Item
1. Financial Statements
GLYECO,
INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
September
30, 2018 and December 31, 2017
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
230,771
|
|
|
$
|
111,302
|
|
Cash - restricted
|
|
|
—
|
|
|
|
6,642
|
|
Accounts receivable, net
|
|
|
1,043,465
|
|
|
|
1,546,367
|
|
Prepaid expenses
|
|
|
198,630
|
|
|
|
360,953
|
|
Inventories
|
|
|
546,543
|
|
|
|
564,133
|
|
Total current assets
|
|
|
2,019,409
|
|
|
|
2,589,397
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
3,951,291
|
|
|
|
3,897,950
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
403,502
|
|
|
|
436,450
|
|
Goodwill
|
|
|
3,822,583
|
|
|
|
3,822,583
|
|
Other intangible assets, net
|
|
|
1,898,987
|
|
|
|
2,266,654
|
|
Total other assets
|
|
|
6,125,072
|
|
|
|
6,525,687
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,095,772
|
|
|
$
|
13,013,034
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
3,439,931
|
|
|
$
|
2,921,406
|
|
Contingent acquisition consideration
|
|
|
1,503,113
|
|
|
|
1,509,755
|
|
Notes payable – current portion, net of debt discount
|
|
|
2,063,228
|
|
|
|
297,534
|
|
Capital lease obligations – current portion
|
|
|
480,217
|
|
|
|
377,220
|
|
Total current liabilities
|
|
|
7,486,489
|
|
|
|
5,105,915
|
|
|
|
|
|
|
|
|
|
|
Non-Current Liabilities
|
|
|
|
|
|
|
|
|
Notes payable – non-current portion
|
|
|
2,924,149
|
|
|
|
2,953,631
|
|
Capital lease obligations – non-current portion
|
|
|
878,667
|
|
|
|
1,085,985
|
|
Total non-current liabilities
|
|
|
3,802,816
|
|
|
|
4,039,616
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
11,289,305
|
|
|
|
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 September 30, 2018 and December 31, 2017, respectively
|
|
|
—
|
|
|
|
—
|
|
Common stock, par value $0.0001 per share: 300,000,000 shares authorized; 1,348,253 and 1,322,304 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
|
|
|
135
|
|
|
|
132
|
|
Additional paid-in capital
|
|
|
46,511,861
|
|
|
|
45,863,969
|
|
Accumulated deficit
|
|
|
(45,705,529
|
)
|
|
|
(41,996,598
|
)
|
Total stockholders’ equity
|
|
|
806,467
|
|
|
|
3,867,503
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
12,095,772
|
|
|
$
|
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 nine months ended September 30, 2018 and 2017
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
2,895,758
|
|
|
$
|
3,284,670
|
|
|
$
|
9,364,148
|
|
|
$
|
8,493,088
|
|
Cost of goods sold
|
|
|
2,732,548
|
|
|
|
2,876,577
|
|
|
|
8,254,589
|
|
|
|
7,468,406
|
|
Gross profit
|
|
|
163,210
|
|
|
|
408,093
|
|
|
|
1,109,559
|
|
|
|
1,024,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
|
18,367
|
|
|
|
149,233
|
|
|
|
92,511
|
|
|
|
368,195
|
|
Share-based compensation
|
|
|
107,054
|
|
|
|
129,707
|
|
|
|
348,515
|
|
|
|
361,241
|
|
Salaries and wages
|
|
|
513,821
|
|
|
|
539,651
|
|
|
|
1,730,234
|
|
|
|
1,246,252
|
|
Legal and professional
|
|
|
211,208
|
|
|
|
152,797
|
|
|
|
752,688
|
|
|
|
501,528
|
|
Tank remediation
|
|
|
—
|
|
|
|
780,000
|
|
|
|
—
|
|
|
|
780,000
|
|
General and administrative
|
|
|
417,237
|
|
|
|
411,966
|
|
|
|
1,312,667
|
|
|
|
1,112,307
|
|
Total operating expenses
|
|
|
1,267,687
|
|
|
|
2,163,354
|
|
|
|
4,236,615
|
|
|
|
4,369,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,104,477
|
)
|
|
|
(1,755,261
|
)
|
|
|
(3,127,056
|
)
|
|
|
(3,344,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt extinguishment
|
|
|
—
|
|
|
|
146,564
|
|
|
|
—
|
|
|
|
146,564
|
|
Interest expense
|
|
|
240,864
|
|
|
|
154,068
|
|
|
|
572,140
|
|
|
|
573,671
|
|
Total other expense, net
|
|
|
240,864
|
|
|
|
300,632
|
|
|
|
572,140
|
|
|
|
720,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for (benefit from) income taxes
|
|
|
(1,345,341
|
)
|
|
|
(2,055,893
|
)
|
|
|
(3,699,196
|
)
|
|
|
(4,065,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
|
(7,516
|
)
|
|
|
653
|
|
|
|
9,735
|
|
|
|
2,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,337,825
|
)
|
|
$
|
(2,056,546
|
)
|
|
$
|
(3,708,931
|
)
|
|
$
|
(4,067,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(1.00
|
)
|
|
$
|
(1.73
|
)
|
|
$
|
(2.78
|
)
|
|
$
|
(3.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic and diluted
|
|
|
1,343,029
|
|
|
|
1,189,818
|
|
|
|
1,333,131
|
|
|
|
1,077,673
|
|
See
accompanying notes to the condensed consolidated financial statements.
