Item 1. Financial Statements
GLYECO, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2018 and December 31, 2017
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
404,290
|
|
|
$
|
111,302
|
|
Cash - restricted
|
|
|
—
|
|
|
|
6,642
|
|
Accounts receivable, net
|
|
|
1,146,652
|
|
|
|
1,546,367
|
|
Prepaid expenses
|
|
|
473,135
|
|
|
|
360,953
|
|
Inventories
|
|
|
632,550
|
|
|
|
564,133
|
|
Total current assets
|
|
|
2,656,627
|
|
|
|
2,589,397
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
3,990,351
|
|
|
|
3,897,950
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
436,450
|
|
|
|
436,450
|
|
Goodwill
|
|
|
3,822,583
|
|
|
|
3,822,583
|
|
Other intangible assets, net
|
|
|
2,144,098
|
|
|
|
2,266,654
|
|
Total other assets
|
|
|
6,403,131
|
|
|
|
6,525,687
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,050,109
|
|
|
$
|
13,013,034
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
3,011,095
|
|
|
$
|
2,921,406
|
|
Contingent acquisition consideration
|
|
|
1,503,113
|
|
|
|
1,509,755
|
|
Notes payable – current portion
|
|
|
310,712
|
|
|
|
297,534
|
|
Capital lease obligations – current portion
|
|
|
434,842
|
|
|
|
377,220
|
|
Total current liabilities
|
|
|
5,259,762
|
|
|
|
5,105,915
|
|
|
|
|
|
|
|
|
|
|
Non-Current Liabilities
|
|
|
|
|
|
|
|
|
Notes payable – non-current portion, net of debt discount
|
|
|
3,759,047
|
|
|
|
2,953,631
|
|
Capital lease obligations – non-current portion
|
|
|
1,094,814
|
|
|
|
1,085,985
|
|
Total non-current liabilities
|
|
|
4,853,861
|
|
|
|
4,039,616
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,113,623
|
|
|
|
9,145,531
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred stock; 40,000,000 shares authorized; $0.0001 par value; no shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
|
|
|
—
|
|
|
|
—
|
|
Common stock, 300,000,000 shares authorized; $0.0001 par value; 166,593,661 and 165,288,061 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
|
|
|
16,659
|
|
|
|
16,529
|
|
Additional paid-in capital
|
|
|
46,133,997
|
|
|
|
45,847,572
|
|
Accumulated deficit
|
|
|
(43,214,170
|
)
|
|
|
(41,996,598
|
)
|
Total stockholders’ equity
|
|
|
2,936,486
|
|
|
|
3,867,503
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
13,050,109
|
|
|
$
|
13,013,034
|
|
See accompanying notes to the condensed
consolidated financial statements.
GLYECO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the three months ended March 31, 2018
and 2017
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
3,001,010
|
|
|
$
|
2,290,321
|
|
Cost of goods sold
|
|
|
2,449,100
|
|
|
|
2,150,586
|
|
Gross profit
|
|
|
551,910
|
|
|
|
139,735
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
|
48,591
|
|
|
|
53,426
|
|
Share-based compensation
|
|
|
119,888
|
|
|
|
136,986
|
|
Salaries and wages
|
|
|
662,231
|
|
|
|
343,055
|
|
Legal and professional
|
|
|
330,439
|
|
|
|
160,991
|
|
General and administrative
|
|
|
482,032
|
|
|
|
357,213
|
|
Total operating expenses
|
|
|
1,643,181
|
|
|
|
1,051,671
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,091,271
|
)
|
|
|
(911,936
|
)
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
109,050
|
|
|
|
196,218
|
|
Total other expense
|
|
|
109,050
|
|
|
|
196,218
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(1,200,321
|
)
|
|
|
(1,108,154
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
17,251
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,217,572
|
)
|
|
$
|
(1,108,910
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic and diluted
|
|
|
165,424,728
|
|
|
|
126,269,222
|
|
See accompanying
notes to the condensed consolidated financial statements.
GLYECO, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statement
of Stockholders’ Equity
For the three months ended March 31, 2018
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid -In
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
165,288,061
|
|
|
$
|
16,529
|
|
|
$
|
45,847,572
|
|
|
$
|
(41,996,598
|
)
|
|
$
|
3,867,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
1,305,600
|
|
|
|
130
|
|
|
|
119,758
|
|
|
|
—
|
|
|
|
119,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relative fair value of warrants to purchase common stock in connection with notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
166,667
|
|
|
|
—
|
|
|
|
166,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,217,572
|
)
|
|
|
(1,217,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2018
|
|
|
166,593,661
|
|
|
$
|
16,659
|
|
|
$
|
46,133,997
|
|
|
$
|
(43,214,170
|
)
|
|
$
|
2,936,486
|
|
See accompanying notes to the condensed
consolidated financial statements.
GLYECO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash
Flows
For the three months ended March 31, 2018
and 2017
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,217,572
|
)
|
|
$
|
(1,108,910
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
153,722
|
|
|
|
114,024
|
|
Amortization
|
|
|
122,556
|
|
|
|
131,458
|
|
Share-based compensation expense
|
|
|
119,888
|
|
|
|
136,986
|
|
Amortization of debt discount
|
|
|
—
|
|
|
|
86,734
|
|
Loss on disposal of equipment
|
|
|
—
|
|
|
|
28,446
|
|
(Recoveries on) provision for bad debt
|
|
|
(36,123
|
)
|
|
|
14,401
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
435,838
|
|
|
|
(45,490
|
)
|
Prepaid expenses
|
|
|
(46,307
|
)
|
|
|
6,694
|
|
Inventories
|
|
|
(68,417
|
)
|
|
|
(761,063
|
)
|
Accounts payable and accrued expenses
|
|
|
89,689
|
|
|
|
886,638
|
|
Due to related parties
|
|
|
—
|
|
|
|
(4,375
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(446,726
|
)
|
|
|
(514,457
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(83,572
|
)
|
|
|
(318,692
|
)
|
Cash paid for acquisition
|
|
|
—
|
|
|
|
(129,500
|
)
|
Payment of contingent acquisition consideration
|
|
|
(6,642
|
)
|
|
|
(17,899
|
)
|
Net cash used in investing activities
|
|
|
(90,214
|
)
|
|
|
(466,091
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Repayment of notes payable
|
|
|
(80,614
|
)
|
|
|
(21,410
|
)
|
Repayment of capital lease obligations
|
|
|
(96,100
|
)
|
|
|
(943
|
)
|
Proceeds from issuance of notes
|
|
|
1,000,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
823,286
|
|
|
|
(22,353
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and restricted cash
|
|
|
286,346
|
|
|
|
(1,002,901
|
)
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash at beginning of the period
|
|
|
117,944
|
|
|
|
1,490,551
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash at end of the period
|
|
$
|
404,290
|
|
|
$
|
487,650
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest paid during period
|
|
$
|
56,049
|
|
|
$
|
9,177
|
|
Income taxes paid during period
|
|
$
|
16,429
|
|
|
$
|
756
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash and restricted cash at end of period:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
404,290
|
|
|
$
|
428,997
|
|
Restricted Cash
|
|
|
—
|
|
|
|
58,653
|
|
|
|
$
|
404,290
|
|
|
$
|
487,650
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Note payable issued for insurance premium
|
|
$
|
65,875
|
|
|
$
|
—
|
|
Acquisition of equipment with capital lease obligations
|
|
$
|
162,551
|
|
|
$
|
—
|
|
Relative fair value of warrants to purchase common stock issued in connection with notes payable
|
|
$
|
166,667
|
|
|
$
|
—
|
|
See accompanying notes to the condensed
consolidated financial statements.
GLYECO, INC. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements (Unaudited)
NOTE 1 – Organization and
Nature of Business
GlyEco, Inc. (the “Company”,
“we”, or “our”)
is a
developer, manufacturer and distributor
of performance fluids for the automotive, commercial and industrial markets. We specialize
in coolants,
additives and complementary fluids.
We believe our vertically integrated approach,
which includes formulating products, acquiring feedstock, managing facility construction and upgrades, operating facilities, and
distributing products through our fleet of trucks, positions us to serve our key markets and enables us to capture incremental
revenue and margin throughout the process. Our network of facilities, develop, manufacture and distribute high quality products
that meet or exceed industry quality standards, including a wide spectrum of ready to use antifreezes and additive packages for
antifreeze/coolant, gas patch coolants and heat transfer fluid industries, throughout North America.
