Item 1. Financial Statements
GLYECO, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2018 and December 31, 2017
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
142,933
|
|
|
$
|
111,302
|
|
Cash - restricted
|
|
|
—
|
|
|
|
6,642
|
|
Accounts receivable, net
|
|
|
1,532,603
|
|
|
|
1,546,367
|
|
Prepaid expenses
|
|
|
355,008
|
|
|
|
360,953
|
|
Inventories
|
|
|
547,878
|
|
|
|
564,133
|
|
Total current assets
|
|
|
2,578,422
|
|
|
|
2,589,397
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
3,877,605
|
|
|
|
3,897,950
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
436,800
|
|
|
|
436,450
|
|
Goodwill
|
|
|
3,822,583
|
|
|
|
3,822,583
|
|
Other intangible assets, net
|
|
|
2,021,543
|
|
|
|
2,266,654
|
|
Total other assets
|
|
|
6,280,926
|
|
|
|
6,525,687
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,736,953
|
|
|
$
|
13,013,034
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,835,449
|
|
|
$
|
2,921,406
|
|
Contingent acquisition consideration
|
|
|
1,503,113
|
|
|
|
1,509,755
|
|
Notes payable – current portion
|
|
|
2,057,802
|
|
|
|
297,534
|
|
Capital lease obligations – current portion
|
|
|
452,522
|
|
|
|
377,220
|
|
Total current liabilities
|
|
|
6,848,886
|
|
|
|
5,105,915
|
|
|
|
|
|
|
|
|
|
|
Non-Current Liabilities
|
|
|
|
|
|
|
|
|
Notes payable – non-current portion, net of debt discount
|
|
|
2,898,582
|
|
|
|
2,953,631
|
|
Capital lease obligations – non-current portion
|
|
|
972,573
|
|
|
|
1,085,985
|
|
Total non-current liabilities
|
|
|
3,871,155
|
|
|
|
4,039,616
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,720,041
|
|
|
|
9,145,531
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.0001 per share: 40,000,000 shares authorized; no shares issued and outstanding as of June 30, 2018 and
December 31, 2017, respectively
|
|
|
—
|
|
|
|
—
|
|
Common
stock, par value $0.0001 per share: 300,000,000 shares authorized; 1,332,749 and 1,322,304 shares issued and outstanding as
of June 30, 2018 and December 31, 2017, respectively
|
|
|
133
|
|
|
|
132
|
|
Additional paid-in capital
|
|
|
46,384,483
|
|
|
|
45,863,969
|
|
Accumulated deficit
|
|
|
(44,367,704
|
)
|
|
|
(41,996,598
|
)
|
Total stockholders’ equity
|
|
|
2,016,912
|
|
|
|
3,867,503
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
12,736,953
|
|
|
$
|
13,013,034
|
|
See accompanying notes to the condensed
consolidated financial statements.
GLYECO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the three and six months ended June
30, 2018 and 2017
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
3,467,380
|
|
|
$
|
2,918,097
|
|
|
$
|
6,468,390
|
|
|
$
|
5,208,418
|
|
Cost of goods sold
|
|
|
3,072,941
|
|
|
|
2,441,243
|
|
|
|
5,522,041
|
|
|
|
4,591,829
|
|
Gross profit
|
|
|
394,439
|
|
|
|
476,854
|
|
|
|
946,349
|
|
|
|
616,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
|
25,553
|
|
|
|
165,536
|
|
|
|
74,144
|
|
|
|
218,962
|
|
Share-based compensation
|
|
|
121,573
|
|
|
|
94,548
|
|
|
|
241,461
|
|
|
|
231,534
|
|
Salaries and wages
|
|
|
554,182
|
|
|
|
363,546
|
|
|
|
1,216,413
|
|
|
|
706,601
|
|
Legal and professional
|
|
|
211,041
|
|
|
|
187,740
|
|
|
|
541,480
|
|
|
|
348,731
|
|
General and administrative
|
|
|
413,398
|
|
|
|
343,128
|
|
|
|
895,430
|
|
|
|
700,341
|
|
Total operating expenses
|
|
|
1,325,747
|
|
|
|
1,154,498
|
|
|
|
2,968,928
|
|
|
|
2,206,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(931,308
|
)
|
|
|
(677,644
|
)
|
|
|
(2,022,579
|
)
|
|
|
(1,589,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
222,226
|
|
|
|
223,385
|
|
|
|
331,276
|
|
|
|
419,603
|
|
Total other expense, net
|
|
|
222,226
|
|
|
|
223,385
|
|
|
|
331,276
|
|
|
|
419,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(1,153,534
|
)
|
|
|
(901,029
|
)
|
|
|
(2,353,855
|
)
|
|
|
(2,009,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
1,197
|
|
|
|
17,251
|
|
|
|
1,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,153,534
|
)
|
|
$
|
(902,226
|
)
|
|
$
|
(2,371,106
|
)
|
|
$
|
(2,011,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.87
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(1.79
|
)
|
|
$
|
(1.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic and diluted
|
|
|
1,332,749
|
|
|
|
1,031,016
|
|
|
|
1,328,099
|
|
|
|
1,020,671
|
|
See accompanying
notes to the condensed consolidated financial statements.
