasibility of realizing P2O revenue in different jurisdictions with partners who have already obtained the necessary operating permits required for P2O. The Company is also reviewing the feasibility of installing a P2O machine in Ontario, where one of the Company's facilities recently obtained it’s air approval. In the event that a New York permit is not obtained and the Company fails to realize P2O revenue through different avenues, the Company would not currently have sufficient cash for the next 12 months. In the event that cash is needed before fuel is sold, the Company has a good current ratio and will seek short and/ or long-term borrowing opportunities. Additionally, the Company is taking steps to minimize expenses and reduce operating costs.
"

IMO... this is an issue that should have been at the forefront from a planning perspective at the beginning. Permitting is so important it is a strategic decision impacting site selection, not a tactical matter to be dealt with after-the-fact. It can be much more than what it seems at first especially for new entrants into a business area.

There is another reference in Subsequent Events:

"The Company received notice dated October 15, 2010 that the Ontario Ministry of Environment registered a “certificate of Approval for Air, Section 9, EPA” in the Company’s name. A “Certificate of Approval for Air” in Ontario is equivalent to a NYDEC Air Permit in the United States. The Company also received a Certificate of Approval for Industrial Sewage Works, Section 53, from the Ministry of the Environment. These approvals are for use at the Company’s fuel blending site. The Ministry of Environment allowed the transfer of existing approvals (permits) of the blending site to the Company"

My interpretation of this is that although the C of A is transferred, it is specific to the blending business, so is not applicable to the pyrolysis business. The wording that it is equivalent to an Air Permit from the DEC simply means that the process to obtain is the same. Likely the same data could be used.

This statement is paricularly revealing:

"On November 10th, 2010, JBI Inc.’s simple air permit application was officially submitted to the DEC after significant consultation and meetings between the parties. JBI Inc.’s environmental consultant has significant experience with permitting and in consulting with the DEC prior to submitting our permit application, we mutually agreed upon language and data so that many of the questions that would typically arise during a permit review process were already eliminated. These lengthy consultations and discussions with the DEC about the permit language and data greatly reduce the amount of time required for the DEC to review a submitted application."

IMO... all of these discussions could have happened before. The critical timeline or path was likely the scheduling of the stack test. But.. for the application to not be submitted until Nov 10 is an unnecessary delay that I see no reason for.

IMO the whole subject of commercialization could have been illuminated more. There is nothing wrong with process improvement as alluded to here:

"There have been many other additions to the P2O machine and facility since the last quarterly filing, all of which have been designed to increase efficiencies and improve operations. A second condenser was added to the P2O system so that there is one condenser to condense the heavy fuel (diesel) and another to condense the light fractions (gasoline). Additional improvements include an expansion of the furnace, installation of a small cooling tower and the purchase of a small diesel generator for times when our machinery is disconnected from the electrical grid.
"

It does not excite me, because it is simply a bit late in the game.

There is a statement about commercialization that I would have expanded on:

"The Company has incurred many non-recurring expenses in preparation for the commercialization of its Plastic2Oil technology, the operation of its fuel-blending site, and the restructuring of Pak-It."

I noticed that the number for spending at the blending site is now 75k, was 24k. A more realistic number.

There is a statement near the end that they have enough cash to sustain themselves until they get an Air Permit,,, what about the Solid Waste Permit or issue??? That makes the SW permit a big issue.

Lastly, there is a statement that the legal proceedings are "immaterial" to the company. I disagree... if MK chooses to pursue the Misrepresentation charges against JB, it could be very damaging to the company.