See accompanying notes to the condensed
consolidated financial statements.
See accompanying notes to the condensed
consolidated financial statements
Notes to Condensed Consolidated Financial
Statements (Unaudited)
NOTE 1 – Organization and
Nature of Business
GlyEco, Inc. (the “Company”,
“we”, or “our”)
is a chemical company focused on technology
development and manufacturing of coolants, additives, and related performance fluids. We serve and support the automotive, heavy-duty,
and industrial markets with an unwavering commitment to customer service and quality. GlyEco Inc., located in Institute, West Virginia,
is a vertically integrated company which manufactures ethylene glycol, additives, and finished fluids. Maintaining control over
all core ingredients of its glycol-based performance fluids, and directly managing all aspects of the manufacturing process allows
GlyEco Inc. to offer our customers the highest value with competitive costs.
The Company was formed in the State of
Nevada on October 21, 2011.
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 named (“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 and fourth quarter of fiscal year 2018, the Company
purchased an additional 2.9% and 0.20%, respectively, of RS&T (for a total percentage ownership of 100% of RS&T).
On January 11, 2019, the Company completed
the sale (the “Asset Sale”) of the route antifreeze collection and re-distillation segment (the “Consumer Segment”)
to Heritage-Crystal Clean, LLC (the “Purchaser”) pursuant to the terms of an asset purchase agreement (see Note 9).
We are currently comprised of the parent
corporation GlyEco, Inc., and our subsidiaries WEBA, and Glyeco WV.
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 March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018, have been prepared assuming
that the Company will continue as a going concern. As of March 31, 2019, the Company has yet to achieve profitable operations and
is dependent on its ability to raise capital from stockholders or other sources to sustain operations. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. Ultimately, we plan to achieve profitable operations through
the implementation of operating efficiencies at our facilities and increased revenue through the offering of additional products
and the expansion of our geographic footprint through acquisitions, broader distribution from our current facilities and/or the
opening of additional facilities. The condensed consolidated financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
NOTE 2 – Basis of Presentation and Summary of Significant
Accounting Policies
The following represents an update for
the three months ended March 31, 2019 to the significant accounting policies described in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2018, filed with the United States Securities and Exchange Commission (the “SEC”)
on April 1, 2019.
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 of America (“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 three months ended March 31, 2019 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2019.
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, 2018, 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.
|
There were no noncontrolling interests as of March 31, 2019
and December 31, 2018 and noncontrolling interests were not significant for the three months ended March 31, 2018.
Operating Segments
As a result of the sale of the Consumer
Segment in January 2019, the Company operates as one segment.
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 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 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 Company satisfies a performance obligation.
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.
Costs and Expenses
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 months ended March 31, 2019 and 2018. 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 $19,480 and $6,427 as of March 31, 2019 and
December 31, 2018, 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 or related to discontinued
operations would be presented separately in the appropriate asset and liability sections of the condensed consolidated
balance sheets, 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 the three months ended March 31, 2019 and 2018 would be anti-dilutive. At March 31, 2019, these potentially dilutive
securities included warrants to purchase 104,957 shares of common stock and stock options to purchase 25,941 shares of common stock
for a total of 130,898 shares of common stock. At March 31, 2018, these potentially dilutive securities included warrants
to purchase 79,785 shares of common stock and stock options to purchase 27,101 shares of common stock for a total of 106,886 shares
of common stock.
Share-based Compensation
All share-based payments including grants
of 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 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.
Discontinued Operations
Our Consumer Segment, which was sold
in January 2019, was classified as discontinued operations in the condensed consolidated balance sheets at March 31, 2019 and
December 31, 2018 and in the condensed consolidated statements of operations, in accordance with ASC 205-20
“Presentation of Financial Statements”, ASC 360-10 “Property Plant and Equipment” and ASC 350-20
“Intangibles-Goodwill and Other Goodwill”. Cash flows and operations that relate to the Consumer Segment are
shown separately from continuing operations. Assets and liabilities classified as discontinued operations are measured at the
lower of carrying amount and fair value less costs to sell. Assets, liabilities and results of operations related to the
Consumer Segment in the prior year have been reclassified as discontinued operations.
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 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. The Company has adopted ASU 2016-02 using the modified retrospective approach.
This ASU also requires disclosures designed to give financial statement users information on the amount, timing and uncertainty
of cash flows. See Note 8, Leases, for further information regarding our lease accounting policies.
NOTE 3 – Revenue
Disaggregation of Revenue
The Company disaggregates its revenue from
contracts with customers by principal product group and geographic region, as the Company believes it best depicts the nature,
amount, timing and uncertainty of its revenue and cash flows. See details in the tables below:
Net Trade Revenue by Principal Product Group
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Antifreeze
|
|
$
|
119,736
|
|
|
$
|
—
|
|
Ethylene Glycol
|
|
|
919,507
|
|
|
|
763,802
|
|
Additive
|
|
|
689,908
|
|
|
|
497,623
|
|
Total
|
|
$
|
1,729,151
|
|
|
$
|
1,261,425
|
|
Net Trade Revenue by Geographic Region
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
US
|
|
$
|
1,218,067
|
|
|
$
|
917,380
|
|
Canada
|
|
|
502,785
|
|
|
|
316,099
|
|
China
|
|
|
—
|
|
|
|
20,658
|
|
Mexico
|
|
|
—
|
|
|
|
7,288
|
|
Chile
|
|
|
8,299
|
|
|
|
—
|
|
Total
|
|
$
|
1,729,151
|
|
|
$
|
1,261,425
|
|
Contract Balances
Accounts receivable are recorded when the
right to consideration becomes unconditional. The Company does not have any contract assets or liabilities as of March 31, 2019
and December 31, 2018. The Company expenses commissions when incurred as they would be amortized over one year or less.