GLYECO, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statement
of Stockholders’ Equity
For the six months ended June 30, 2018
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
1,322,304
|
|
|
$
|
132
|
|
|
$
|
45,863,969
|
|
|
$
|
(41,996,598
|
)
|
|
$
|
3,867,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
10,445
|
|
|
|
1
|
|
|
|
241,460
|
|
|
|
—
|
|
|
|
241,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relative fair value of warrants issued in connection
with notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
279,054
|
|
|
|
—
|
|
|
|
279,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,371,106
|
)
|
|
|
(2,371,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018
|
|
|
1,332,749
|
|
|
$
|
133
|
|
|
$
|
46,384,483
|
|
|
$
|
(44,367,704
|
)
|
|
$
|
2,016,912
|
|
See accompanying notes to the condensed
consolidated financial statements.
GLYECO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash
Flows
For the six months ended June 30, 2018 and
2017
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,371,106
|
)
|
|
$
|
(2,011,136
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
309,800
|
|
|
|
233,612
|
|
Amortization
|
|
|
245,111
|
|
|
|
263,775
|
|
Share-based compensation expense
|
|
|
241,461
|
|
|
|
231,534
|
|
Amortization of debt discount
|
|
|
66,404
|
|
|
|
174,416
|
|
Loss on disposal of equipment
|
|
|
—
|
|
|
|
28,446
|
|
(Recoveries on) provision for bad debt
|
|
|
(39,676
|
)
|
|
|
37,086
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
53,440
|
|
|
|
(266,922
|
)
|
Prepaid expenses
|
|
|
71,820
|
|
|
|
(31,555
|
)
|
Inventories
|
|
|
16,255
|
|
|
|
(883,280
|
)
|
Deposits
|
|
|
(350
|
)
|
|
|
(46,355
|
)
|
Accounts payable and accrued expenses
|
|
|
(85,957
|
)
|
|
|
730,536
|
|
Due to related parties
|
|
|
—
|
|
|
|
(6,191
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,492,798
|
)
|
|
|
(1,546,034
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(126,904
|
)
|
|
|
(520,113
|
)
|
Cash paid for noncontrolling interest in RS&T
|
|
|
—
|
|
|
|
(129,500
|
)
|
Payment of contingent acquisition consideration
|
|
|
(6,642
|
)
|
|
|
(35,462
|
)
|
Net cash used in investing activities
|
|
|
(133,546
|
)
|
|
|
(685,075
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Repayment of notes payable
|
|
|
(226,763
|
)
|
|
|
(1,041,669
|
)
|
Proceeds from sale-leaseback
|
|
|
—
|
|
|
|
1,700,000
|
|
Proceeds from exercise of warrants
|
|
|
—
|
|
|
|
275,000
|
|
Repayment of capital lease obligations
|
|
|
(200,661
|
)
|
|
|
(74,093
|
)
|
Proceeds from issuance of notes, net
|
|
|
2,078,757
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,651,333
|
|
|
|
859,238
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and restricted cash
|
|
|
24,989
|
|
|
|
(1,371,871
|
)
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash at beginning of the period
|
|
|
117,944
|
|
|
|
1,490,551
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash at end of the period
|
|
$
|
142,933
|
|
|
$
|
118,680
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest paid during period
|
|
$
|
205,123
|
|
|
$
|
68,238
|
|
Income taxes paid during period
|
|
$
|
16,429
|
|
|
$
|
1,953
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash and restricted cash at end of period:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
142,933
|
|
|
$
|
77,590
|
|
Restricted Cash
|
|
|
—
|
|
|
|
41,090
|
|
|
|
$
|
142,933
|
|
|
$
|
118,680
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
1,700,000
|
|
Relative fair value of warrants issued in connection with notes payable
|
|
$
|
279,054
|
|
|
$
|
—
|
|
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,
now doing business as Glyeco West Virginia, Inc. (“Glyeco WV”) 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 Glyeco WV (for a total percentage ownership of 99.8% of Glyeco WV).
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 our processing
and distribution centers. We currently have six (6) processing and distribution centers, which are located in (1)
Minneapolis, Minnesota, (2) Indianapolis, Indiana, (3) Lakeland, Florida, (4) Rock Hill, South California, (5) Tea, South
Dakota, and (6) Landover, Maryland and are held in six (6) subsidiaries under the names of GlyEco Acquisition Corp. #1
through GlyEco Acquisition Corp. #7, excluding #4.
Stock Split
On July 10, 2018, the Company
effected
a reverse stock split of its common stock, immediately followed by a forward stock split of its common stock. The ratio for the
reverse stock split is fixed at 1-for-500 and the ratio for the forward stock split is fixed at 4-for-1, resulting in a net reverse
split of 125 for 1. All share and per share information in this Form 10-Q has been retroactively adjusted to reflect the reverse
stock split.