On December 27, 2016, the Company purchased
WEBA Technology Corp. (“WEBA”), a privately-owned company that develops, manufactures and markets additive packages
for the antifreeze/coolant, gas patch coolants and heat transfer industries, and purchased 96.9% of Recovery Solutions & Technologies
Inc. (“RS&T”), a privately-owned company involved in the development and commercialization of glycol recovery technology.
On December 28, 2016, the Company purchased certain glycol distillation assets from Union Carbide Corporation (“UCC”),
a wholly-owned subsidiary of The Dow Chemical Company, located in Institute, West Virginia (the “Dow Assets”). During
the first quarter of fiscal year 2017, the Company purchased an additional 2.9% of RS&T (for a total percentage ownership of
99.8% of RS&T).
The Company was formed in the State of
Nevada on October 21, 2011.
We are currently comprised of the parent
corporation GlyEco, Inc., WEBA, RS&T, and our acquisition subsidiaries that were formed to acquire the processing and distribution
centers listed above. Our current processing and distribution centers are held in six subsidiaries under the names of GlyEco
Acquisition Corp. #1 through GlyEco Acquisition Corp. #7, excluding #4.
Going Concern
The condensed consolidated financial statements
as of March 31, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and 2017, have been prepared assuming
that the Company will continue as a going concern. As of March 31, 2018, the Company has yet to achieve profitable operations and
is dependent on its ability to raise capital from stockholders or other sources to sustain operations. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. Ultimately, we plan to achieve profitable operations through
the implementation of operating efficiencies at our facilities and increased revenue through the offering of additional products
and the expansion of our geographic footprint through acquisitions, broader distribution from our current facilities and/or the
opening of additional facilities. The condensed consolidated financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
NOTE 2 – Basis of Presentation and Summary of Significant
Accounting Policies
The following represents an update for
the three months ended March 31, 2018 to the significant accounting policies described in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2017.
Basis of Presentation
The accompanying condensed consolidated
financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United
States (“GAAP”), and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
In the opinion of management, the accompanying
unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation on an interim basis. The operating results for the three months ended March 31, 2018 are not
necessarily indicative of the results that may be expected for the full year ending December 31, 2018.
Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management
believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction
with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, including the Company’s
audited consolidated financial statements and related notes included therein.
Principles of Consolidation
These consolidated financial statements
include the accounts of GlyEco, Inc., and its wholly-owned and majority-owned subsidiaries. All significant intercompany transactions
have been eliminated as a result of consolidation.
Noncontrolling Interests
The Company recognizes noncontrolling interests
as equity in the consolidated financial statements separate from the parent company’s equity. Noncontrolling interests’
partners have less than 50% share of voting rights at any one of the subsidiary level companies. The amount of net income (loss)
attributable to noncontrolling interests is included in consolidated net income (loss) on the face of the consolidated statements
of operations. Changes in a parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are
treated as equity transactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or
loss in net income (loss) when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. Additionally, operating losses are allocated to noncontrolling interests even when
such allocation creates a deficit balance for the noncontrolling interest partner.
The Company provides either in the consolidated
statements of stockholders’ equity, if presented, or in the notes to consolidated financial statements, a reconciliation
at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable
to the parent, and equity (net assets) attributable to the noncontrolling interest that separately discloses:
|
(1)
|
Net income or loss
|
|
(2)
|
Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners.
|
|
(3)
|
Each component of other comprehensive income or loss
|
Noncontrolling interests were not significant as of March 31,
2018 and December 31, 2017.
Operating Segments
Operating segments are defined as components
of an enterprise about which separate financial information is available that is evaluated on a regular basis by the
chief operating decision maker, or decision-making group, in deciding how to allocate resources to an individual segment and in
assessing the performance of the segment. Operating segments may be aggregated into a single operating segment if the segments
have similar economic characteristics, among other criteria. We have two operating segments, the Consumer and Industrial segments
(See Note 8).
Use of Estimates
The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported
revenues and expenses during the reporting periods. Because of the use of estimates inherent within the financial reporting process,
actual results may differ significantly from those estimates. Significant estimates include, but are not limited to,
items such as the allowance for doubtful accounts, the value of share-based compensation and warrants, the recoverability of property,
plant and equipment, goodwill, other intangibles and the determination of their estimated useful lives, contingent liabilities,
and environmental and asset retirement obligations. Due to the uncertainties inherent in the formulation of accounting estimates,
it is reasonable to expect that these estimates could be materially revised within the next year.
Revenue Recognition
The Company’s significant accounting policy
for revenue was updated as a result of the adoption of Topic 606:
The Company recognizes revenue when its
customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to
receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines
are within the scope of Topic 606, the Company performs the following five steps: (1) identify the contract(s) with a customer,
(2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction
price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance
obligation. See Note 3 for additional information on revenue recognition.
Costs
Cost of goods sold includes all direct
material and labor costs and those indirect costs of bringing raw materials to sale condition, including depreciation of equipment
used in manufacturing and shipping and handling costs. Selling, general, and administrative costs are charged to operating expenses
as incurred. Research and development costs are expensed as incurred, are included in operating expenses and were insignificant
in 2018 and 2017. Advertising costs are expensed as incurred.
Accounts Receivable
Accounts receivable are recognized and
carried at the original invoice amount less an allowance for expected uncollectible amounts. Inherent in the assessment of the
allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s willingness or
ability to pay, the Company’s compliance with customer invoicing requirements, the effect of general economic conditions
and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered
past due. We do not charge interest on past due balances. The Company writes off trade receivables when all reasonable collection
efforts have been exhausted. Bad debt expense is reflected as a component of general and administrative expenses in the consolidated
statements of operations. The allowance for doubtful accounts totaled $134,339 and $213,136 as of March 31, 2018 and December 31,
2017, respectively.
Inventories
Inventories are reported at the lower of
cost and net realizable value. The cost of raw materials, including feedstocks and additives, is determined on an average unit
cost of the units in a production lot. Work-in-process represents labor, material and overhead costs associated with the manufacturing
costs at an average unit cost of the units in the production lot. Finished goods represents work-in-process items with additive
costs added. The Company periodically reviews its inventories for obsolete or unsalable items and adjusts its carrying value to
reflect estimated net realizable values.
Net realizable value is the estimated selling price
in the ordinary course of business less the cost to sell.
Property, Plant and Equipment
Property, plant and equipment is stated
at cost. The Company provides for depreciation on the cost of its equipment using the straight-line method over an estimated useful
life, ranging from three to twenty years, and zero salvage value. Expenditures for repairs and maintenance are charged to expense
as incurred.
For purposes of computing depreciation,
the useful lives of property, plant and equipment are as follows:
Leasehold improvements
|
|
Lesser of the remaining lease term or 5 years
|
|
|
|
Machinery and equipment
|
|
3-15 years
|
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or
fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale
would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material.
Deferred Financing Costs, Debt Discount
and Detachable Debt-Related Warrants
Costs incurred in connection with debt
are deferred and recorded as a reduction to the debt balance in the accompanying consolidated balance sheets. The Company amortizes
debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts relate to the
relative fair value of warrants issued in conjunction with the debt and are also recorded as a reduction to the debt balance and
amortized over the expected term of the debt to interest expense using the effective interest method.
Net Loss Per Share Calculation
The basic net loss per common share is
computed by dividing the net loss available to common shareholders by the weighted average number of shares outstanding during
a period. Diluted loss per common share is computed by dividing the net loss available to common shareholders by the weighted average
number of common shares outstanding plus potentially dilutive securities. The Company’s potentially dilutive securities outstanding
are not shown in a diluted net loss per share calculation because their effect in both 2018 and 2017 would be anti-dilutive. At
March 31, 2018, these potentially dilutive securities included warrants to purchase of 9,973,124 of common stock and stock options
to purchase 3,387,621 shares of common stock for a total of 13,360,745 shares of common stock. At March 31, 2017, these potentially
dilutive securities included warrants to purchase 11,316,874 shares of common stock and stock options to purchase 7,950,093 shares
of Common Stock for a total of 19,266,967 shares of common stock.
Share-based Compensation
All share-based payments to employees and
non-employee directors, including grants of employee stock options, are expensed based on their estimated fair values at the grant
date, in accordance with Accounting Standards Codification (“ASC”) 718. Compensation expense for share-based payments
to employees and directors is recorded over the vesting period using the estimated fair value on the date of grant, as calculated
by the Company using the Black-Scholes-Merton (“BSM”) option-pricing model or the Monte Carlo Simulation. For awards
with only service conditions that have graded vesting schedules, compensation cost is recorded on a straight-line basis over the
requisite service period for the entire award, unless vesting occurs earlier. For awards with market conditions, compensation cost
is recorded on the accelerated attribution method over the derived service period.