GLYECO,
INC. AND SUBSIDIARIES
Unaudited
Condensed Consolidated Statement of Stockholders’ Equity
For
the nine months ended September 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
|
|
|
22,171
|
|
|
|
3
|
|
|
|
348,512
|
|
|
|
—
|
|
|
|
348,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued under ESPP
|
|
|
3,778
|
|
|
|
—
|
|
|
|
20,326
|
|
|
|
—
|
|
|
|
20,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relative fair value of warrants issued in connection with notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
279,054
|
|
|
|
—
|
|
|
|
279,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,708,931
|
)
|
|
|
(3,708,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018
|
|
|
1,348,253
|
|
|
$
|
135
|
|
|
$
|
46,511,861
|
|
|
$
|
(45,705,529
|
)
|
|
$
|
806,467
|
|
See
accompanying notes to the condensed consolidated financial statements.
GLYECO,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
For
the nine months ended September 30, 2018 and 2017
|
|
Nine months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,708,931
|
)
|
|
$
|
(4,067,682
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
471,430
|
|
|
|
360,854
|
|
Amortization
|
|
|
367,667
|
|
|
|
395,663
|
|
Share-based compensation expense
|
|
|
348,515
|
|
|
|
361,241
|
|
Amortization of debt discount
|
|
|
146,040
|
|
|
|
205,180
|
|
Loss on debt extinguishment
|
|
|
—
|
|
|
|
146,564
|
|
Loss on disposal of equipment
|
|
|
—
|
|
|
|
28,446
|
|
(Recoveries on) provision for bad debt
|
|
|
(45,762
|
)
|
|
|
65,946
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
548,664
|
|
|
|
(530,655
|
)
|
Prepaid expenses
|
|
|
228,198
|
|
|
|
52,766
|
|
Inventories
|
|
|
17,590
|
|
|
|
(260,775
|
)
|
Deposits
|
|
|
32,948
|
|
|
|
(49,415
|
)
|
Accounts payable and accrued expenses
|
|
|
518,525
|
|
|
|
1,588,249
|
|
Due to related parties
|
|
|
—
|
|
|
|
(6,191
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,075,116
|
)
|
|
|
(1,709,809
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(240,908
|
)
|
|
|
(687,219
|
)
|
Cash paid for noncontrolling interest in RS&T
|
|
|
—
|
|
|
|
(129,500
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(240,908
|
)
|
|
|
(816,719
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Repayment of notes payable
|
|
|
(336,323
|
)
|
|
|
(1,125,860
|
)
|
Proceeds from sale-leaseback
|
|
|
—
|
|
|
|
1,700,000
|
|
Proceeds from exercise of warrants
|
|
|
—
|
|
|
|
337,500
|
|
Repayment of capital lease obligations
|
|
|
(313,584
|
)
|
|
|
(159,219
|
)
|
Payment of contingent acquisition consideration
|
|
|
(6,642
|
)
|
|
|
(54,117
|
)
|
Purchase of ESPP shares
|
|
|
20,326
|
|
|
|
—
|
|
Proceeds from sale of common stock, net
|
|
|
—
|
|
|
|
541,779
|
|
Proceeds from issuance of notes payable, net
|
|
|
2,065,074
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,428,851
|
|
|
|
1,240,083
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and restricted cash
|
|
|
112,827
|
|
|
|
(1,286,445
|
)
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash at beginning of the period
|
|
|
117,944
|
|
|
|
1,490,551
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash at end of the period
|
|
$
|
230,771
|
|
|
$
|
204,106
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest paid during period
|
|
$
|
298,908
|
|
|
$
|
46,549
|
|
Income taxes paid during period
|
|
$
|
19,716
|
|
|
$
|
2,606
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash and restricted cash at end of period:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
230,771
|
|
|
$
|
181,671
|
|
Restricted cash
|
|
|
—
|
|
|
|
22,435
|
|
|
|
$
|
230,771
|
|
|
$
|
204,106
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Note payable issued for insurance premium
|
|
$
|
65,875
|
|
|
$
|
—
|
|
Acquisition of equipment with notes payable
|
|
$
|
74,600
|
|
|
$
|
116,655
|
|
Notes payable and accrued interest converted into shares of common stock
|
|
$
|
—
|
|
|
$
|
1,845,103
|
|
Acquisition of equipment with capital lease obligations
|
|
$
|
209,263
|
|
|
$
|
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 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, which are held in six 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 Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the reverse stock split.