Going Concern
The
condensed consolidated financial statements as of June 30, 2018 and December 31, 2017 and for the three and six months ended June
30, 2018 and 2017 have been prepared assuming that the Company will continue as a going concern. As of June 30, 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 six months ended June 30, 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 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 six months ended June 30, 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 the Company 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 a 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; and
|
|
(3)
|
Each component of other comprehensive income or loss.
|
Noncontrolling interests were not significant as of June 30,
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 receivable, 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 ASU 2014-09, “Revenue
from Contracts with Customers (Topic 606)” in the first quarter of 2018.
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 the three and six months ended June 30, 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 condensed
consolidated statements of operations. The allowance for doubtful accounts totaled $96,922 and $213,136 as of June 30, 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 condensed 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 condensed 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 condensed 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 share of common stock is computed by dividing the net loss available to holders of common stock by the weighted
average number of shares of common stock outstanding during a period. Diluted loss per share of common stock is computed by dividing
the net loss available to holders of common stock by the weighted average number of shares of common stock outstanding plus potentially
dilutive securities. The Company’s potentially dilutive securities outstanding are not shown in the diluted net loss per
share calculation because their effect in both the three and six months ended June 30, 2018 and 2017 would be anti-dilutive.
At June 30, 2018, these potentially dilutive securities included warrants to purchase 120,285 shares of common stock and stock
options to purchase 27,101 shares of common stock for a total of 147,386 shares of common stock. At June 30, 2017, these
potentially dilutive securities included warrants to purchase 63,035 shares of common stock and stock options to purchase 60,980
shares of common stock for a total of 124,015 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)” (“ASU
2014-09”), 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 core principle of ASU 2014-09 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 ASU 2014-09 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. ASU 2014-09 was effective for annual and interim periods beginning after December 15, 2017.
The Company elected to adopt ASU 2014-09 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 “
Revenue Recognition
” in Note 2 and Note 3 for additional disclosures regarding the Company’s
revenue recognition policies and contracts with customers.
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. The Company
has not yet selected a transition method and is currently assessing the impact that 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, $41,090 and $6,642 as of December 31,
2016, June 30, 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 the principal activities of 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
June 30, 2018
|
|
|
|
Consumer
|
|
|
Industrial
|
|
Antifreeze
|
|
$
|
1,327,263
|
|
|
$
|
—
|
|
Ethylene Glycol
|
|
|
—
|
|
|
|
1,191,186
|
|
Additive
|
|
|
—
|
|
|
|
868,318
|
|
Windshield Washer fluid
|
|
|
75,342
|
|
|
|
—
|
|
Equipment
|
|
|
5,271
|
|
|
|
—
|
|
Total
|
|
$
|
1,407,876
|
|
|
$
|
2,059,504
|
|
Net Trade Revenue by Geographic Region
|
|
Three
Months
Ended
June 30,
2018
|
|
|
|
|
|
US
|
|
$
|
3,020,029
|
|
Canada
|
|
|
444,471
|
|
China
|
|
|
-
|
|
India
|
|
|
2,880
|
|
Total
|
|
$
|
3,467,380
|
|
Net Trade Revenue by Principal Product Group
|
|
Six Months Ended
June 30, 2018
|
|
|
|
Consumer
|
|
|
Industrial
|
|
Antifreeze
|
|
$
|
2,979,459
|
|
|
$
|
—
|
|
Ethylene Glycol
|
|
|
—
|
|
|
|
1,954,988
|
|
Additive
|
|
|
—
|
|
|
|
1,368,514
|
|
Windshield Washer fluid
|
|
|
157,516
|
|
|
|
—
|
|
Equipment
|
|
|
7,913
|
|
|
|
—
|
|
Total
|
|
$
|
3,144,888
|
|
|
$
|
3,323,502
|
|
Net Trade Revenue by Geographic Region
|
|
Six
Months
Ended
June 30,
2018
|
|
|
|
|
|
US
|
|
$
|
5,683,614
|
|
Canada
|
|
|
761,238
|
|
China
|
|
|
20,658
|
|
India
|
|
|
2,880
|
|
Total
|
|
$
|
6,468,390
|
|
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 June 30, 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:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
259,577
|
|
|
$
|
241,297
|
|
Work in process
|
|
|
21,726
|
|
|
|
69,991
|
|
Finished goods
|
|
|
266,575
|
|
|
|
252,845
|
|
Total inventories
|
|
$
|
547,878
|
|
|
$
|
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
|
|
|
June 30,
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Additions
|
|
|
Amortization
|
|
|
2018
|
|
Finite live intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer list and tradename
|
|
5 years
|
|
$
|
987,500
|
|
|
$
|
—
|
|
|
$
|
(325,027
|
)
|
|
$
|
662,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
5 years
|
|
|
1,199,000
|
|
|
|
—
|
|
|
|
(587,930
|
)
|
|
|
611,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
10 years
|
|
|
880,000
|
|
|
|
—
|
|
|
|
(132,000
|
)
|
|
|
748,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
3,066,500
|
|
|
$
|
—
|
|
|
$
|
(1,044,957
|
)
|
|
$
|
2,021,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Machinery and equipment
|
|
$
|
4,934,251
|
|
|
$
|
4,782,257
|
|
Leasehold improvements
|
|
|
304,311
|
|
|
|
275,973
|
|
Accumulated depreciation
|
|
|
(1,645,414
|
)
|
|
|
(1,335,615
|
)
|
|
|
|
3,593,148
|
|
|
|
3,722,615
|
|
Construction in process
|
|
|
284,457
|
|
|
|
175,335
|
|
Total property, plant and equipment, net
|
|
$
|
3,877,605
|
|
|
$
|
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 preferred stock, par value
$0.0001 per share, having preferences to be determined by the Board of Directors of the Company for dividends and liquidation
of the Company’s assets. Of the 40,000,000 shares of preferred stock the Company is authorized to issue by its articles
of incorporation, the Board of Directors has designated up to 3,000,000 shares as Series AA Preferred Stock.
