The publicly-traded stock of Nevada-incorporated John Bordynuik, Inc. (JBII.PK), also known as JBI, was cut in half after the Securities Exchange Commission filed suit last week alleging its founder, CEO and controlling shareholder, John Bordynuik, had committed securities fraud. The details of the complaint can be found published on the SEC's website.
A little background; JBI is a development stage company which claims to have found the recipe for an inexpensive catalyst which, when used in the process of heating waste plastic to high temperatures in the absence of oxygen, a process commonly known as pyrolysis, can purportedly produce a crude oil equivalent for a total cost of under $10 per barrel. The company named this process “Plastic2Oil” or “P2O.” The company further claims that refineries have offered to purchase the oil product for just a few dollars under the price of West Texas Intermediate crude oil, a price which currently sits at $102 per barrel. As per CEO Mr. Bordynuik's public communication in 2009, each processor will cost around $80,000, will be able to produce 109 barrels of this crude oil equivalent per day and can be constructed so quickly that Mr. Bordynuik said the company's “plan is to launch 2,500 sites over the next few years."
Lofty claims to be sure. A piece of equipment which, with the aid of a special catalyst, could pay for itself in only eight days while eliminating garbage from the environment and where 2,500 sites would gross nearly nine billion dollars per year. In 2009, in anticipation of what Mr. Bordynuik termed a P2O “land rush” of his plans to build all of these plastic-to-oil sites, Mr. Bordynuik acquired a company named Javaco to allow for rapid expansion even beyond U.S. borders and into Mexico and South America. Also in late 2009, Mr. Bordynuik wrote agreements and contracts to build 45 of his P2O sites in cooperation with a major developer in Florida, to build shipboard processors which would clean up the Pacific garbage patch as well as process plastic waste generated on islands, and to set up three joint ventures with other parties to build P2O sites in Ohio and Florida.
Investors loved the story and in early 2010, JBI's stock jumped from around $1.00 to over $7.00 per share almost overnight! It didn't hurt that on February 12, Bordynuik put out nineteen press releases in a single day and that a number of stock promotion sites were also working to raise awareness of the company. Even after recent the SEC suit, JBI's market cap sits at a hefty $100 million—generous for most startup companies, let alone one which is still firmly entrenched in a research and development stage.
However, the SEC's suit alleging fraud isn't about anything related to these fantastic claims of turning plastic waste into crude oil for under $10/bbl. In fact, since the fabled catalyst is secret and so far Bordynuik has been reluctant to provide any evidence whatsoever of commercial viability, it would be extremely difficult for the SEC to prove that his amazing claims about the capabilities of his catalyst are also fraudulent. If the cow never tries to jump, there's no way to prove that it can or can't actually jump over the moon.
The SEC's fraud suit against Mr. Bordynuik actually stems from media credits which Mr. Bordynuik purchased in 2009 from another company called Domark in exchange for a million shares of JBI's stock. JBI's stock had a market value of $1.00 per share, or $1 million total for one million shares. Those media credits were originally contracted by Domark with a company called Media4Equity which provides advertising in exchange for equity in fledgling public companies. The media credits had up to $10 million in face value which could theoretically be exchanged for advertising at Media4Equity's rates.
Under the least conservative method, United States generally accepted accounting principles (US GAAP) accounting would require those media credit assets be booked at cost, which in JBI's case would have been the value of the one million shares given in exchange, or $1,000,000. Even if Mr. Bordynuik didn't understand GAAP accounting, he would at least have understood that if the company paid $1,000,000 for an asset in an arm's length transaction, that the market value of that asset probably wasn't really $10 million. Mr. Bordynuik made it appear that JBI was given $9 million in extra value free of charge. In doing so, he made the entire company appear much more valuable--those media credits made up the vast bulk of the company's book value. The day prior to acquiring the media credits the company had no assets of which to speak. It's unlikely that Bordynuik would have been confused by this accounting and if he was, he could have sought council, especially in light of the large amount involved.
The SEC's investigation further into the matter showed that Bordynuik understood very well that he was improperly booking the media credits. When Bordynuk's business consultant, a CPA, told Bordynuik the media credits should be booked at cost and voiced concern about booking them at the inflated $10 million face value, Bordynuik responded by saying it was “audit proof,” a clear indication that Bordynuik understood it was wrong to book the media credits at $10 million but felt it wouldn't be caught. To another business consultant who was preparing JBI's financials, Mr. Bordynuik said, “please get the pro formas as juicy as you can so I can acquire a chemical company for less,” an indication that Mr. Bordynuik wanted to inflate the perception of the company's size.