Going
Concern
The
condensed consolidated financial statements as of September 30, 2018 and December 31, 2017 and for the three and nine months ended
September 30, 2018 and 2017 have been prepared assuming that the Company will continue as a going concern. As of September 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 nine months ended September 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, filed with the United States Securities and
Exchange Commission (the “SEC”) on April 2, 2018.
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 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 nine months
ended September 30, 2018 are not necessarily indicative of the results that may be expected for the 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 September 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 Accounting Standards Update
(“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) 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 nine months ended September 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 $77,277 and $213,136 as of September
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 nine months ended September 30, 2018 and 2017 would be anti-dilutive.
At September 30, 2018, these potentially dilutive securities included warrants to purchase 104,957 shares of common stock and
stock options to purchase 27,101 shares of common stock for a total of 132,058 shares of common stock. At September 30, 2017,
these potentially dilutive securities included warrants to purchase 45,185 shares of common stock and stock options to purchase
38,981 shares of common stock for a total of 84,166 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, 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 Notes 2 and 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, $22,435 and $6,642 as of December 31, 2016, September 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 ASU 2014-09. 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
September 30, 2018
|
|
|
|
Consumer
|
|
|
Industrial
|
|
Antifreeze
|
|
$
|
1,322,456
|
|
|
$
|
—
|
|
Ethylene Glycol
|
|
|
—
|
|
|
|
887,092
|
|
Additive
|
|
|
—
|
|
|
|
624,069
|
|
Windshield Washer fluid
|
|
|
59,056
|
|
|
|
—
|
|
Equipment
|
|
|
3,085
|
|
|
|
—
|
|
Total
|
|
$
|
1,384,597
|
|
|
$
|
1,511,161
|
|
Net Trade Revenue by Geographic Region
|
|
Three
Months
Ended
September 30,
2018
|
|
|
|
|
|
US
|
|
$
|
2,639,937
|
|
Canada
|
|
|
244,782
|
|
Chile
|
|
|
5,413
|
|
India
|
|
|
5,626
|
|
Total
|
|
$
|
2,895,758
|
|
Net Trade Revenue by Principal Product Group
|
|
Nine Months Ended
September 30, 2018
|
|
|
|
Consumer
|
|
|
Industrial
|
|
Antifreeze
|
|
$
|
4,301,915
|
|
|
$
|
—
|
|
Ethylene Glycol
|
|
|
—
|
|
|
|
2,842,080
|
|
Additive
|
|
|
—
|
|
|
|
1,992,583
|
|
Windshield Washer fluid
|
|
|
216,572
|
|
|
|
—
|
|
Equipment
|
|
|
10,998
|
|
|
|
—
|
|
Total
|
|
$
|
4,529,485
|
|
|
$
|
4,834,663
|
|
Net Trade Revenue by Geographic Region
|
|
Nine Months
Ended
September 30,
2018
|
|
|
|
|
|
US
|
|
$
|
8,323,551
|
|
Canada
|
|
|
1,006,020
|
|
China
|
|
|
20,658
|
|
India
|
|
|
8,506
|
|
Chile
|
|
|
5,413
|
|
Total
|
|
$
|
9,364,148
|
|
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 September 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:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
284,611
|
|
|
$
|
241,297
|
|
Work in process
|
|
|
17,177
|
|
|
|
69,991
|
|
Finished goods
|
|
|
244,755
|
|
|
|
252,845
|
|
Total inventories
|
|
$
|
546,543
|
|
|
$
|
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
|
|
|
September
30,
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Additions
|
|
|
Amortization
|
|
|
2018
|
|
Finite live intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer list and tradename
|
|
5 years
|
|
$
|
987,500
|
|
|
$
|
—
|
|
|
$
|
(375,102
|
)
|
|
$
|
612,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
5 years
|
|
|
1,199,000
|
|
|
|
—
|
|
|
|
(638,411
|
)
|
|
|
560,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
10 years
|
|
|
880,000
|
|
|
|
—
|
|
|
|
(154,000
|
)
|
|
|
726,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible
assets
|
|
|
|
$
|
3,066,500
|
|
|
$
|
—
|
|
|
$
|
(1,167,513
|
)
|
|
$
|
1,898,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Machinery and equipment
|
|
$
|
5,030,339
|
|
|
$
|
4,782,257
|
|
Leasehold improvements
|
|
|
372,344
|
|
|
|
275,973
|
|
Accumulated depreciation
|
|
|
(1,806,686
|
)
|
|
|
(1,335,615
|
)
|
|
|
|
3,595,997
|
|
|
|
3,722,615
|
|
Construction in process
|
|
|
355,294
|
|
|
|
175,335
|
|
Total property, plant and equipment, net
|
|
$
|
3,951,291
|
|
|
$
|
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 September 30, 2018, the Company had no shares of preferred stock outstanding.