As of June 30, 2018, the Company had no
shares of preferred stock outstanding.
Common Stock
As
of June 30, 2018, the Company has 1,332,749 shares of common stock, par value $0.0001 per share, outstanding. The Company’s
articles of incorporation authorize the Company to issue up to 300,000,000 shares of common stock. The holders are entitled to
one vote for each share on matters submitted to a vote of stockholders, and to share pro rata in all dividends payable on the
common stock after payment of dividends on any shares of preferred stock 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 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 2017 ESPP is terminated by the Board of Directors of the Company,
if earlier.
The
Company recorded stock-based compensation expense related to the 2017 ESPP of approximately $11,000 and $20,000 during the three
and six months ended June 30, 2018, respectively.
During the six months ended June 30,
2018, the Company issued the following shares of common stock for compensation:
On January 8, 2018, the Company issued
1,200 shares of common stock to one employee of the Company at a price of $7.50 per share for a value of approximately $9,000.
On March 31, 2018, the Company issued an
aggregate of 9,245 shares of common stock to six directors of the Company pursuant to the Company’s FY2017 Director Compensation
Plan at a price of $8.13 per share for a value of approximately $75,000.
On June 30, 2018, the Company expensed
the value of an aggregate of 11,766 shares of common stock to six directors of the Company pursuant to the Company’s FY2017
Director Compensation Plan at a price of $6.38 per share totaling approximately $75,000.
The
shares were issued in July 2018.
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
|
|
|
114,236
|
|
|
$
|
8.75
|
|
Restricted stock granted
|
|
|
15,640
|
|
|
|
4.55
|
|
Restricted stock vested
|
|
|
—
|
|
|
|
—
|
|
Restricted stock forfeited
|
|
|
(9,280
|
)
|
|
|
8.73
|
|
|
|
|
|
|
|
|
|
|
Unvested at June 30, 2018
|
|
|
120,596
|
|
|
$
|
8.34
|
|
During the three and six months ended June
30, 2018 and 2017, the Company recorded $35,570 and $62,344 and $13,545 and $47,671, respectively, related to the performance and
market based restricted stock awards.
Options
and Warrants
During
the six months ended June 30, 2018, the Company issued warrants to purchase an aggregate of 84,000 shares of common stock in connection
with the issuance of notes payable. (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 (American Society for Testing Materials) 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 Glyeco WV, 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.
Glyeco WV 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 Glyeco WV facility is approximately 1.5 million gallons per month of concentrated
ethylene glycol. The Glyeco WV 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 for reporting purposes.
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 June
30, 2018 is presented below:
|
|
Consumer
|
|
|
Industrial
|
|
|
Inter-
Segment
Eliminations
|
|
|
Corporate
|
|
|
Total
|
|
Sales, net
|
|
$
|
1,407,876
|
|
|
$
|
2,277,694
|
|
|
$
|
(218,190
|
)
|
|
$
|
—
|
|
|
$
|
3,467,380
|
|
Cost of goods sold
|
|
|
1,496,481
|
|
|
|
1,794,650
|
|
|
|
(218,190
|
)
|
|
|
—
|
|
|
|
3,072,941
|
|
Gross (loss) profit
|
|
|
(88,605
|
)
|
|
|
483,044
|
|
|
|
—
|
|
|
|
—
|
|
|
|
394,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
554,170
|
|
|
|
378,266
|
|
|
|
—
|
|
|
|
393,311
|
|
|
|
1,325,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from operations
|
|
|
(642,775
|
)
|
|
|
104,778
|
|
|
|
—
|
|
|
|
(393,311
|
)
|
|
|
(931,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(4,983
|
)
|
|
|
40,168
|
|
|
|
—
|
|
|
|
(257,411
|
)
|
|
|
(222,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before provision for income taxes
|
|
$
|
(647,758
|
)
|
|
$
|
144,946
|
|
|
$
|
—
|
|
|
$
|
(650,722
|
)
|
|
$
|
(1,153,534
|
)
|
Segment
information, and the reconciliation to the Company’s consolidated financial statements, for the six months ended June 30,
2018 is presented below:
|
|
Consumer
|
|
|
Industrial
|
|
|
Inter-
Segment
Eliminations
|
|
|
Corporate
|
|
|
Total
|
|
Sales, net
|
|
$
|
3,147,460
|
|
|
$
|
3,886,019
|
|
|
$
|
(565,089
|
)
|
|
$
|
—
|
|
|
$
|
6,468,390
|
|
Cost of goods sold
|
|
|
3,065,668
|
|
|
|
3,021,462
|
|
|
|
(565,089
|
)
|
|
|
—
|
|
|
|
5,522,041
|
|
Gross profit
|
|
|
81,792
|
|
|
|
864,557
|
|
|
|
—
|
|
|
|
—
|
|
|
|
946,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,267,706
|
|
|
|
770,700
|
|
|
|
—
|
|
|
|
930,522
|
|
|
|
2,968,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from operations
|
|
|
(1,185,914
|
)
|
|
|
93,857
|
|
|
|
—
|
|
|
|
(930,522
|
)
|
|
|