Non-employee share-based compensation is
accounted for based on the fair value of the related stock or options, using the BSM, or the fair value of the goods or services
on the measurement date, whichever is more readily determinable.
Recently Issued Accounting Pronouncements
There have been no recent accounting pronouncements
or changes in accounting pronouncements that are of significance, or potential significance to the Company, except as discussed
below.
In the first quarter of 2018, the Company
adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is the new comprehensive revenue recognition
standard that supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry
specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services
to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods
or services. In 2015 and 2016, FASB issued additional ASUs related to Topic 606 that delayed the effective date of the guidance
and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification of performance
obligations, and accounting for licenses, and included other improvements and practical expedients. The new guidance was effective
for annual and interim periods beginning after December 15, 2017. The Company elected to adopt the new guidance using
the modified retrospective transition method for all contracts not completed as of the date of adoption. The adoption of the new
guidance did not have a material impact on the consolidated financial statements. See the Revenue Recognition sub header and Note
3 for additional disclosures regarding the Company’s contracts with customers as well as the impact of adopting Topic 606.
In February 2016, the FASB issued ASU 2016-02,
“Leases”, which requires the lease rights and obligations arising from lease contracts, including existing and new
arrangements, to be recognized as assets and liabilities on the balance sheet. ASU 2016-02 is effective for reporting periods beginning
after December 15, 2018 with early adoption permitted. While the Company is still evaluating ASU 2016-02, the Company expects the
adoption of ASU 2016-02 will not have a material effect on the Company’s consolidated financial condition due to the recognition
of the lease rights and obligations as assets and liabilities. Lessees must apply a modified retrospective transition approach
for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.
The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative
period presented. Lessees may not apply a full retrospective transition approach. The Company has not yet selected a transition
method and is currently assessing the impact of the adoption of ASU 2016-02 will have on the consolidated financial statements.
In August 2016, the
FASB issued ASU 2016-18, “Statement of Cash Flows: Classification Restricted Cash”, which requires that a statement
of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. The Company adopted this standard in the first quarter of 2018 by using the retrospective
transition method, which required the following disclosures and changes to the presentation of its consolidated financial statements:
cash and restricted cash reported on the condensed consolidated statements of cash flows now includes restricted cash of $76,552,
$58,653 and $6,642 as of December 31, 2016, March 31, 2017 and December 31, 2017, respectively, as well as previously reported
cash.
NOTE 3 – Revenue
Revenue Recognition
All of the Company’s revenue is derived
from product sales. As of January 1, 2018, the Company accounts for revenue in accordance with Topic 606, “Revenue from Contracts
with Customers.” See discussion of principal activities for the Company’s operating segments in Note 8.
Product sales consist of sales of the Company’s
products to manufacturers and distributors. The Company considers order confirmations or purchase orders, which in some cases are
governed by master supply agreements, to be contracts with a customer. Product sale contracts are short-term contracts where the
time between order confirmation and satisfaction of all performance obligations is less than one year.
Revenues from product sales are
recognized when the customer obtains control of the Company’s product, which occurs at a point in time, usually upon
shipment, with payment terms typically in the range of 30 to 60 days after invoicing, depending on business and geographic
region. When the Company performs shipping and handling activities after the transfer of control to the customer (e.g., when
control transfers prior to shipment), these are considered fulfillment activities, and accordingly, the costs are accrued
when the related revenue is recognized. The Company has no obligations for returns and warranties. Taxes collected from
customers relating to product sales and remitted to governmental authorities are excluded from revenues.
Disaggregation of Revenue
The Company disaggregates its revenue
from contracts with customers by principal product group and geographic region, as the Company believes it best depicts the nature,
amount, timing and uncertainty of its revenue and cash flows. See details in the tables below:
Net Trade Revenue by Principal Product Group
|
|
Three Months Ended
March 31, 2018
|
|
|
Consumer
|
|
|
Industrial
|
Antifreeze
|
|
$
|
1,652,196
|
|
|
$
|
—
|
Ethylene Glycol
|
|
|
—
|
|
|
|
763,802
|
Additive
|
|
|
—
|
|
|
|
500,196
|
Windshield Washer fluid
|
|
|
82,174
|
|
|
|
—
|
Equipment
|
|
|
2,642
|
|
|
|
—
|
Total
|
|
$
|
1,737,012
|
|
|
$
|
1,263,998
|
Net Trade Revenue by Geographic Region
|
|
Three Months Ended
March 31, 2018
|
|
|
|
|
|
US
|
|
$
|
2,663,586
|
|
Canada
|
|
|
316,767
|
|
China
|
|
|
20,658
|
|
Total
|
|
$
|
3,001,010
|
|
Contract Balances
Accounts receivable are recorded
when the right to consideration becomes unconditional. The Company does not have any contract assets or liabilities as of
March 31, 2018 and December 31, 2017. The Company has utilized the practical expedient which enables the Company to expense
commissions when incurred as they would be amortized over one year or less.
NOTE
4 – Inventories
The
Company’s total inventories were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
252,130
|
|
|
$
|
241,297
|
|
Work in process
|
|
|
20,800
|
|
|
|
69,991
|
|
Finished goods
|
|
|
359,620
|
|
|
|
252,845
|
|
Total inventories
|
|
$
|
632,550
|
|
|
$
|
564,133
|
|
NOTE 5
– Goodwill and Other Intangible Assets
The
components of goodwill and other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Balance at
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
Accumulated
|
|
|
March 31,
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Additions
|
|
|
Amortization
|
|
|
2018
|
|
Finite live intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer list and tradename
|
|
5 years
|
|
$
|
987,500
|
|
|
$
|
—
|
|
|
$
|
(274,952
|
)
|
|
$
|
712,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
5 years
|
|
|
1,199,000
|
|
|
|
—
|
|
|
|
(537,450
|
)
|
|
|
661,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
10 years
|
|
|
880,000
|
|
|
|
—
|
|
|
|
(110,000
|
)
|
|
|
770,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
3,066,500
|
|
|
$
|
—
|
|
|
$
|
(922,402
|
)
|
|
$
|
2,144,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Indefinite
|
|
$
|
3,822,583
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,822,583
|
|
We
compute amortization using the straight-line method over the estimated useful lives of the intangible assets. The Company has
no indefinite-lived intangible assets other than goodwill.
NOTE
6 – Property, Plant and Equipment
The
Company’s property, plant and equipment were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Machinery and equipment
|
|
$
|
4,910,771
|
|
|
$
|
4,782,257
|
|
Leasehold improvements
|
|
|
275,973
|
|
|
|
275,973
|
|
Accumulated depreciation
|
|
|
(1,489,338
|
)
|
|
|
(1,335,615
|
)
|
|
|
|
3,697,406
|
|
|
|
3,722,615
|
|
Construction in process
|
|
|
292,945
|
|
|
|
175,335
|
|
Total property, plant and equipment, net
|
|
$
|
3,990,351
|
|
|
$
|
3,897,950
|
|
NOTE 7–
Stockholders’ Equity
Preferred
Stock
The
Company’s articles of incorporation authorize the Company to issue up to 40,000,000 shares of $0.0001 par value, preferred
shares having preferences to be determined by the board of directors for dividends, and liquidation of the Company’s assets.
Of the 40,000,000 preferred shares the Company is authorized by its articles of incorporation, the Board of Directors has designated
up to 3,000,000 as Series AA preferred shares.
As
of March 31, 2018, the Company had no shares of preferred stock outstanding.
Common
Stock
As
of March 31, 2018, the Company has 166,593,661 shares of common stock, par value $0.0001, outstanding. The Company’s articles
of incorporation authorize the Company to issue up to 300,000,000 shares of the common stock. The holders are entitled to one
vote for each share on matters submitted to a vote to shareholders, and to share pro rata in all dividends payable on common stock
after payment of dividends on any preferred shares having preference in payment of dividends.
2017
Employee Stock Purchase Plan
On
September 29, 2017, subject to stockholder approval, the Company’s Board of Directors approved the Company’s 2017
Employee Stock Purchase Plan (the “2017 ESPP”). The 2017 ESPP was approved by the Company’s stockholders at
the Company’s 2017 Annual Meeting of Stockholders on November 14, 2017.
Under
the 2017 ESPP, the Company may grant eligible employees the right to purchase our common stock through payroll
deductions at a price equal to the lesser of the eighty five percent (85%) of the fair market value of a share of common stock
on the exercise date of the current offering period or eighty five percent (85%) of the fair market value of our common stock on
the grant date of the then current offering period. The first offering period began on November 14, 2017. Thereafter, there
will be consecutive six-month offering periods until January 2, 2022, or until the Plan is terminated by the Board, if
earlier.