On the same day as acquiring the media credits, August 24th, 2009, Bordynuik also acquired a company named Javaco, also from Domark, for $150,000 and 2.5 million shares of JBI stock. Javaco was in the business of selling used cable equipment in Mexico and South America but Bordynuik's stated purpose was that Javaco would allow for rapid P2O expansion into Mexico and beyond—a statement which made little sense for a company supposedly trying to commercialize a revolutionary catalyst for pyrolysis but which hadn't even built one commercial plant anywhere. A month later, Bordynuik acquired a Florida company called Pak-it, LLC for $4.6 million in stock and notes. Pak-it LLC had a subsidiary named Dickler Chemical Laboratories which was in the business of manufacturing and selling industrial cleaning products. Neither of the Javaco or Pak-it acquisitions made much sense in light of trying to commercialize P2O and together their operations generate net losses, but they certainly made JBI look bigger. For a company which had no assets a couple of months earlier, that was significant.
After purchasing the media credits, it appears that Bordynuik then took steps to ensure the true valuation of the media credits stayed hidden. For auditing the financial statements, Bordynuik settled on Gately and Associates, an audit firm which made the Public Company Accounting Oversight Board's (PCAOB) short list of 'naughty' accounting firms. When the PCAOB notified Gately and Associates of Gately and Associates' unsatisfactory controls and demanded corrective action, it appears Gately and Associates simply ignored the PCAOB, leading to their inclusion on that list. Further, when Bordynuik learned that the auditor was arrested for violating his probation, Felony DUI and possession of marijuana, Bordynuik wanted to keep him for the audits anyway, even paying for the auditor's criminal trial. It certainly looks as though Bordynuik may have been opinion shopping. Either way it worked and both Gately and Associates and Bordynuik signed off on the 2009 10K annual report with the egregious over-valuation of the media credits.
This isn't the first time I saw a penny stock try to bolster its balance sheet using underhanded means. There was a company called Magnum d'Or, where a controlling stake was purchased by Chad Austin Curtis (infamous for his promotion activities in the Sulja Bros scam). Magnum d'Or, under Curtis' control, claimed to have a revolutionary catalyst which could transform old used tires back into re-usable rubber. Magnum d'Or then purchased a large, mostly filled tire dump in Colorado, and then listed the old tires on their balance sheet as an asset worth over $7 million! After all, the tires were now 'inventory', right? This deception appeared instrumental in getting additional financing for Magnum d'Or. But I digress.
JBI's many proponents will be quick to say that booking the media credits at an inflated value may have been only a mistake made since Bordynuik was a naïve CEO and will point out that whether mistake or fraud in accounting, that doesn't automatically mean that Bordynuik's claims about a fantastic catalyst are also fabricated. However, the SEC's investigation does appear to strongly point to deception by the controlling shareholder and CEO. If Bordynuik went through all those steps to mislead investors about the media credits, wouldn't it be possible that he's also lying about having an almost magical catalyst which could make the normally uneconomical process of pyrolysis not only profitable, but profitable to the tune of having amazing 90% gross margins? Bordynuik is the controlling shareholder which means he controls the board of directors he himself picked and every aspect of JBI, including how much he pays himself out of invested funds. Absolute integrity should be a requirement for any investor looking to invest—an ingredient which Bordynuik appears to be missing if the SEC's complaint is to be believed.
This wouldn't be the first time Bordynuik was deceptive. In April 2010, Bordynuik told shareholders that he had an offer from Somerset Refinery to purchase oil from his P2O process for the price of West Texas Intermediate crude oil minus $3 per barrel. The problem—Somerset Refinery had already been shut down for two months when he said it. Did he really get an offer but then didn't realize they were defunct and therefore this was just another 'honest' mistake? There's no way to verify since Somerset is shut down and its employees scattered to the wind. It's an odd coincidence that the only refinery ever mentioned by Bordynuik as having made an offer for JBI's oil just happened to go out of business. When Mr. Bordynuik previously said “refineries” (plural) that also should have indicated that there was more than one. No other refinery offering to buy Bordynuik's oil has surfaced since then.
In other deception, in 2009, Bordynuik put out a press release saying the company “Files Patent Application for Plastic2Oil Technology.” A year later in the SEC filings, Bordynuik admitted that no patent protection was ever sought. If the purpose of that deceptive press release wasn't merely to pump the stock, what was it? What prompted that press release if nothing related to patents was actually happening?