(2,022,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(10,411
|
)
|
|
|
(4,431
|
)
|
|
|
—
|
|
|
|
(316,434
|
)
|
|
|
(331,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before provision for income taxes
|
|
$
|
(1,196,325
|
)
|
|
$
|
89,426
|
|
|
$
|
—
|
|
|
$
|
(1,246,956
|
)
|
|
$
|
(2,353,855
|
)
|
NOTE 9
– Notes Payable
Notes payable consist of the following:
|
|
As of
June 30, 2018
|
|
|
As of
December 31, 2017
|
|
2018 Related Party 10% Unsecured
Notes, net of debt discount of $233,894
|
|
$
|
1,866,106
|
|
|
$
|
—
|
|
2017 Secured Note
|
|
|
93,324
|
|
|
|
104,990
|
|
2018 and 2017 Unsecured Note
|
|
|
80,593
|
|
|
|
188,060
|
|
2016 Secured Notes
|
|
|
266,361
|
|
|
|
308,115
|
|
2016 WEBA Seller Notes
|
|
|
2,650,000
|
|
|
|
2,650,000
|
|
Total notes payable
|
|
|
4,956,384
|
|
|
|
3,251,165
|
|
Less current portion
|
|
|
(2,057,802
|
)
|
|
|
(297,534
|
)
|
Long-term portion of notes payable
|
|
$
|
2,898,582
|
|
|
$
|
2,953,631
|
|
2018
Related Party 10% Unsecured Notes
On
March 29, 2018, the Company entered into a subscription agreement (the “10% Notes Subscription Agreement”) by and
between the Company and Wynnefield Partners Small Cap Value I, L.P. and Wynnefield Partners Small Cap Value, L.P., (“Wynnefield
Funds”) which are under the management of Wynnefield Capital, Inc. (“Wynnefield Capital”). The 10% Notes Subscription
Agreement was the first tranche of a private placement (“Private Placement”). Pursuant to the 10% Notes Subscription
Agreement, the Company offered and issued (i) $1,000,000 in principal amount of 10% Senior Unsecured Promissory Notes (the “10%
Notes” or “Institutional Notes”) and (ii) warrants (the “Warrants” or “Institutional Warrants”)
to purchase up to 40,000 shares of common stock of the Company. The Company received $1,000,000 in proceeds from the offering.
The first tranche of the 10% Notes is scheduled to mature on May 4, 2019. The 10% Notes bear interest at a rate of 10% per annum
due on the maturity date or as otherwise specified by the 10% Notes.
The Company closed a second tranche of the Private Placement
on April 10, 2018 with one of its directors, Charles F. Trapp , with respect to a 10% note with a principal amount of $50,000
and a warrant to purchase 2,000 shares of common stock. The second tranche of the Private Placement is scheduled to mature on
May 9, 2019.
The
Company closed a third tranche of the Private Placement on May 1, 2018 with Ian Rhodes, the Company’s Chief Executive Officer
and director, with respect to a 10% note with a principal amount of $50,000 and a warrant to purchase 2,000 shares of common stock.
The third tranche of the Private Placement is scheduled to mature on June 1, 2019.
The
Company closed a fourth tranche of the Private Placement on May 4, 2018 with the Wynnefield Funds managed by Wynnefield Capital,
for an aggregate principal amount of $1,000,000 of 10% notes and warrants to purchase an aggregate of 40,000 shares of common
stock. The fourth tranche of the Private Placement is scheduled to mature on May 6, 2019.
The
Company allocated the proceeds received from the Initial Notes and the Initial Warrants on a relative fair value basis at the
time of issuance. The total debt discount of $300,298, including the relative fair value of the warrants and the debt issuance
costs will be amortized over the life of the 10% Notes to interest expense using the effective interest method. Amortization expense
during the six months ended June 30, 2018 was $66,404.
We estimated the fair value of the
Initial Warrants on the issuance date using a BSM option pricing model with the following assumptions:
|
|
Initial
Warrants
|
|
Expected term
|
|
|
3 years
|
|
Volatility
|
|
|
143.81
|
%
|
Risk Free Rate
|
|
|
2.39
|
%
|
The proceeds of the Initial Notes were
allocated to the components as follows:
|
|
|
Proceeds
allocated at
issuance
date
|
|
Notes
|
|
|
$
|
1,820,946
|
|
Warrants
|
|
|
|
279,054
|
|
Total
|
|
|
$
|
2,100,000
|
|
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. The ending balance is included in accounts payable and accrued expenses in the accompanying
condensed consolidated balance sheet.
|
|
2018
|
|
|
2017
|
|
Beginning Balance as of January 1,
|
|
$
|
—
|
|
|
$
|
5,123
|
|
Monies owed to related party for services performed
|
|
|
42,889
|
|
|
|
61,818
|
|
Monies paid
|
|
|
(32,605
|
)
|
|
|
(66,941
|
)
|
Ending balance as of June 30,
|
|
$
|
10,284
|
|
|
$
|
-
|
|
10% Notes
In
addition, on March 29, 2018 and May 4, 2018, the Company entered into the Institutional Notes for an aggregate principal amount
of $2,000,000 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. The Company’s Chairman of the Board, Dwight
Mamanteo, is a portfolio manager of Wynnefield Capital. (See Note 9 for additional information).