The
Company recorded stock-based compensation expense related to the ESPP of $9,000 during the three months ended March 31,
2018.
During
the three months ended March 31, 2018, the Company issued the following shares of common stock for compensation:
On
January 8, 2018, the Company issued 150,000 shares of common stock to one employee of the Company at a price of $0.06 per share
for a value of $9,000.
On
March 31, 2018, the Company issued an aggregate of 1,155,600 shares of common stock to six directors of the Company pursuant to
the Company’s FY2018 Director Compensation Plan at a price of $0.065 per share for a value of $75,114.
A
summary of the Company’s performance and market-based restricted stock awards (including shares approved but not issued) is presented
below:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
per Share
|
|
Unvested at January 1, 2018
|
|
|
14,279,498
|
|
|
$
|
0.07
|
|
Restricted stock granted
|
|
|
—
|
|
|
|
—
|
|
Restricted stock vested
|
|
|
—
|
|
|
|
—
|
|
Restricted stock forfeited
|
|
|
(660,000
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2018
|
|
|
13,619,498
|
|
|
$
|
0.07
|
|
During
the three months ended March 31, 2018 and 2017, the Company recorded $26,774 and $34,126, respectively, related to the performance
and market based restricted stock awards.
Options
and warrants
During
the three months ended March 31, 2018, the Company issued 5,000,000 warrants (See Note 9).
NOTE 8
– Segments
GlyEco
conducts its operations in two business segments: the Consumer segment and the Industrial segment. The Consumer segment’s
principal business activity is the production and distribution of ASTM grade glycol products, specifically automotive antifreeze
and specialty-blended antifreeze, for sale into the automotive and industrial end markets. The Consumer segment operates a full
lifecycle business, picking up waste antifreeze and producing finished antifreeze from both recycled and virgin glycol sources.
We operate six processing and distribution centers located in the eastern region of the United States. The production capacity
of the Consumer segment is approximately 90,000 gallons per month of ready to use (50/50) antifreeze. Operations in our Industrial
segment are conducted through WEBA and RS&T, two of our subsidiaries. WEBA develops, manufactures and markets additive
packages for the antifreeze/coolant, gas patch coolant and heat transfer industries throughout North America. RS&T operates
a glycol re-distillation plant in West Virginia that produces virgin quality glycol for sale to industrial customers worldwide.
The production capacity of the RS&T facility is approximately 1.5 million gallons per month of concentrated ethylene glycol.
The RS&T facility current produces antifreeze and industrial grade ethylene glycol.
The
Company uses loss before provision for income taxes as its measure of profit/loss for segment reporting purposes. Loss before
provision for income taxes by operating segment includes all operating items relating to the businesses, including inter segment
transactions. Items that primarily relate to the Company as a whole are assigned to Corporate.
Inter
segment eliminations present the adjustments for inter segment transactions to reconcile segment information to the Company’s
consolidated financial statements.
Segment
information, and the reconciliation to the Company’s consolidated financial statements, for the three months ended March
31, 2018, is presented below:
|
|
Consumer
|
|
|
Industrial
|
|
|
Inter
Segment
Eliminations
|
|
|
Corporate
|
|
|
Total
|
|
Sales, net
|
|
$
|
1,739,584
|
|
|
$
|
1,608,325
|
|
|
$
|
(346,899
|
)
|
|
$
|
—
|
|
|
$
|
3,001,010
|
|
Cost of goods sold
|
|
|
1,569,187
|
|
|
|
1,226,812
|
|
|
|
(346,899
|
)
|
|
|
—
|
|
|
|
2,449,100
|
|
Gross profit
|
|
|
170,397
|
|
|
|
381,513
|
|
|
|
—
|
|
|
|
—
|
|
|
|
551,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
713,536
|
|
|
|
392,434
|
|
|
|
—
|
|
|
|
537,211
|
|
|
|
1,643,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(543,139
|
)
|
|
|
(10,921
|
)
|
|
|
—
|
|
|
|
(537,211
|
)
|
|
|
(1,091,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(5,428
|
)
|
|
|
(44,599
|
)
|
|
|
—
|
|
|
|
(59,023
|
)
|
|
|
(109,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
$
|
(548,567
|
)
|
|
$
|
(55,520
|
)
|
|
$
|
—
|
|
|
$
|
(596,234
|
)
|
|
$
|
(1,200,321
|
)
|
NOTE 9
– Notes Payable
Notes
payable consist of the following:
|
|
As of
March 31, 2018
|
|
|
As of
December 31, 2017
|
|
2018 10% Related Party Unsecured Notes, net of debt discount of $166,667
|
|
$
|
833,333
|
|
|
$
|
—
|
|
2017 Secured Note
|
|
|
99,157
|
|
|
|
104,990
|
|
2018 and 2017 Unsecured Note
|
|
|
200,399
|
|
|
|
188,060
|
|
2016 Secured Notes
|
|
|
286,870
|
|
|
|
308,115
|
|
2016 WEBA Seller Notes
|
|
|
2,650,000
|
|
|
|
2,650,000
|
|
Total notes payable
|
|
|
4,069,759
|
|
|
|
3,251,165
|
|
Less current portion
|
|
|
(310,712
|
)
|
|
|
(297,534
|
)
|
Long-term portion of notes payable
|
|
$
|
3,759,047
|
|
|
$
|
2,953,631
|
|
2018
Related Party Unsecured Notes
10%
Notes Issuance
On
March 29, 2018, the Company entered into a subscription agreement (the “10% Notes Subscription Notes Agreement”) by
and between the Company and various funds managed by Wynnefield Capital. The 10% Notes Subscription Agreement was the first tranche
of a private placement (see Note 12). Pursuant to the 10% Notes Subscription Agreement, the Company offered and issued $1,000,000
in principal amount of 10% Senior Unsecured Promissory Notes (the “10% Notes”) and (ii) warrants (the “Warrants”)
to purchase up to 5,000,000 shares of common stock of the Company. The Company received $1,000,000 in proceeds from the offering.
The 10% Notes are scheduled to mature on May 4, 2019 (the “10% Note Maturity Date”). The 10% Notes bear interest at
a rate of 10% per annum due on the 10% Note Maturity Date or as otherwise specified by the 10% Notes.
The
Company allocated the proceeds received to the 10% Notes and the Warrants on a relative fair value basis at the time of
issuance. The total debt discount of $166,667 will be amortized over the life of the 10% Notes to interest expense using
the effective interest method. Amortization expense during the quarter ended March 31, 2018 was insignificant.
We
estimated the fair value of the Warrants on the issuance date using a Black-Scholes pricing model with the following assumptions:
|
|
Warrants
|
|
Expected term
|
|
|
3 years
|
|
Volatility
|
|
|
143.81
|
%
|
Risk Free Rate
|
|
|
2.39
|
%
|
The
proceeds of the 10% Notes were allocated to the components as follows:
|
|
|
Proceeds
allocated at
issuance date
|
|
Notes
|
|
|
$
|
833,333
|
|
Warrants
|
|
|
|
166,667
|
|
Total
|
|
|
$
|
1,000,000
|
|
2018
and 2017 Unsecured Note
In October
2017 and later amended in January 2018, the Company entered into an unsecured note with Bank Direct to finance its insurance premiums
(the “2018 and 2017 Unsecured Note”). The key terms of the 2018 and 2017 Unsecured Note include: (i) an original principal
balance of $242,866, (ii) an interest rate of 5.4%, and (iii) a term of ten months. If the Company should default on the loan,
Bank Direct may cancel the Company’s underlying insurance and the Company would only owe any earned but unpaid premium.
This would be a minimal amount as deposits and payments are paid in advance to reduce the lender’s risk.