Common
Stock
As
of September 30, 2018, the Company had 1,348,253 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.
The
Company issued 3,778 shares of common stock to employees in connection with our employee stock purchase plan (see below) for total
payments of $20,326.
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 $1,000 and $10,000 during the three
and nine months ended September 30, 2018, respectively.
During
the nine months ended September 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.
On
September 30, 2018, the Company expensed the value of approximately $75,000 for 10,344 shares of common stock to six directors
of the Company pursuant to the Company’s FY2017 Director Compensation Plan at a price of $7.25 per share. The shares were
issued in October 2018.
During
the three months ended September 30, 2018, the Company issued an aggregate of 3,778 shares of common stock to employees of the
Company pursuant to the Company’s Equity Incentive Program at a price of $5.38 per share.
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 September 30, 2018
|
|
|
120,596
|
|
|
$
|
8.34
|
|
During
the three and nine months ended September 30, 2018 and 2017, the Company recorded $41,700 and $104,044 and $48,749 and $96,420,
respectively, related to the performance and market-based restricted stock awards.
Options
and Warrants
During
the nine months ended September 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 (benefit from) 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 September
30, 2018 is presented below:
|
|
Consumer
|
|
|
Industrial
|
|
|
Inter-
Segment
Eliminations
|
|
|
Corporate
|
|
|
Total
|
|
Sales, net
|
|
$
|
1,398,313
|
|
|
$
|
1,790,754
|
|
|
$
|
(293,309
|
)
|
|
$
|
—
|
|
|
$
|
2,895,758
|
|
Cost of goods sold
|
|
|
1,447,657
|
|
|
|
1,578,200
|
|
|
|
(293,309
|
)
|
|
|
—
|
|
|
|
2,732,548
|
|
Gross (loss) profit
|
|
|
(49,344
|
)
|
|
|
212,554
|
|
|
|
—
|
|
|
|
—
|
|
|
|
163,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
540,886
|
|
|
|
334,970
|
|
|
|
—
|
|
|
|
391,831
|
|
|
|
1,267,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(590,230
|
)
|
|
|
(122,416
|
)
|
|
|
—
|
|
|
|
(391,831
|
)
|
|
|
(1,104,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(5,051
|
)
|
|
|
(5,483
|
)
|
|
|
—
|
|
|
|
(230,330
|
)
|
|
|
(240,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for (benefit from) income taxes
|
|
$
|
(595,281
|
)
|
|
$
|
(127,899
|
)
|
|
$
|
—
|
|
|
$
|
(622,161
|
)
|
|
$
|
(1,345,341
|
)
|
Segment
information, and the reconciliation to the Company’s consolidated financial statements, for the nine months ended September
30, 2018 is presented below:
|
|
Consumer
|
|
|
Industrial
|
|
|
Inter-
Segment
Eliminations
|
|
|
Corporate
|
|
|
Total
|
|
Sales, net
|
|
$
|
4,545,773
|
|
|
$
|
5,676,773
|
|
|
$
|
(858,398
|
)
|
|
$
|
—
|
|
|
$
|
9,364,148
|
|
Cost of goods sold
|
|
|
4,513,325
|
|
|
|
4,599,662
|
|
|
|
(858,398
|
)
|
|
|
—
|
|
|
|
8,254,589
|
|
Gross profit
|
|
|
32,448
|
|
|
|
1,077,111
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,109,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,808,592
|
|
|
|
1,105,670
|
|
|
|
—
|
|
|
|
1,322,353
|
|
|
|
4,236,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,776,144
|
)
|
|
|
(28,559
|
)
|
|
|
—
|
|
|
|
(1,322,353
|
)
|
|
|
(3,127,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(15,462
|
)
|
|
|
(9,914
|
)
|
|
|
—
|
|
|
|
(546,764
|
)
|
|
|
(572,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
$
|
(1,791,606
|
)
|
|
$
|
(34,874
|
)
|
|
$
|
—
|
|
|
$
|
(1,869,117
|
)
|
|
$
|
(3,699,196
|
)
|
NOTE 9
– Notes Payable
Notes
payable consist of the following:
|
|
As of
September 30, 2018
|
|
|
As of
December 31, 2017
|
|
2018 Related Party 10% Unsecured Notes, net of debt discount of $167,940
|
|
$
|
1,932,058
|
|
|
$
|
—
|
|
2018 Secured Note
|
|
|
73,076
|
|
|
|
—
|
|
2017 Secured Note
|
|
|
87,491
|
|
|
|
104,990
|
|
2018 and 2017 Unsecured Note
|
|
|
—
|
|
|
|
188,060
|
|
2016 Secured Notes
|
|
|
244,752
|
|
|
|
308,115
|
|
2016 WEBA Seller Notes
|
|
|
2,650,000
|
|
|
|
2,650,000
|
|
Total notes payable
|
|
|
4,987,377
|
|
|
|
3,251,165
|
|
Less current portion
|
|
|
(2,063,228
|
)
|
|
|
(297,534
|
)
|
Long-term portion of notes payable
|
|
$
|
2,924,149
|
|
|
$
|
2,953,631
|
|
2018
Related Party 10% Unsecured Notes
On
April 6, 2018, the Company commenced a private placement (“Private Placement”) of 10% Senior Unsecured Promissory
Notes (the “10% Notes”) and (ii) warrants (the “Warrants”) to purchase up to 100,000 shares of common
stock of the Company, that were issued pursuant to subscription agreement. 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 Warrants have an exercise price per share of $0.05.