The Company closed a subsequent
tranche of the Private Placement on April 10, 2018, with Trapp with respect to the Trapp Note with a principal amount of
$50,000 and the Trapp Warrant to purchase 2,000 shares of common stock. (See Note 9 for additional information).
The Company closed a subsequent
tranche of the Private Placement on May 1, 2018, with Rhodes with respect to the Rhodes Note with a principal amount of
$50,000 and the Rhodes Warrant to purchase 2,000 shares of common stock. (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.
During early August 2018, the Company
experienced an environmental issue related to the processing of feedstock at its Institute, WV facility, which resulted in
the Company shutting down production at the facility. The Company is working with regulatory agencies, its landlord and site
services provider, and feedstock suppliers to address this issue and currently expects production to resume in late August or
early September. At this time, the Company cannot estimate the cost, if any, related to the issue.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
The
following discussion and analysis of our financial condition and results of operations for the three and six months ended June
30, 2018 should be read together with our condensed consolidated financial statements and related notes included elsewhere in
this quarterly report. This discussion contains forward-looking statements and information relating to our business that reflect
our current views and assumptions with respect to future events and are subject to risks and uncertainties that may cause our
or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These forward-looking
statements speak only as of the date of this report. Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of activity, or achievements. Except as required by applicable
law, including the securities laws of the United States, we expressly disclaim any obligation or undertaking to disseminate any
update or revisions of any of the forward-looking statements to reflect any change in our expectations with regard thereto or
to conform these statements to actual results.
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.
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 American Society for Testing Materials (“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 Technology Corp. (“WEBA”)
and Glyeco West Virginia, 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. Glyeco WV operates a glycol re-distillation plant
in West Virginia that produces virgin quality glycol for sale to industrial customers worldwide. The Glyeco WV facility currently
produces antifreeze and industrial grade ethylene glycol. The production capacity of the Glyeco WV 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. We believe that our products are trusted in all vehicle makes and
models and regional fleet and by local and national auto retailers. Our QC&A Program is managed and supported by dedicated
process and chemical engineering staff and requires periodic onsite field audits, and ongoing training by our facility managing
partners.
Industrial Segment
Our Industrial segment consists of two
divisions: WEBA, our additives business and Glyeco WV, 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 all-organic(“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 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 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.
Glyeco
WV operates a glycol re-distillation plant in West Virginia, which produces virgin quality glycol for sale to industrial customers
worldwide. The Glyeco WV 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 Glyeco WV 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 as a low-cost manufacturer. To deliver value to all of our stockholders 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.
In addition, we focus on internal and external training programs and we are 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 BSM 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;
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●
|
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;
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●
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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
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●
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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. 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.
During early August 2018, the Company
experienced an environmental issue related to the processing of feedstock at its Institute, WV facility, which resulted in
the Company shutting down production at the facility. The Company is working with regulatory agencies, its landlord and site
services provider, and feedstock suppliers to address this issue and currently expects production to resume in late August or
early September. At this time, the Company cannot estimate the cost, if any, related to the issue.
Results
of Operations
Six
Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Net
Sales
For
the six months ended June 30, 2018, Net Sales were $6,468,390 compared to $5,208,418 for the six months ended June 30, 2017, representing
an increase of $1,259,972, or approximately 24%. The increase in Net Sales was due to an increase of $1,336,836 of sales related
to the Industrial Segment businesses compared to the same period in 2017. The WV facility in the Industrial Segment did not commence
operations until March of 2017, impacting sales in the six-months ended June 30, 2017. Net Sales, including intersegment sales
for the six months ended June 30, 2018, were $3,147,460 and $3,886,019 for the Consumer and Industrial segments, respectively.
Cost
of Goods Sold
For
the six months ended June 30, 2018, our Costs of Goods Sold was $5,522,041, compared to $4,591,829 for the six months ended June
30, 2017, representing an increase of $930,212, or approximately 20%. The increase in Cost of Goods Sold was primarily due
to costs associated with the increase in net sales. The Consumer segment also incurred increased Cost of Goods Sold due to increased
feedstock costs and one-time machine repair costs.
Gross
Profit (Loss)
For
the six months ended June 30, 2018, we realized a gross profit of $946,349, compared to a gross profit of $616,589 for the
six months ended June 30, 2017. Gross profit, including intersegment sales, for the six months ended June 30, 2018 was $81,792
and $864,557 for the Consumer and Industrial segments, respectively.