NOTE 10
– Related Party Transactions
Vice
President of U.S. Operations
The
former Vice President of U.S. Operations is the sole owner of BKB Holdings, LLC, which is the landlord of the property where GlyEco
Acquisition Corp #5’s processing and distribution center is located. The Vice President of U.S. Operations also is the sole
owner of Renew Resources, LLC, which provides services to the Company as a vendor.
|
|
2018
|
|
|
2017
|
|
Beginning Balance as of January 1,
|
|
$
|
—
|
|
|
$
|
5,123
|
|
Monies owed to related party for services performed
|
|
|
18,780
|
|
|
|
24,707
|
|
Monies paid
|
|
|
(18,780
|
)
|
|
|
(28,014
|
)
|
Ending balance as of March 31,
|
|
$
|
—
|
|
|
$
|
1,816
|
|
10%
Notes
On
March 29, 2018, we entered into debt agreements for an aggregate principal amount of $1,000,000 from the offering and
issuance of 10% Notes to Wynnefield Partners Small Cap Value I, L.P. and Wynnefield Partners Small Cap Value, L.P, which are
under the management of Wynnefield Capital, Inc. (“Wynnefield Capital”), an affiliate of the Company. The
Company’s Chairman of the Board, Dwight Mamanteo, is a portfolio manager of Wynnefield Capital. (See Note 9 for
additional information).
NOTE 11
– Commitments and Contingencies
Litigation
The
Company may be party to legal proceedings in the ordinary course of business from time to time. Litigation is subject to
inherent uncertainties, and an adverse result in a legal proceeding could arise that may harm our business. Below is an overview
of a pending legal proceeding in which an adverse result could have a material adverse effect on our business and results of operations.
On
December 27, 2017, PSP Falcon Industries, LLC (“PSP Falcon”) filed a civil action against the Company in the Ocean
County Superior Court located in Toms River, New Jersey. The civil action relates to an outstanding balance alleged to be due
to PSP Falcon from the Company in an amount of $530,633 related to certain construction expenses. The Company believes it has
paid PSP Falcon in full for the services rendered and therefore that no outstanding balance remains due. Accordingly, the Company
plans to vigorously defend itself from this claim.
Environmental
Matters
We
are subject to federal, state, and local laws, regulations and ordinances relating to the protection of the environment, including
those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, and occupational
health and safety. It is management’s opinion that the Company is not currently exposed to significant environmental remediation
liabilities or asset retirement obligations. However, if a release of hazardous substances occurs, or is found on one of our properties
from prior activity, we may be subject to liability arising out of such conditions and the amount of such liability could be material.
The Company accrues for potential environmental liabilities in a manner consistent with GAAP; that is, when it is probable a liability
has been incurred and the amount of the liability is reasonably estimable. The Company reviews the status of its environmental
sites on a yearly basis and adjusts its reserves accordingly. Such potential liabilities accrued by the Company do not take into
consideration possible recoveries of future insurance proceeds. The Company maintains insurance coverage for unintentional acts
that result in environmental remediation liabilities up to $1 million per occurrence; $2 million in the aggregate, with an umbrella
liability policy that doubles the coverage. These policies do, however, take into account the likely share other parties will
bear at remediation sites. It would be difficult to estimate the Company’s ultimate level of liability due to the number
of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty
as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and
risk assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at
the sites, and the often quite lengthy periods over which eventual remediation may occur. The Company does not currently believe
that any claims, penalties or costs in connection with known environmental matters will have a material adverse effect on the
Company’s financial position, results of operations or cash flows.
In
December 2016, the Company completed the acquisition of certain glycol distillation assets from Union Carbide Corporation in Institute,
West Virginia. In order to comply with West Virginia regulations enacted in 2017, the Company has elected to accrue $780,000 for
tank remediation. The amount of the accrual is based on various assumptions and estimates and will be periodically reevaluated
in light of a variety of future events and contingencies.
NOTE 12
– Subsequent Events
Closing
of Private Placement
On
April 6, 2018, the Company closed on a private placement (the “Private Placement”) of up to $2,500,000 million
(the “Maximum Offering Amount) in principal amount of 10% Unsecured Promissory Notes (the “Notes”) and
common stock purchase warrants to purchase up to 12,500,000 shares of the Company’s common stock pursuant to a
Subscription Agreement (the “Subscription Agreement”) by and among the Company and each prospective
investor. Each of the Notes will mature thirteen months from their issuance date (each a “Maturity Date”). The
Private Placement will continue until the earlier of (a) the date upon which subscriptions for the Maximum Offering Amount
have been received and accepted by the Company or (b) April 30, 2018, unless terminated at an earlier time by the Company, or
unless extended by the Company in its sole discretion, without notice to or consent by prospective investors, to a date not
later than May 15, 2018.
The
Company closed a subsequent tranche of the Private Placement on April 10, 2018, with one of its directors, Charles F. Trapp (“Trapp”;
and together with the Institutional Investors, the “Initial Investors” and each an “Initial Investor”),
with respect to a Note with a principal amount of $50,000 (the “Trapp Note”; and together with the Institutional Notes,
the “Initial Notes” and each an “Initial Note”) and a Warrant to purchase 250,000 shares of common stock
(the “Trapp Warrant”; and together with the Institutional Warrants, the “Initial Warrants”).
The
Company closed a subsequent tranche of the Private Placement on May 1, 2018, with one of its directors and its Chief Executive
Officer, Ian Rhodes (“Rhodes”; and together with the Institutional Investors, the “Initial Investors”
and each an “Initial Investor”), with respect to a Note with a principal amount of $50,000 (the “Rhodes Note”;
and together with the Institutional Notes, the “Initial Notes” and each an “Initial Note”) and a Warrant
to purchase 250,000 shares of common stock (the “Rhodes Warrant”; and together with the Institutional Warrants, the
“Initial Warrants”).
The
Company closed a subsequent tranche of the Private Placement on May 4, 2018, with various funds managed by Wynnefield
Capital, for an aggregate principal amount of $1,000,000 of Notes (the “Institutional Notes”) and Warrants to
purchase an aggregate of 5,000,000 shares of common stock (the “Institutional Warrants”).
The
proceeds from the purchase of all Notes and Warrants will be used primarily for working capital and general corporate purposes.
The Initial Notes and Initial Warrants were issued pursuant to the Subscription Agreement, by and among the Company and each Initial
Investor.
The
Initial Notes bear interest at a rate of 10% per annum and shall be payable on the relevant Maturity Date along with the principal
amount of the Initial Notes, plus any liquidated damages and other amounts due under the Initial Notes. At any time after issuance
of the Institutional Notes or the Trapp Note, the Company may deliver to such investor a notice of prepayment with respect to
any portion of the principal amount of the relevant Initial Note, and any accrued and unpaid interest thereon. Upon the occurrence
of an event of default under the Initial Notes, the Company must repay to the Initial Investors a 125% premium of the outstanding
principal amount of the Initial Notes and accrued and unpaid interest thereon, in addition to the payment of all other amounts,
costs, expenses and liquidated damages due in respect of the Initial Notes.
The
Initial Warrants are exercisable to purchase up to an aggregate of 5,250,000 shares of common stock (the “Initial Warrant
Shares”; and together with the Initial Notes and the Initial Warrants, the “Initial Securities”) commencing
on the date of issuance at an exercise price of $0.05 per share (the “Exercise Price”). The Initial Warrants will
expire on the third anniversary of their date of issuance. The Exercise Price is subject to adjustment upon stock splits, reverse
stock splits, and similar capital changes. An Initial Investor does not have a right to exercise its respective Initial Warrants
to the extent that such exercise would result in such Initial Investor being the beneficial owner in excess of 4.99% (or, upon
election of such Initial Investor, 9.99%), which beneficial ownership limitation may be increased or decreased up to 9.99% upon
notice to the Company, provided that any increase in such limitation will not be effective until 61 days following notice to the
Company.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
consolidated financial statements for the fiscal year ended December 31, 2017, and the notes thereto, along with Management’s
Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2017, filed separately with the US Securities and Exchange Commission. This discussion and analysis contains
forward-looking statements based upon current beliefs, plans, expectations, intentions and projections that involve risks, uncertainties
and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. We use words such
as “anticipate,” “estimate,” “plan, “project,” “continuing,” “ongoing,”
“expect,” “believe,” “intend,” “may,” “will,” “should,”
“could,” and similar expressions to identify forward-looking statements. Our actual results and the timing of selected
events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including
those set forth under the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December
31, 2017, and any updates to those risk factors filed from time in our Quarterly Reports on Form 10-Q including those set forth
under Part II, Item 1A of this Quarterly Report on Form 10-Q.
Unless
otherwise noted herein, terms such as the “Company,” “GlyEco,” “we,” “us,” “our”
and similar terms refer to GlyEco, Inc., a Nevada corporation, and our subsidiaries.
In
addition, the following discussion should be read in conjunction with the information contained in the condensed consolidated
financial statements of the Company and related notes included elsewhere herein.
Company
Overview
GlyEco
is a
developer, manufacturer and distributor
of performance fluids for the automotive, commercial and industrial markets. We specialize in
coolants,
additives and complementary fluids.