The
Company closed the first tranche of the Private Placement on April 6, 2018, with 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”), with respect to 10% Notes with an aggregate principal amount of $1,000,000 and Warrants
to purchase an aggregate of 40,000 shares of common stock. This tranche of the Private Placement is scheduled to mature on May
4, 2019.
The
Company closed the 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. This 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 former Chief Executive
Officer and a former director (see Item 5), with respect to a 10% Note with a principal amount of $50,000 and a Warrant to purchase
2,000 shares of common stock. This 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. This tranche of the Private Placement is scheduled to mature on May 6, 2019.
The
Company allocated the proceeds received from the 10% Notes and the Warrants on a relative fair value basis at the time of issuance.
The total debt discount of $313,980, 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 nine months
ended September 30, 2018 was $146,040.
We
estimated the fair value of the Warrants on the issuance date using a BSM option pricing model with the following assumptions:
|
|
Warrants
|
|
Expected term
|
|
|
3 years
|
|
Volatility
|
|
|
143.81
|
%
|
Risk Free Rate
|
|
|
2.39
|
%
|
The
proceeds of the 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
Secured Note
In
September 2018, the Company entered into a secured promissory note with MHC Financial (the “2018 Secured Note”). The
2018 Secured Note is collateralized by a vehicle. The key terms of the 2018 Secured Note includes: (i) an original principal balance
of $74,600, (ii) interest rate of 8.74%, and (iii) term of 3.5 years.
2018
and 2017 Unsecured Note
In October
2017, and later amended in January 2018, the Company issued 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. This loan has been
paid in full.
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
|
|
|
70,147
|
|
|
|
94,441
|
|
Monies paid
|
|
|
(70,147
|
)
|
|
|
(99,564
|
)
|
Ending balance as of September 30,
|
|
$
|
—
|
|
|
$
|
—
|
|
10%
Notes
On
April 6, 2018 and May 4, 2018, the Company issued the 10% 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 Charles 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. (See Note 9 for additional information.)
The
Company closed a subsequent tranche of the Private Placement on May 1, 2018, with Ian Rhodes with respect to a 10% Note with a
principal amount of $50,000 and a 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.
Since the Company’s Quarterly Report on Form 10-Q that the Company filed with the SEC on August
14, 2018 (the “Prior 10-Q”), there have been no material developments with respect to the civil action filed by PSP
Falcon Industries, LLC against the Company in the Ocean County Superior Court located in Toms River, New Jersey. For additional
information regarding the foregoing action, please see the Prior 10-Q.
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 was back in operation before the
last week of August. The WVDEP and USEPA investigated the incident, and determined the Company had done everything correctly,
and no citations or fines were issued. The feedstock suppliers involved have made concessions to compensate us for our related
costs.
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 nine months ended September
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 Black-Sholes-Merton option-pricing model to estimate the value of options and warrants issued to employees and consultants
as compensation for services rendered to the Company. This model uses estimates of volatility, risk free interest rate and the
expected term of the options or warrants, along with the current market price of the underlying stock, to estimate the value of
the options and warrants on the date of grant. In addition, the calculation of compensation costs requires that the Company estimate
the number of awards that will be forfeited during the vesting period. The fair value of the stock-based awards is amortized over
the vesting period of the awards. For stock-based awards that vest based on performance conditions, expense is recognized when
it is probable that the conditions will be met. For stock-based awards that vest based on market conditions, expense is recognized
on the accelerated attribution method over the derived service period.
Assumptions
used in the calculation were determined as follows:
●
|
Expected term is
generally determined using the weighted average of the contractual term and vesting period of the award;
|
●
|
Expected volatility
of award grants made under the Company’s plans is measured using the historical daily changes in the market price of
the Company, over the expected term of the award;
|
●
|
Risk-free interest
rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected
term of the awards; and
|
●
|
Forfeitures are
based on the history of cancellations of awards granted by the Company and management’s analysis of potential forfeitures.
|
Contingencies
Litigation
The
Company may be party to legal proceedings in the ordinary course of business from time to time. Litigation is subject to inherent
uncertainties, and an adverse result in a legal proceeding could arise that may harm our business. Below is an overview of a pending
legal proceeding in which an adverse result could have a material adverse effect on our business and results of operations.