Our
gross profit margin for the six months ended June 30, 2018 was approximately 15%, compared to approximately 12% for the six months
ended June 30, 2017. Gross profit margin, including intersegment sales for the six months ended June 30, 2018, was 3% and 22%
for the Consumer and Industrial segments, respectively. Gross profit in the Consumer Segment was negatively impacted by decreased
sales and increased Cost of Goods Sold.
Operating
Expenses
For
the six months ended June 30, 2018, Operating Expenses increased to $2,968,928 from $2,206,169 for the six months ended June 30,
2017, representing an increase of $762,759, or approximately 35%. 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 six months ended June 30, 2018 was approximately 46%, compared to approximately 42% for the six months ended June 30, 2017.
Increased operating expenses were driven by legal and accounting fees and severance payments for employees terminates during the
period.
Consulting Fees consist of marketing and administrative fees incurred under consulting agreements. Consulting
Fees decreased to $74,144 for the six months ended June 30, 2018 from $218,962 for the six months ended June 30, 2017, representing
a decrease of $144,818 or 66%. The decrease in consulting fees were driven by bringing certain accounting and operations positions
in-house. Consulting fees during the six months ended June 2017 included significant expense for outsourced employee recruitment
and placement searches which did not occur in the six months ended June 2018.
Share-Based
Compensation consists of stock and options issued to employees in consideration for services provided to the Company. Share-Based
Compensation increased to $241,461 for the six months ended June 30, 2018 from $231,534 for the six months ended June 30, 2017,
representing an increase of $9,927, or 4%.
Salaries
and Wages consist of wages and the related taxes. Salaries and Wages increased to $1,216,413 for the six months ended
June 30, 2018 from $706,601 for the six months ended June 30, 2017, representing an increase of $509,812 or 72%. 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 six months ended June 30, 2018,
Legal and Professional Fees increased to $541,480 from $348,731 for the six months ended June 30, 2017, representing an increase
of $192,749. The increase is primarily related to work performed in connection with special projects, including tax, audit and
information technology needs.
General
and Administrative (“G&A”) Expenses consist of the general operational costs of our business. For the six months
ended June 30, 2018, G&A Expenses increased to $895,430 from $700,341 for the six months ended June 30, 2017, representing
an increase of $195,089, or approximately 28%. The increase is partially attributable to internal health and safety audits
at our consumer facilities.
Other
Expense
For
the six months ended June 30, 2018, Other Expense was $331,276 compared to $419,603 for the six months ended June 30, 2017, representing
a decrease of $88,327. 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
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
GAAP
net loss
|
|
$
|
(2,371,106
|
)
|
|
$
|
(2,011,136
|
)
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
331,276
|
|
|
|
419,603
|
|
Income
tax expense
|
|
|
17,251
|
|
|
|
1,953
|
|
Depreciation
and amortization
|
|
|
554,911
|
|
|
|
497,387
|
|
Share-based
compensation
|
|
|
241,461
|
|
|
|
231,534
|
|
Adjusted
EBITDA
|
|
$
|
(1,226,207
|
)
|
|
$
|
(860,659
|
)
|
Three
Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Net
Sales
For
the three months ended June 30, 2018, Net Sales were $3,467,380 compared to $2,918,097 for the three months ended June 30, 2017,
representing an increase of $549,283, or approximately 19%. The increase in Net Sales was due to an increase of $669,192 of sales
in the Industrial segment businesses compared to the same period in 2017. Increased Industrial Segment sales were driven by an
increase in the feedstock pipeline and subsequent finished product capacity at the WV facility. This increase was offset by a
decrease of $239,387 in Consumer segment sales. Reduction in sales staff headcount contributed to the decrease in Consumer Segment
sales compared with the three months ended June 2017. Net Sales, including intersegment sales for the three months ended June
30, 2018, were $1,407,876 and $2,277,694 for the Consumer and Industrial segments, respectively.
Cost
of Goods Sold
For
the three months ended June 30, 2018, our Costs of Goods Sold was $3,072,941, compared to $2,441,243 for the three months ended
June 30, 2017, representing an increase of $631,688, or approximately 26%. The increase in Cost of Goods Sold was primarily
due to costs associated with the increase in net sales.
Gross Profit
For
the three months ended June 30, 2018, we realized a gross profit of $394,439, compared to a gross profit of $476,854 for
the three months ended June 30, 2017. Gross profit, including intersegment sales, for the three months ended June 30, 2018 was
a gross loss of $(88,605) and gross profit of $483,044 for the Consumer and Industrial segments, respectively.
Our
gross profit margin for the three months ended June 30, 2018, was approximately 11%, compared to approximately 16% for the three
months ended June 30, 2017. Gross profit margin, including intersegment sales for the three months ended June 30, 2018, was a
gross loss of (6%) and a gross profit of 21% for the Consumer and Industrial segments, respectively. The gross loss margin for
the Consumer segment was negatively impacted by increased feedstock costs at our production facilities and compounded by the decreased
level of Consumer segment sales.