We believe our vertically integrated approach,
which includes formulating products, acquiring feedstock, managing facility construction and upgrades, operating facilities, and
distributing products through our fleet of trucks, positions us to serve our key markets and enables us to capture incremental
revenue and margin throughout the process. Our network of facilities, develop, manufacture and distribute high quality products
that meet or exceed industry quality standards, including a wide spectrum of ready to use antifreezes and additive packages for
the antifreeze/coolant, gas patch coolants and heat transfer fluid industries, throughout North America.
GlyEco
conducts its operation in two business segments: the Consumer segment and the Industrial segment. The Consumer segment’s
principal business activity is the production and distribution of ASTM grade glycol products, specifically automotive antifreeze
and specialty-blended antifreeze, for sale into the automotive and industrial end markets. The Consumer segment operates a full
lifecycle business, picking up waste antifreeze and producing finished antifreeze from both recycled and virgin glycol sources.
We operate six processing and distribution centers located in the eastern region of the United States. The production capacity
of the Consumer segment is approximately 90,000 gallons per month of ready to use (50/50) antifreeze. Operations in our Industrial
segment are conducted through WEBA and RS&T, two of our subsidiaries. WEBA develops, manufactures and markets additive
packages for the antifreeze/coolant, gas patch coolant and heat transfer industries throughout North America. RS&T operates
a glycol re-distillation plant in West Virginia that produces virgin quality glycol for sale to industrial customers worldwide.
The RS&T facility currently produces antifreeze and industrial grade ethylene glycol. The production capacity of the RS&T
facility is approximately 1.5 million gallons per month of concentrated ethylene glycol.
Consumer
Segment
Our
Consumer segment has processing and distribution centers located in (1) Minneapolis, Minnesota, (2) Indianapolis, Indiana, (3)
Lakeland, Florida, (4) Rock Hill, South Carolina, (5) Tea, South Dakota, and (6) Landover, Maryland. The Minneapolis, Minnesota,
Lakeland, Florida, Rock Hill, South Carolina and Tea, South Dakota facilities have distillation equipment and operations for recycling
waste glycol streams as well as blending equipment and operations for mixing glycol and other chemicals to produce finished products
for sale to third party customers, while the Indianapolis, Indiana and Landover, Maryland facilities currently only have blending
equipment and operations for mixing glycol and other chemicals to produce finished products for sale to third party customers. We
estimate that the monthly processing capacity of our facilities with distillation equipment is approximately 90,000 gallons of
ready to use finished products. We have invested significant time and money into increasing the capacity and actual production
of our facilities. Our processing and distribution centers utilize a fleet of trucks to deliver glycol products directly to retail
end users at their storefronts, which is typically 50-100 gallons per customer order and to collect waste material for processing
at our facilities. Collectively, we directly service approximately 5,000 customers. To meet the delivery volume needs of our existing
customers, we supplement our collected and processed glycol with new or virgin glycol that we purchase in bulk from various suppliers.
In addition to our retail end users, we also sell our recycled products to wholesale or bulk distributors who, in turn, sell to
retail end users specifically as automotive or specialty blended antifreeze.
We
have deployed our technology and processes across our six processing and distribution centers, allowing for safe and efficient
handling of waste streams, application of our processing technology and Quality Control & Assurance Program (“QC&A
Program”), sales of high-quality glycol products, and data systems allowing for tracking, training, and further development
of our products and service.
Our
Consumer segment product offerings include:
●
|
Antifreeze/Coolant
- We formulate several antifreeze products to meet ASTM and/or Original Equipment Manufacturers (“OEM”) manufacturer
specifications for engine coolants. In addition, we custom blend antifreeze to customer specifications.
|
●
|
Heating, Ventilation
and Air Conditioning (“HVAC”) Fluids - We formulate HVAC coolant to meet ASTM and/or OEM manufacturer specifications
for HVAC fluids. In addition, we custom blend HVAC coolants to customer specifications.
|
●
|
Waste Glycol Disposal
Services - Utilizing our fleet of collection/delivery trucks, we collect waste glycol from generators for recycling. We coordinate
large batches of waste glycol to be picked up from generators and delivered to our processing and distribution centers for
recycling or in some cases to be safely disposed.
|
We
currently sell and deliver all of our products in bulk containers (55 gallon barrels, 250 gallon totes, etc.) or variable metered
bulk quantities.
We
began developing new methods for recycling glycols in 1999. We recognized a need in the market to improve the quality of recycled
glycol being returned to retail customers. In addition, we believed through process technology, systems, and footprint we could
clean more types of waste glycol in a more cost-efficient manner. Each type of industrial waste glycol contains a different list
of impurities which traditional waste antifreeze processing does not clean effectively. Additionally, many of the contaminants
left behind using these processes - such as esters, organic acids and high dissolved solids - leave the recycled material risky
to use in vehicles or machinery.
Our
patented technology removes difficult pollutants, including esters, organic acids, high dissolved solids and high un-dissolved
solids in addition to the benefit of clearing oil/hydrocarbons, additives and dyes that are typically found in used engine coolants.
Our QC&A Program seeks to ensure consistently high quality, ASTM standard compliant recycled material.
Industrial
Segment
Our
Industrial segment consists of two divisions: WEBA, our additives business and RS&T, our glycol re-distillation plant in West
Virginia.
WEBA
develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolants and heat transfer industries
throughout North America. We believe WEBA is one of the largest companies serving the North American additive market. WEBA’s METALGUARD®
additive package product line includes one-step inhibitor systems, which give our customers the ability to easily make various
types of antifreeze concentrate and 50/50 coolants for all automobiles, heavy-duty diesel engines, stationary engines in gas patch
and other applications. METALGUARD® additive packages cover the entire range of coolant types from basic green conventional
to the newest extended life OAT antifreezes of all colors. Our heat transfer fluid additives allow our customers to make finished
heat transfer fluids for most industry applications including all-aluminum systems. The METALGUARD® heat transfer fluids include
light and heavy-duty fluids, both propylene and ethylene glycol based, for various operating temperatures. These inhibitors cover
the industry standard of phosphate-based inhibitors as well as all-organic (OAT) inhibitors for specific pH range and aluminum
system requirements.
All
of the METALGUARD® products are tested at our in-house laboratory facility and by third-party laboratories to assure conformance.
We use the standards set by the ASTM (American Society of Testing Materials) for all of our products. All of our products
pass the most current ASTM standards and testing for each type of product. Our manufacturing facility conforms to the highest
levels of process quality control including ISO 9001 certification.
RS&T
operates a glycol re-distillation plant in West Virginia, which produces virgin quality glycol for sale to industrial customers
worldwide. The RS&T facility currently produces antifreeze and industrial grade ethylene glycol. We believe it is one of the
largest glycol re-distillation plants in North America, with production capacity of approximately 1.5 million gallons per month
of concentrated ethylene glycol. The RS&T facility, located at the Dow Institute Site at Institute, West Virginia, includes
five distillation columns, three wiped-film evaporators, heat exchangers, processing and storage tanks, and other processing equipment.
The facility’s tanks include feedstock storage capacity of several million gallons and finished goods storage capacity of
several million gallons. The plant is equipped with rail and truck unloading/loading facilities, and on-site barge loading/unloading
facilities.
Our
Strategy
We
are a vertically integrated specialty chemical company focused on high quality glycol-based and other products where we can be
an efficiency leader providing value added products. To deliver value to all of our stakeholders we: develop, manufacture and
deliver value-added niche or specialty products, deliver high quality products which meet or exceed industry standards, provide
white glove, proactive customer service, effectively manage costs as a low cost manufacturer, operate a dependable low cost distribution
network, leverage technology and innovation throughout our company and are eco-friendly.
To
effectively deliver on our strategy, we offer a broad spectrum of products in our niches, focus on non-standard innovative products,
leverage multiple distribution channels and we are market smart in that we maximize less competitive/under-served markets. Our
manufacturing operations produce high quality products while effectively managing costs by recycling at high capacity and high
up time, driving down raw material costs with focused feedstock streams management and using technology and data to manage our
business in real-time. Our distribution operations provide dependable service at a low cost by effectively using know how, technology
and data. We leverage technology and innovation to develop a recognized brand and operate certified laboratories and well supported
research and development activities. We focus on internal and external training programs. We are also eco-friendly with the products
we offer and the way we operate our businesses.