Since the Company’s Quarterly Report on Form 10-Q that the Company filed with the SEC on August
14, 2018 (the “Prior 10-Q”), there have been no material developments with respect to the civil action filed by PSP
Falcon Industries, LLC against the Company in the Ocean County Superior Court located in Toms River, New Jersey. For additional
information regarding the foregoing action, please see the Prior 10-Q.
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 was back in operation before the
last week of August. The WVDEP and USEPA investigated the incident, and determined the Company had done everything correctly,
and no citations or fines were issued. The feedstock suppliers involved have made concessions to compensate us for our related
costs.
Results
of Operations
Nine
Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Net
Sales
For
the nine months ended September 30, 2018, Net Sales were $9,364,148 compared to $8,493,088 for the nine months ended September
30, 2017, representing an increase of $871,060, or approximately 10%. The increase in Net Sales was due to an increase of $1,050,739
of sales related to the Industrial Segment businesses during the nine months ended September 30, 2018, compared to nine months
ended September 30, 2017. The WV facility in the Industrial Segment did not commence operations until March 2017, impacting sales
in the nine months ended September 30, 2017. Net Sales, including intersegment sales for the nine months ended September 30, 2018,
were $4,545,773 and $5,676,773 for the Consumer and Industrial segments, respectively.
Cost
of Goods Sold
For
the nine months ended September 30, 2018, our Costs of Goods Sold was $8,254,589, compared to $7,468,406 for the nine months ended
September 30, 2017, representing an increase of $786,183, or approximately 11%. The increase in Cost of Goods Sold was primarily
due to costs associated with the increase in net sales. Cost of Goods Sold in the Consumer segment were impacted for the nine
months ended September 30, 2018 by increased feedstock cost, increased bulk transportation rates and one-time machine repair costs
compared with nine months ended September 30, 2017.
Gross
Profit
For
the nine months ended September 30, 2018, we realized a gross profit of $1,109,559, compared to a gross profit of $1,024,682
for the nine months ended September 30, 2017. Gross profit, including intersegment sales, for the nine months ended September
30, 2018 was $32,448 and $1,077,111 for the Consumer and Industrial segments, respectively.
Our
gross profit margin for the nine months ended September 30, 2018 was approximately 12%, compared to approximately 12% for the
nine months ended September 30, 2017. Gross profit margin, including intersegment sales for the nine months ended September 30,
2018, was 1% and 19% for the Consumer and Industrial segments, respectively. Gross profit margin in the Consumer Segment was negatively
impacted by decreased sales and increased Cost of Goods Sold while gross profit margin in the Industrial Segment grew due to increased
capacity utilization at the WV facility.
Operating
Expenses
For
the nine months ended September 30, 2018, Operating Expenses decreased to $4,236,615 from $4,369,523 for the nine months ended
September 30, 2017, representing a decrease of $132,908, or approximately 3%. 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 nine months ended September 30, 2018 was approximately 45%, compared to approximately 51% for the nine months ended
September 30, 2017. The decrease in expense ratio from the nine months ended September 30, 2018, as compared to the nine months
ended September 30, 2017, was driven by the tank remediation expense of $780,000 during the quarter ended September 30, 2017.
Consulting
Fees consist of marketing and administrative fees incurred under consulting agreements. Consulting Fees decreased to
$92,511 for the nine months ended September 30, 2018 from $368,195 for the nine months ended September 30, 2017, representing
a decrease of $275,684 or 75%. The decrease in consulting fees was driven by bringing certain accounting and operations positions
in-house. Consulting fees during the nine months ended September 30, 2017 included significant expense for outsourced employee
recruitment and placement searches which did not occur in the nine months ended September 30, 2018. We also saw a reduction in
technology consulting expenses as the ERP implementation nears completion.
Share-Based
Compensation consists of stock and options issued to employees in consideration for services provided to the Company. Share-Based
Compensation decreased to $348,515 for the nine months ended September 30, 2018 from $361,241 for the nine months ended September
30, 2017, representing a decrease of $12,726, or 4%.
Salaries
and Wages consist of wages and the related taxes. Salaries and Wages increased to $1,730,234 for the nine months ended
September 30, 2018 from $1,246,252 for the nine months ended September 30, 2017, representing an increase of $483,982 or 39%. The
increase was driven by the addition of employees in such areas as marketing, sales and finance in late 2017. Salaries and Wages
expense has decreased over the course of 2018 with corporate headcount reductions in the second quarter of 2018.