Since inception, the story of JBI as told by Bordynuik has been very inconsistent and often raised even more eventual questions. For example, in 2009 when Bordynuik put out press releases touting deals to build 45 P2O sites in Florida with Sousa Development, shipboard P2O sites with Heddle Marine, three other joint ventures to build P2O sites in Ohio and Florida, agreements to sell naphtha and an agreement to sell pyrolysis-derived fuels to Oxy Vinyls, each and every one of those deals vanished and were never heard from again. No excuse from Bordynuik was ever given why none ever came to fruition. Were the press releases just baseless and put out to make the company look “juicy” or did Bordynuik have some reasonable and rational basis for believing they would come to fruition? Since virtually every deal ever announced by Bordynuik fell apart, including Bordynuik's previous quarterly habit saying that he expected commercal production within one quarter since Q1 2010 and then resetting in every next quarter to say it's still one quarter away, it seems probable that Bordynuik doesn't have much of any reasonable basis for many of his statements to shareholders. Investors who believe in Bordynuik should wonder if there is any rational basis for Bordynuik saying that he could produce a crude oil equivalent for under $10/bbl. If the problem is that he's just too optimistic to the point of being quixotic, maybe he was too optimistic when he said he could make crude oil (and at times even diesel) for a total cost of under $10/bbl ($0.25/gallon).
The unexplained delays are also continuous. In April 2010, Bordynuik announced that the first P2O processor was ready for production. That was already almost a year after he ordered the off-the-shelf processor from a Chinese company named Donghe in mid 2009 which merely had to be assembled. That April, Bordynuik made it clear to shareholders that the only step left to commercial operations was getting a simple permit from the New York Department of Environmental Conservation (NYDEC) to allow him to burn the off-gasses produced as a byproduct of the P2O pyrolysis process. In June, 2010, during the conference call in response to a question, he reiterated, “As soon as we obtain the air permit we will begin running the processor in full commercial production.” Nine months later (no explanation for the lengthy time needed) he finally filled out the ten-page permit application and the NYDEC approved it less than three weeks later. Bordynuik then put out a press release announcing that commercial operations had commenced.
But commercial operations hadn't commenced. From the various message boards dedicated to following the stock, it was clear that shareholders believed that the processor was finally in full commercial operation and why shouldn't they believe that? Bordynuik gave every indication that it would be happening and gave no indication that he hadn't actually started. It was only five months later when Bordynuik didn't report the expected revenues in the first quarterly report that there was a potential clue that the promised full commercial production wasn't happening. By that time Bordynuik released a few more press releases touting deals and that may have distracted shareholders from the glaring inconsistency in his story line. As of today, over a year even after that announcement of commercial operations, there's still no indication that the first processor has been put into productive service. Delays and plot twists abound.
Bordynuik does, however, list 'P2O' sales to a company called Coco Asphalt. However, in the filings, Bordynuik leaves it very ambiguous as to whether the P2O sales refers to products from his P2O process, or from the “P2O division.” JBI's P2O division also houses a previously defunct “blending facility” purchased by JBI from a friend of Bordynuik's family. Blending businesses routinely obtain third-party fuel, blend in additives and then deliver that fuel. It seems quite possible the “petroleum distillate” was purchased and resold without any ties to the P2O process itself. Bordynuik himself provides no clarification on this important and material subject.
Looking at JBI's last 10Q which Bordynuik filed with the SEC in November, Bordynuik shows the P2O division as having a high gross margin as a percent of sales. However the P2O division cost of sales he reported for the nine-month period is also oddly less than what he reported for the total six month period in the prior quarter. There was no explanation given for this discrepancy. It's clear that Bordynuik, at a minimum, changed the accounting for the cost of sales and those changes certainly made the income statement look more “juicy” but it's not altogether clear that those P2O costs of sales accurately reflect JBI's P2O operations, especially since the total P2O cost of sales is even less than the lease of a recycling facility he leased just a year earlier and which is housed under the P2O division umbrella. Along with a few math errors in the 3Q statement, it's likely the 2011 third quarterly report will have to be amended or restated at some point.
In the past six months, Bordynuik also struck three new deals. One was with major paperboard company Rock-Tenn to build P2O sites on Rock-Tenn's property in order to process Rock-Tenn's plastic-containing waste. It was a no-risk, no obligation deal for Rock-Tenn but the press release Bordynuik put out shot JBI's stock up by 50%. I recently e-mailed John Stakel at Rock-Tenn, who signed the agreement with Bordynuik, and asked if he knew how Bordynuik was progressing. The response from Mr. Stakel said he didn't know any John Bordynuik. Apparently there wasn't much progress on the deal with Rock-Tenn in the past five months if Mr. Stakel simply forgot.