Critical
Accounting Policies
We
have identified in the consolidated financial statements contained herein certain critical accounting policies that affect the
more significant judgments and estimates used in the preparation of the consolidated financial statements. Our discussion
and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation
of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. Management reviews with the Audit
Committee the selection, application and disclosure of critical accounting policies. On an ongoing basis, we evaluate our estimates,
including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of
uncertainty. These areas include going concern, collectability of accounts receivable, inventory, impairment of goodwill, carrying
amounts and useful lives of intangible assets, fair value of assets acquired and liabilities assumed in business combinations,
stock-based compensation expense, and deferred taxes. We base our estimates on historical experience, our observance of trends
in particular areas, and information or valuations and various other assumptions that we believe to be reasonable under the circumstances
and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent
from other sources. Actual amounts could differ significantly from amounts previously estimated.
We
believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity:
Revenue
Recognition
The
Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration
which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for the arrangements
that the Company determines are within the scope of Topic 606, the Company performs the following five steps: (1) identify the
contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price,
(4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as)
the entity satisfies a performance obligation. See Note 3 for additional information on revenue recognition.
Collectability
of Accounts Receivable
Accounts
receivable consist primarily of amounts due from customers from sales of products and are recorded net of an allowance for doubtful
accounts. In order to record our accounts receivable at their net realizable value, we assess their collectability. A considerable
amount of judgment is required in order to make this assessment, based on a detailed analysis of the aging of our receivables,
the credit worthiness of our customers and our historical bad debts and other adjustments. If economic, industry or specific customer
business trends worsen beyond earlier estimates, we increase the allowance for uncollectible accounts by recording additional
expense in the period in which we become aware of the new conditions.
Substantially
all our customers are based in the United States. The economic conditions in the United States can significantly impact the recoverability
of our accounts receivable.
Inventories
Inventories
consist primarily of feedstock and other raw materials and finished product ready for sale. Inventories are stated at the lower
of cost or market with cost recorded on an average cost basis. Costs include purchase costs, fleet and fuel costs, direct labor,
transportation costs and production related costs. In determining whether inventory valuation issues exist, we consider various
factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, historical sales and production
usage. Shifts in market trends and conditions, changes in customer preferences or the loss of one or more significant customers
are factors that could affect the value of our inventory. These factors could make our estimates of inventory valuation differ
from actual results.
Long-Lived
Assets
We
periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful life of
long-lived assets or whether the remaining balance of the long-lived assets should be evaluated for possible impairment. Instances
that may lead to an impairment include the following: (i) a significant decrease in the market price of a long-lived asset group;
(ii) a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical
condition; (iii) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived
asset or asset group, including an adverse action or assessment by a regulator; (iv) an accumulation of costs significantly in
excess of the amount originally expected for the acquisition or construction of a long-lived asset or asset group; (v) a current-period
operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates
continuing losses associated with the use of a long-lived asset or asset group; or (vi) a current expectation that, more likely
than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously
estimated useful life.
Upon
recognition of an event, as previously described, we use an estimate of the related undiscounted cash flows, excluding interest,
over the remaining life of the property and equipment and long-lived assets in assessing their recoverability. We measure impairment
loss as the amount by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). We primarily employ the
two following methodologies for determining the fair value of a long-lived asset: (i) the amount at which the asset could be bought
or sold in a current transaction between willing parties; or (ii) the present value of expected future cash flows grouped at the
lowest level for which there are identifiable independent cash flows.
Deferred
Financing Costs, Debt Discount and Detachable Debt-Related Warrants
Costs
incurred in connection with debt are deferred and recorded as a reduction to the debt balance in the accompanying consolidated
balance sheets. The Company amortizes debt issuance costs over the expected term of the related debt using the effective interest
method. Debt discounts relate to the relative fair value of warrants issued in conjunction with the debt are also recorded as
a reduction to the debt balance and accreted over the expected term of the debt to interest expense using the effective interest
method.
Share-Based
Compensation
We
use the Black-Scholes-Merton option-pricing model to estimate the value of options and warrants issued to employees and consultants
as compensation for services rendered to the Company. This model uses estimates of volatility, risk free interest rate and the
expected term of the options or warrants, along with the current market price of the underlying stock, to estimate the value of
the options and warrants on the date of grant. In addition, the calculation of compensation costs requires that the Company estimate
the number of awards that will be forfeited during the vesting period. The fair value of the stock-based awards is amortized over
the vesting period of the awards. For stock-based awards that vest based on performance conditions, expense is recognized when
it is probable that the conditions will be met. For stock-based awards that vest based on market conditions, expense is recognized
on the accelerated attribution method over the derived service period.
Assumptions
used in the calculation were determined as follows:
●
|
Expected term is
generally determined using the weighted average of the contractual term and vesting period of the award;
|
●
|
Expected volatility
of award grants made under the Company’s plans is measured using the historical daily changes in the market price of
the Company, over the expected term of the award;
|
●
|
Risk-free interest
rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected
term of the awards; and
|
●
|
Forfeitures are
based on the history of cancellations of awards granted by the Company and management’s analysis of potential forfeitures.
|
Contingencies
Litigation
The
Company may be party to legal proceedings in the ordinary course of business from time to time. Litigation is subject to inherent
uncertainties, and an adverse result in a legal proceeding could arise that may harm our business. Below is an overview of a pending
legal proceeding in which an adverse result could have a material adverse effect on our business and results of operations.
On
December 27, 2017, PSP Falcon Industries, LLC (“PSP Falcon”) filed a civil action against the Company in the Ocean
County Superior Court located in Toms River, New Jersey. The civil action relates to an outstanding balance alleged to be due
to PSP Falcon from the Company in an amount of $530,633 related to certain construction expenses. The Company believes it has
paid PSP Falcon in full for the services rendered and therefore that no outstanding balance remains due. Accordingly, the Company
plans to vigorously defend itself from this claim.
Environmental
Matters
We
are subject to federal, state, and local laws, regulations and ordinances relating to the protection of the environment, including
those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, and occupational
health and safety. It is management’s opinion that the Company is not currently exposed to significant environmental remediation
liabilities or asset retirement obligations. However, if a release of hazardous substances occurs, or is found on one of our properties
from prior activity, we may be subject to liability arising out of such conditions and the amount of such liability could be material.
The
Company accrues for potential environmental liabilities in a manner consistent with GAAP; that is, when it is probable a liability
has been incurred and the amount of the liability is reasonably estimable. The Company reviews the status of its environmental
sites on a yearly basis and adjusts its reserves accordingly. Such potential liabilities accrued by the Company do not take into
consideration possible recoveries of future insurance proceeds. The Company maintains insurance coverage for unintentional acts
that result in environmental remediation liabilities up to $1 million per occurrence and $2 million in the aggregate, with an
umbrella liability policy that doubles the coverage. These policies do, however, take into account the likely share other parties
will bear at remediation sites. It would be difficult to estimate the Company’s ultimate level of liability due to the number
of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty
as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and
risk assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at
the sites, and the often quite lengthy periods over which eventual remediation may occur. Other than as disclosed above with respect
to an adverse result regarding the Company’s obligations to address certain environmental clean-up matters at the former
New Jersey processing and distribution center, the Company does not currently believe that any claims, penalties or costs in connection
with known environmental matters will have a material adverse effect on the Company’s financial position, results of operations
or cash flows.
In
December 2016, the Company completed the acquisition of certain glycol distillation assets from Union Carbide Corporation in Institute,
West Virginia. In order to comply with West Virginia regulations enacted in 2017, the Company has elected to accrue $780,000 for
tank remediation. The amount of the accrual is based on various assumptions and estimates and will be periodically reevaluated
in light of a variety of future events and contingencies.
Results
of Operations
Three
Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017
Net
Sales
For
the three-month period ended March 31, 2018, Net Sales were $3,001,010 compared to $2,290,321 for the three-month period ended
March 31, 2017, representing an increase of $710,689, or approximately 31%. The increase in Net Sales was due to $667,644 of sales
related to the Industrial Segment businesses compared to the same period in 2017. Net Sales, including intersegment sales for
the three-month period ended March 31, 2018, were $1,739,584 and $1,608,325 for the Consumer and Industrial segments, respectively.
Cost
of Goods Sold
For
the three-month period ended March 31, 2018, our Costs of Goods Sold was $2,449,100, compared to $2,150,586 for the three-month
period ended March 31, 2017, representing an increase of $298,514, or approximately 14%. The increase in Cost of Goods Sold
was primarily due to costs associated with the increase in net sales.
Gross
Profit
For
the three-month period ended March 31, 2018, we realized a gross profit of $551,910, compared to a gross profit of $139,735
for the three-month period ended March 31, 2017. Gross profit, including intersegment sales, for the three-month period ended
March 31, 2018 was $170,397 and $ 381,513 for the Consumer and Industrial segments, respectively.