Operating
Expenses
For
the three months ended June 30, 2018, Operating Expenses increased to $1,325,747 from $1,154,498 for the three months ended June
30, 2017, representing an increase of $171,249, or approximately 15%. 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 months ended June 30, 2018 was approximately 38%, compared to approximately 40% for the three months ended
June 30, 2017. Increased operating expenses were driven by legal and accounts fees and severance payments for employees terminate
during the period.
Consulting
Fees consist of marketing and administrative fees incurred under consulting agreements. Consulting Fees decreased
to $25,553 for the three months ended June 30, 2018 from $165,536 for the three months ended June 30, 2017, representing a
decrease of $139,983 or 85%. Consulting fees during the three months ended June 2017 includes significant expense for
outsourced employee recruitment.
Share-Based
Compensation consists of stock and options issued to employees in consideration for services provided to the Company.
Share-Based Compensation increased to $121,573 for the three months ended June 30, 2018 from $94,548 for the three months
ended June 30, 2017, representing an increase of $27,025, or 29%. This was due to the increased equity granted during
this time period.
Salaries
and Wages consist of wages and the related taxes. Salaries and Wages increased to $554,182 for the three months ended
June 30, 2018 from $363,546 for the three months ended June 30, 2017, representing an increase of $190,636 or 52%. 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 months ended June 30, 2018,
Legal and Professional Fees increased to $211,041 from $187,740 for the three months ended June 30, 2017, representing an increase
of $23,301 or approximately 12%. The increase is primarily related to work performed in connection with special projects including
tax, audit and information technology needs.
General
and Administrative (“G&A”) Expenses consist of the general operational costs of our business. For the three months
ended June 30, 2018, G&A Expenses increased to $413,398 from $343,128 for the three months ended June 30, 2017, representing
an increase of $70,270, or approximately 20%. The increase is primarily due to expenses incurred for an internal health and
safety audit program and the associated travel.
Other Expense
For
the three months ended June 30, 2018, Other Expense was $222,226 compared to $223,385 for the three months ended June 30, 2017,
representing a decrease of $1,159. 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
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
GAAP net loss
|
|
$
|
(1,153,534
|
)
|
|
$
|
(902,226
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
222,226
|
|
|
|
223,385
|
|
Income tax expense
|
|
|
-
|
|
|
|
1,197
|
|
Depreciation and amortization
|
|
|
278,633
|
|
|
|
251,905
|
|
Share-based compensation
|
|
|
121,573
|
|
|
|
94,548
|
|
Adjusted EBITDA
|
|
$
|
(531,102
|
)
|
|
$
|
(331,191
|
)
|
Liquidity
and 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.
Cash
Flows
The
table below sets forth certain information about the Company’s cash flows for the six months ended June 30, 2018 and 2017:
|
|
For the Six Months Ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Net cash used in operating activities
|
|
$
|
(1,492,798
|
)
|
|
$
|
(1,546,034
|
)
|
Net cash used in investing activities
|
|
|
(133,546
|
)
|
|
|
(649,613
|
)
|
Net cash provided by financing activities
|
|
|
1,651,333
|
|
|
|
859,238
|
|
Net change in cash and restricted cash
|
|
|
24,989
|
|
|
|
(1,336,409
|
)
|
Cash and restricted cash - beginning of period
|
|
|
117,944
|
|
|
|
1,413,999
|
|
Cash and restricted cash - end of period
|
|
$
|
142,933
|
|
|
$
|
77,590
|
|
Cash
Used in Operating Activities
.
For the six months ended June 30, 2018 and 2017, net cash used in operating activities
was $1,492,798 and $1,546,034, respectively. The decrease in cash used in operating activities in the six months ended
June 30, 2018 is due to the significant period over period changes in accounts receivable, inventories and accounts payable and
accrued expenses.
Cash
Used in Investing Activities
.
For the six months ended June 30, 2018, the Company used $133,546 in cash for investing
activities, compared to $685,075 used in the six months ended June 30, 2017. These amounts were comprised of capital
expenditures for equipment.
Cash from Financing Activities
.
For the six months ended June 30, 2018,
net cash from financing activities was $1,651,333, which was comprised of $2,100,000 in gross proceeds from notes payable, offset
by payments made on other notes payable and capital lease obligations. For the six months ended June 30, 2017, $859,238 was provided
by financing activities.
Current
Assets and Liabilities
As
of June 30, 2018, we had $2,578,422 in current assets, including $142,933 in cash, $1,532,603 in accounts receivable and $547,878
in inventories. Cash increased from $111,302 as of December 31, 2017 to $142,933 as of June 30, 2018, primarily due to the timing
of payments.
As
of June 30, 2018, we had total current liabilities of $6,848,886, consisting primarily of accounts payable and accrued expenses
of $2,835,449, contingent acquisition consideration of $1,503,113, and the current portion of notes payable of $2,057,802. As
of June 30, 2018, we had total non-current liabilities of $3,871,155, consisting primarily of the non-current portion of our notes
payable and capital lease obligations.
Going
Concern
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. As of June 30, 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 continue to 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. 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. We also believe that we can raise
adequate funds through the issuance of equity or debt as necessary to continue to support our planned expansion. There can be
no assurances, however, that the Company will be able to achieve profitable operations or 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.
Off-balance Sheet Arrangements
None.