Plastic2Oil Inc (PTOI)

[loanranger]

Matt Ingham in the CC:
"As you will see in the next slide, our cost per gallon is comprised of four main components; (1) feedstock costs; (2) feedstock pre-processing; (3) P2O processors and plant overhead, and (4) freight, for the shipment of plastics and fuels."

The net book value of Machinery & Equipment going into the quarter was $3,594,555. M&E depreciation expense for the quarter was approximately $188,000. It's reasonable to assume that the vast majority of that asset category is the cost of the processors, isn't it? (See p. 13 of the 10-Q)

Isn't there something wrong with this picture?
"For the period ended March 31, 2013, total depreciation expense consists of $7,646 included in Cost of Sales (March 31, 2012 - $2,838) and depreciation of property, plant and equipment and accretion of long-term liability of $189,327 (March 31, 2012 - $137,196), which is separately disclosed in the condensed consolidated statements of operations."


Why is only $7,646 in depreciation charged to Cost of Sales (with the remainder reflected as Selling, General and Administrative expenses) when in all likelihood better than 20 times that amount is actually attributable to "P2O processors and plant overhead" and hence SHOULD be charged to Cost of Sales?


What is management really saying when they say "the P2O Processors and Plant Overhead costs account for 9% of the overall cost of a gallon of fuel, at approximately $0.11 per gallon" and "The isolated cost to run Processor #2 with staff, utilities and depreciation included is minimal, at $0.11 per gallon of fuel produced."?


What is achieved by classifying certain significant production costs as Selling, General and Administrative expenses when they are actually attributable to the manufacturing effort and belong in Cost of Sales?
The real bottom line answer to that question is "NOTHING".....at least in terms of dollars and cents. What it does achieve is the avoidance of some embarrassment and the (improper) enhancement of gross margins. I suspect that there are other costs that are being mistreated this way, but if just this one was treated as I believe it should be, Cost of Goods sold for fuel along with the Cost per Gallon in the quarter would have been more than double that which was reported and the $1,009 Gross Profit on fuel sales would have been reported as a 6 digit loss.

Maybe I have this wrong, but the basic question is simple:
How can the millions of dollars in P2O processor assets (to be depreciated over a useful life of 3-15 years according to the 10-Q) result in just a $7,646 charge to Cost of Sales for Depreciation in the quarter?

http://www.aipb.org/pdf/DEPRECIA.pdf