Legal
and Professional Fees consist of legal, accounting, tax and audit services. For the nine months ended September 30,
2018, Legal and Professional Fees increased to $752,688 from $501,528 for the nine months ended September 30, 2017, representing
an increase of $251,160. 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 nine months
ended September 30, 2018, G&A Expenses increased to $1,312,667 from $1,112,307 for the nine months ended September 30, 2018,
representing an increase of $200,360, or approximately 18%. The increase is partially attributable to internal health and
safety audits at our consumer facilities as well as onsite visits by corporate personnel to manage miscellaneous facility repairs
and improvements throughout the period.
Tank
remediation expense consists of an accrual from the compliance with West Virginia regulations enacted in 2017, where the Company
elected to accrue $780,000 for tank remediation during the nine months ended September 30, 2017.
Other
Expense
For
the nine months ended September 30, 2018, Other Expense was $572,140 compared to $720,235 for the nine months ended September
30, 2017, representing a decrease of $148,095. Other Expense consists of Interest Expense. For the nine months ended September
30, 2017, included was accelerated interest expense as a result of repayment and conversion of notes payable.
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
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
GAAP net loss
|
|
$
|
(3,708,931
|
)
|
|
$
|
(4,067,682
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
572,140
|
|
|
|
573,671
|
|
Loss on debt extinguishment
|
|
|
—
|
|
|
|
146,564
|
|
Tank Remediation
|
|
|
—
|
|
|
|
780,000
|
|
Income tax expense
|
|
|
9,735
|
|
|
|
2,606
|
|
Depreciation and amortization
|
|
|
839,097
|
|
|
|
756,517
|
|
Share-based compensation
|
|
|
348,515
|
|
|
|
361,241
|
|
Adjusted EBITDA
|
|
$
|
(1,939,444
|
)
|
|
$
|
(1,447,083
|
)
|
Three
Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Net
Sales
For
the three months ended September 30, 2018, Net Sales were $2,895,758 compared to $3,284,670 for the three months ended September
30, 2017, representing a decrease of $388,912, or approximately 12%. The 2017 revenue comparison for this period included a one-time
EG toll-processing arrangement for $588,385. Excluding this item, sales in the industrial segment increased, driven by a moderate
increase in incoming feedstock to the WV facility. Consumer segment sales decreased by $57,536 compared to the three months ended
September 30, 2017. The decrease was driven by a reduction in sales staff headcount and a shift in focus from adding new retail
customers to pursuit of larger bulk accounts that require longer sales lead time. Net Sales, including intersegment sales for
the three months ended September 30, 2018, were $1,398,313 and $1,790,754 for the Consumer and Industrial segments, respectively.
Cost
of Goods Sold
For
the three months ended September 30, 2018, our Costs of Goods Sold was $2,732,548, compared to $2,876,577 for the three months
ended September 30, 2017, representing a decrease of $144,029, or approximately 5%. The decrease in Cost of Goods Sold was
primarily due to the decrease in net sales over the same period. Proportionally our Cost of Goods Sold increased in the Consumer
Segment driven by increased feedstock cost and bulk shipping rates.
Gross
Profit (Loss)
For
the three months ended September 30, 2018, we realized a gross profit of $163,210, compared to a gross profit of $408,093
for the three months ended September 30, 2017. Gross profit, including intersegment sales, for the three months ended September
30, 2018 was a gross loss of $(49,344) and gross profit of $212,554 for the Consumer and Industrial segments, respectively.
Our
gross profit margin for the three months ended September 30, 2018, was approximately 6%, compared to approximately 12% for the
three months ended September 30, 2017. Gross profit margin, including intersegment sales for the three months ended September
30, 2018, was a gross loss of (4%) and a gross profit of 12% for the Consumer and Industrial segments, respectively. The gross
loss for the Consumer segment was driven by increased feedstock costs at our production facilities and compounded by the decreased
level of Consumer segment sales. Although down from first quarter 2018, our Consumer segment facility and truck repair costs remain
elevated compared with the three months ended September 30, 2017. Gross margin in the Industrial Segment remains flat to prior
year at 12%.
Operating
Expenses
For
the three months ended September 30, 2018, Operating Expenses decreased to $1,267,687 from $2,163,354 for the three months ended
September 30, 2017, representing a decrease of $895,667, or approximately 41%. 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 September 30, 2018 was approximately 44%, compared to approximately 66% for the three
months ended September 30, 2017. The main factor driving down Operating Expenses was driven by the tank remediation expense of
$780,000 during the quarter ended September 30, 2017.
Consulting
Fees consist of marketing and administrative fees incurred under consulting agreements. Consulting Fees decreased to
$18,367 for the three months ended September 30, 2018 from $149,233 for the three months ended September 30, 2017, representing
a decrease of $130,866 or 88%. Consulting fees during the three months ended September 30, 2017 includes significant expense for
outsourced employee recruitment, a full-time accounting consultant and branding consultants engaged during the quarter. All three
of these expenses were discontinued in the first quarter of 2018.