Bordynuik also struck a deal with Indigo Energy and another deal with XTR Energy just last month. I wasn't able to get a response from Indigo but the CEO of XTR Energy did return my call. XTR's CEO indicated that the agreement was for transportation fuels meeting Canada's specs and was told by Bordynuik that Bordynuik expected to have those available by the second quarter of 2012. An expectation of the second quarter represents a new delay which Bordynuik never mentioned to shareholders, shareholders who undoubtedly believed the first processor was already available to produce at the time of the announcement. In a recent update, Bordynuik said JBI would purchase third party fuels to make up any difference between what JBI could provide and what XTR Energy needed. An unusual 'strategy' to be sure.
To date it has been almost three years since Bordynuik purchased controlling interest in the shell stock which he renamed John Bordynuik, Inc. In addition to nearly three years, the reported accumulated deficit indicates Bordynuik burned through $29 million in his stated quest to build P2O processors costing only $80,000 to $200,000 each. So far out of the 2,500 sites he said he planned to have built a “few years” out from 2009, he has built one and that one currently doesn't appear to be anywhere close to actually producing commercially. On January 6th, 2012, Bordynuik filed with the SEC indicating that over the past week, he was able to sell additional stock and warrants for another $2.8 million. Bordynuik has given no guidance for how much additional investment he expects to need before he expects to put even one processor in operation.
I've watched a number of stock scams unfold and often they follow the same general theme. They usually claim to have a revolutionary technology with a story which sounds almost plausible, won't provide any credible evidence to support their claims, announce deals which sound great but which eventually go nowhere, and they hate skeptics with a passion. Just over a year ago, Bordynuik even had his lawyer send me a cease and desist letter just to try to get me to stop posting my opinions about JBI on a stock message board. Prior to the letter, Bordynuik had opportunity to talk to me via e-mail as I sent him courteous e-mails asking for clarification on some of his communication to shareholders. Bordynuik ignored every e-mail I sent.
Stock scams often are extremely successful in getting associations with credible people and companies. They often get those associations by offering no-risk deals or providing other incentives in return for lip service or sham agreements which the scam company has no intention of filling. SEC-litigated fraud company US Sustainable Energy, which also claimed to have a secret catalyst which could make pyrolysis wildly profitable, was able to get the president of the Dominican Republic to publicly say positive words about that company. Green Rubber, a company associated with scam company Magnum d'Or, was able to get former President Bill Clinton to talk up Green Rubber. It's unclear whether or not Mr. Clinton ever actually received his $100,000 to $200,000 speaking fee for that engagement. In this case Green Rubber was also able to get actual investment from 'Die Hard' actor Bruce Willis. I'm certain Mr. Willis doesn't know the entire story but by now I'm guessing he at least suspects the nearly one million dollars he had invested won't pan out. JBI's Bordynuik was also able to get lip service from former New York state senator Thompson. My guess is that the $5,000 campaign contribution didn't hurt Bordynuik's chances. I spoke to Mr. Thompson at length about JBI and about Bordynuik but Mr. Thompson didn't want to go on record so I'm respecting his wishes.
My personal assessment is that securities fraud, occurring most often in penny stocks, is absolutely rampant and the SEC is doing what they can to have an impact. The SEC is effective but they can't do everything. Investors need to protect themselves and understand that fraud does exist. Investors shouldn't give some person free rein with their hard-earned money just because that person purchased controlling interest in a publicly-traded shell stock for a few tens of thousands of dollars. Investors should understand that if they run across a penny stock promising a too-good-to-be-true revolutionary technology and if they additionally decide to ignore the associated adage, they should at least take a step back from their excitement and try to evaluate their investment objectively. If one act of deception finds its way to the surface, you can bet that the company didn't intend the public to know of the deception and that probably means the act of deception is only the very tip of the iceberg. If unexplained or inadequately explained delays start happening, it's time to pay attention. These types of stories play out over and over in penny stocks and the stock message boards are filled with investors who firmly believe that their particular scam company is the 'real deal.' The operators of these scams try to keep shareholders chasing a carrot around the calendar while selling shares as long as they can. 'Caveat Emptor' should always be the mantra when investing, but should be especially when dealing with penny stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.