Our
gross profit margin for the three-month period ended March 31, 2018, was approximately 18%, compared to approximately 6% for the
three-month period ended March 31, 2017. Gross profit margin, excluding intersegment sales for the three-month period ended March
31, 2018, was 10% and 24% for the Consumer and Industrial segments, respectively. The gross profit margin for the Consumer segment
was positively impacted by increased sales and proportionately lower costs.
Operating
Expenses
For
the three-month period ended March 31, 2018, operating expenses increased to $1,643,181 from $1,051,671 for the three-month period
ended March 31, 2017, representing an increase of $591,510, or approximately 56%. Operating Expenses consist of Consulting Fees,
Share-Based Compensation, Salaries and Wages, Legal and Professional Expenses, and General and Administrative Expenses. Our operating
expense ratio for the three-month period ended March 31, 2018, was approximately 55%, compared to approximately 46% for the three-month
period ended March 31, 2017.
Consulting
Fees consist of marketing and administrative fees incurred under consulting agreements. Consulting Fees decreased to
$48,591 for the three-month period ended March 31, 2018, from $53,426 for the three-month period ended March 31, 2017, representing
a decrease of $4,835 or 9%.
Share-Based
Compensation consists of stock and options issued to employees in consideration for services provided to the Company. Share-Based
Compensation decreased to $119,888 for the three-month period ended March 31, 2018, from $136,986 for the three-month period ended
March 31, 2017, representing a decrease of $17,098, or 12%.
Salaries
and Wages consist of wages and the related taxes. Salaries and Wages increased to $662,231 for the three-month period
ended March 31, 2018, from $343,055 for the three-month period ended March 31, 2017, representing an increase of $319,176 or 93%.
The increase is due to the addition of employees in such areas as marketing, sales and finance in late 2017.
Legal
and Professional Fees consist of legal, accounting, tax and audit services. For the three-month period ended March
31, 2018, Legal and Professional Fees increased to $330,439 from $160,991 for the three-month period ended March 31, 2017, representing
an increase of $169,448. The increase is primarily related to work performed in connection with special projects including tax,
audit and IT needs.
General
and Administrative (G&A) Expenses consist of general operational costs of our business. For the three-month period ended March
31, 2018, G&A Expenses increased to $482,032 from $357,213 for the three-month period ended March 31, 2017, representing an
increase of $124,819, or approximately 35%. The increase is due to expenses related to the build out of our sales team, including
the associated travel and training expenses.
Other
Expense
For
the three-month period ended March 31, 2018, Other Expense was $109,050 compared to $196,218 for the three-month period ended
March 31, 2017, representing a decrease of $87,168. Other Expense consists of Interest Expense.
Adjusted
EBITDA
Presented
below is the non-GAAP financial measure representing earnings before interest, taxes, depreciation, amortization and share-based
compensation (which we refer to as “Adjusted EBITDA”). Adjusted EBITDA should be viewed as supplemental to, and not
as an alternative for, net income (loss) and cash flows from operations calculated in accordance with GAAP.
Adjusted
EBITDA is used by our management as an additional measure of our Company’s performance for purposes of business decision-making,
including developing budgets, managing expenditures, and evaluating potential acquisitions or divestitures. Period-to-period comparisons
of Adjusted EBITDA help our management identify additional trends in our Company’s financial results that may not be shown
solely by period-to-period comparisons of net income (loss) and cash flows from operations. In addition, we may use Adjusted EBITDA
in the incentive compensation programs applicable to many of our employees in order to evaluate our Company’s performance.
Further, we believe that the presentation of Adjusted EBITDA is useful to investors in their analysis of our results and helps
investors make comparisons between our company and other companies that may have different capital structures, different effective
income tax rates and tax attributes, different capitalized asset values and/or different forms of employee compensation. Our management
recognizes that Adjusted EBITDA has inherent limitations because of the excluded items, particularly those items that are recurring
in nature. In order to compensate for those limitations, management also reviews the specific items that are excluded from Adjusted
EBITDA, but included in net income (loss), as well as trends in those items. The amounts of those items are set forth, for the
applicable periods, in the reconciliations of Adjusted EBITDA to net loss below.
RECONCILIATION
OF NET LOSS TO ADJUSTED EBITDA
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
GAAP net loss
|
|
$
|
(1,217,572
|
)
|
|
$
|
(1,108,910
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
109,050
|
|
|
|
196,218
|
|
Income tax expense
|
|
|
17,251
|
|
|
|
756
|
|
Depreciation and amortization
|
|
|
276,278
|
|
|
|
245,482
|
|
Share-based compensation
|
|
|
119,888
|
|
|
|
136,986
|
|
Adjusted EBITDA
|
|
$
|
(695,105
|
)
|
|
$
|
(529,468
|
)
|
Liquidity
& Capital Resources; Going Concern
We
assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant
factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures, and acquisitions
of businesses and technologies. Cash provided by financing continues to be the Company’s primary source of funds.
We believe that we can raise adequate funds through the issuance of equity or debt as necessary to continue to support our planned
expansion.
For
the three months ended March 31, 2018 and 2017, net cash used in operating activities was $446,726 and $514,457 respectively. The
decrease in cash used in operating activities is due to the significant period over period changes in accounts receivable, inventories
and accounts payable and accrued expenses.
For
the three months ended March 31, 2018, the Company used $90,214 in cash for investing activities, compared to the $466,091 used
in the prior year’s period. These amounts were comprised of capital expenditures for equipment.
For
the three months ended March 31, 2018, net cash from financing activities was $823,286, which was comprised of
$1,000,000 proceeds from a note payable, offset by payments made on other notes payable and capital lease obligations. For the three
months ended March 31, 2017, we paid $22,353, in cash related to financing activities, primarily related to period debt
payments.
As
of March 31, 2018, we had $2,656,627 in current assets, including $404,290 in cash, $1,146,652 in accounts receivable and $632,550
in inventories. Cash increased from $111,302 as of December 31, 2017, to $404,290 as of March 31, 2018, primarily due to the timing
of payments.
As
of March 31, 2018, we had total current liabilities of $5,259,762 consisting primarily of accounts payable and accrued expenses
of $3,011,095, contingent acquisition consideration of $1,503,113, and the current portion of notes payable of $310,712. As of
March 31, 2018, we had total non-current liabilities of $4,853,861, consisting primarily of the non-current portion of our notes
payable and capital lease obligations.
The
accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. As of March 31, 2018, the Company has yet to achieve profitable operations and is dependent on our ability to raise capital
from stockholders or other sources to sustain operations and to ultimately achieve profitable operations. These factors raise
substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date of this
filing.
Our
plans to address these matters include achieving profitable operations, raising additional financing through offering our shares
of the Company’s capital stock in private and/or public offerings of our securities and through debt financing if available
and needed. There can be no assurances, however, that the Company will be able to obtain any financings or that such financings
will be sufficient to sustain our business operation or permit the Company to implement our intended business strategy. We plan
to achieve profitable operations through the implementation of operating efficiencies at our facilities and increased revenue
through the offering of additional products and the expansion of our geographic footprint through acquisitions, broader distribution
from our current facilities and/or the opening of additional facilities.
In
their report dated April 2, 2018 with respect to our consolidated financial statements for the years ended December 31, 2017 and
2016, KMJ Corbin & Company LLP, our independent registered public accounting firm, expressed substantial doubt about our ability
to continue as a going concern as a result of our recurring losses from operations and our dependence on our ability to raise
capital, among other factors.
Cash
Flows
The
table below sets forth certain information about the Company’s cash flows for the three months ended March 31, 2018 and
2017:
|
|
For the Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Net cash used in operating activities
|
|
$
|
(446,726
|
)
|
|
$
|
(514,457
|
)
|
Net cash used in investing activities
|
|
|
(90,214
|
)
|
|
|
(466,091
|
)
|
Net cash provided (used in) by financing activities
|
|
|
823,286
|
|
|
|
(22,353
|
)
|
Net change in cash and restricted cash
|
|
|
286,346
|
|
|
|
(1,002,901
|
)
|
Cash and restricted cash - beginning of period
|
|
|
117,944
|
|
|
|
1,490,551
|
|
Cash and restricted cash - end of period
|
|
$
|
404,290
|
|
|
$
|
487,650
|
|
The
Company may not have sufficient capital to sustain expected operations for the next twelve months. To date, we financed operations
and investing activities through private sales of our securities exempt from the registration requirements of the Securities Act
of 1933, as amended.
Off-balance
Sheet Arrangements
None.