Share-Based
Compensation consists of stock and options issued to employees in consideration for services provided to the Company. Share-Based
Compensation decreased to $107,054 for the three months ended September 30, 2018 from $129,707 for the three months ended September
30, 2017, representing a decrease of $22,653, or 7%.
Salaries
and Wages consist of wages and the related taxes. Salaries and Wages decreased to $513,821 for the three months ended
September 30, 2018 from $539,651 for the three months ended September 30, 2017, representing a decrease of $25,830 or 5%. This
decrease is due to corporate headcount reductions and expiration of severance agreements in the second quarter of 2018.
Legal
and Professional Fees consist of legal, accounting, tax and audit services. For the three months ended September 30,
2018, Legal and Professional Fees increased to $211,208 from $152,797 for the three months ended September 30, 2017, representing
an increase of $58,411 or approximately 38%. 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 September 30, 2018, G&A Expenses increased to $417,237 from $411,966 for the three months ended September 30, 2017,
representing an increase of $5,271, or approximately 1%. G&A expenses stabilized during the quarter after two quarters
in a row of increased health and safety audit expenses at the facilities. We have reduced the Consumer segment sales staff and
associated travel expenses which has driven more consistent quarterly G&A expense.
Tank
remediation expense consists of an accrual from the compliance with West Virginia regulations enacted in 2017, where the Company
elected to accrue $780,000 for tank remediation during the nine months ended September 30, 2017.
Other
Expense
For
the three months ended September 30, 2018, Other Expense was $240,864 compared to $300,632 for the three months ended September
30, 2017, representing a decrease of $59,768 or approximately 20%. Other Expense consists of Interest Expense in 2018. For the
three months ended September 30, 2017, included was accelerated interest expense as a result of repayment and conversion of notes
payable.
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
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
GAAP net loss
|
|
$
|
(1,337,825
|
)
|
|
$
|
(2,056,546
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
240,864
|
|
|
|
154,068
|
|
Loss on debt extinguishment
|
|
|
—
|
|
|
|
146,564
|
|
Tank remediation
|
|
|
—
|
|
|
|
780,000
|
|
Income tax (benefit) expense
|
|
|
(7,516
|
)
|
|
|
653
|
|
Depreciation and amortization
|
|
|
284,186
|
|
|
|
259,130
|
|
Share-based compensation
|
|
|
107,054
|
|
|
|
129,707
|
|
Adjusted EBITDA
|
|
$
|
(713,237
|
)
|
|
$
|
(586,424
|
)
|
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 nine months ended September 30, 2018 and
2017:
|
|
For the Nine
Months Ended
|
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
Net cash used in operating activities
|
|
$
|
(1,075,116
|
)
|
|
$
|
(1,709,809
|
)
|
Net cash used in investing activities
|
|
|
(240,908
|
)
|
|
|
(816,719
|
)
|
Net cash provided by financing activities
|
|
|
1,428,851
|
|
|
|
1,240,083
|
|
Net change in cash and restricted cash
|
|
|
112,827
|
|
|
|
(1,286,445
|
)
|
Cash and restricted cash - beginning of period
|
|
|
117,944
|
|
|
|
1,490,551
|
|
Cash and restricted cash - end of period
|
|
$
|
230,771
|
|
|
$
|
204,106
|
|
Cash
Used in Operating Activities
.
For the nine months ended September 30, 2018 and 2017, net cash used in operating
activities was $1,075,116 and $1,709,809, respectively. The decrease in cash used in operating activities in the nine
months ended September 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 nine months ended September 30, 2018, the Company used $240,908 in cash for
investing activities, compared to $816,719 used in the nine months ended September 30, 2017. These amounts were comprised
of capital expenditures for equipment.
Cash
from Financing Activities
.
For the nine months ended September 30, 2018, net cash provided by financing
activities was $1,428,851, 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 nine months ended September 30, 2017, $1,240,083 was provided by
financing activities.
Current
Assets and Liabilities
As
of September 30, 2018, we had $2,019,409 in current assets, including $230,771 in cash, $1,043,465 in accounts receivable and
$546,543 in inventories. Cash increased from $111,302 as of December 31, 2017 to $230,771 as of September 30, 2018, primarily
due to the timing of payments.
As
of September 30, 2018, we had total current liabilities of $7,486,489, consisting primarily of accounts payable and accrued expenses
of $3,439,931, contingent acquisition consideration of $1,503,113, and the current portion of notes payable of $2,063,228. As
of September 30, 2018, we had total non-current liabilities of $3,802,816, consisting primarily of the non-current portion of
our notes payable and capital lease obligations.
Going
Concern
In
its 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 September 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.