Contract liabilities consist of deposits
made by customers for goods that have not yet been delivered. Once delivery is made the liability is reduced and the revenue is
recognized. As of March 31, 2019 and December 31, 2018, the Company had $107,650 and $274,103, respectively, in customer deposits.
The Company recognized $229,044 in revenue during the three months ended March 31, 2019, related to customer deposits at December
31, 2018.
NOTE 4 – Inventories
The Company’s total inventories were
as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
186,495
|
|
|
$
|
157,031
|
|
Finished goods
|
|
|
31,794
|
|
|
|
81,864
|
|
Total inventories
|
|
$
|
218,289
|
|
|
$
|
238,895
|
|
NOTE 5 – Goodwill and
Other Intangible Assets
The
components of goodwill and other intangible assets are as follows:
|
|
|
|
Gross
Balance at
|
|
|
|
|
|
|
|
|
Net
Balance at
|
|
|
|
Estimated
|
|
March 31,
|
|
|
|
|
|
Accumulated
|
|
|
March 31,
|
|
|
|
Useful Life
|
|
2019
|
|
|
Additions
|
|
|
Amortization
|
|
|
2019
|
|
Finite live intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer list and tradename
|
|
5 years
|
|
$
|
881,000
|
|
|
$
|
—
|
|
|
$
|
(395,400
|
)
|
|
$
|
485,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
5 years
|
|
|
814,000
|
|
|
|
—
|
|
|
|
(371,224
|
)
|
|
|
442,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
10 years
|
|
|
880,000
|
|
|
|
—
|
|
|
|
(198,000
|
)
|
|
|
682,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
2,575,000
|
|
|
$
|
—
|
|
|
$
|
(964,624
|
)
|
|
$
|
1,610,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Indefinite
|
|
$
|
2,937,288
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,937,288
|
|
We compute amortization using the straight-line
method over the estimated useful lives of the intangible assets. The Company has no indefinite-lived intangible assets other than
goodwill.
NOTE 6 – Property, Plant and Equipment
The Company’s property, plant and
equipment were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Machinery and equipment
|
|
$
|
2,734,810
|
|
|
$
|
2,694,528
|
|
Leasehold improvements
|
|
|
275,985
|
|
|
|
305,772
|
|
Accumulated depreciation
|
|
|
(590,895
|
)
|
|
|
(522,160
|
)
|
|
|
|
2,419,900
|
|
|
|
2,478,140
|
|
Construction in process
|
|
|
81,000
|
|
|
|
84,478
|
|
Total property, plant and equipment, net
|
|
$
|
2,500,900
|
|
|
|
2,562,618
|
|
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 March 31, 2019, the Company had no
shares of preferred stock outstanding.
Common Stock
As of March 31, 2019, the Company had 1,383,731
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 6,354 shares of common
stock to employees in connection with our employee stock purchase plan (see below) for total payments of $6,749.
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 share-based
compensation expense related to the 2017 ESPP during the three months ended March 31, 2019 was insignificant.
During the three months ended March
31, 2019, the Company issued the following shares of common stock for compensation:
On January 2, 2019, the Company issued
an aggregate of 18,780 shares of common stock to six directors of the Company pursuant to the Company’s FY2017 Director Compensation
Plan at a price of $3.99 per share for a value of approximately $75,000 which was expensed during the year ended December 31, 2018.
On March 31, 2019, the Company expensed
the value of an aggregate of 64,680 shares of common stock to six directors of the Company pursuant to the Company’s FY2017
Director Compensation Plan at a price of $1.16 per share totaling approximately $75,000. The shares were issued in April 2019.
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, 2019
|
|
|
120,596
|
|
|
$
|
8.34
|
|
Restricted stock granted
|
|
|
—
|
|
|
|
—
|
|
Restricted stock vested
|
|
|
—
|
|
|
|
—
|
|
Restricted stock forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2019
|
|
|
120,596
|
|
|
$
|
8.34
|
|
During the three months ended March 31,
2019 and 2018, the Company recorded $35,032 and $26,774 respectively, related to the performance and market-based restricted stock
awards.
Options and Warrants
During the three months ended March 31,
2019, the Company did not issue any options or warrants.
NOTE 8
– Leases
On January 1, 2019, we adopted ASC
842, “Leases” which, among other changes, requires us to record liabilities classified as operating leases on our condensed
consolidated balance sheets along with a corresponding right-of-use asset. Results for reporting periods beginning after January 1,
2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with
our historic accounting under Topic 840. We elected the package of practical expedients available for expired or existing contracts,
which allowed us to carryforward our historical assessments of whether contracts are or contain leases, lease classification tests
and treatment of initial direct costs. We also elected to not separate lease components from non-lease components for all fixed
payments, and we exclude variable lease payments in the measurement of right-of-use assets and lease liabilities.
Upon adoption of ASC 842, we recorded a
$475,000 increase in other assets, a $112,000 decrease to other current liabilities, and a $587,000 increase to operating lease
liabilities. The impact primarily related to the change in assigning a right-of-use asset and related lease liability to our operating
leases. We did not record any cumulative effect adjustments to opening retained earnings, and adoption of the lease standard had
no impact to cash from or used in operating, financing, or investing on our consolidated cash flow statements.
We determine if an arrangement is a
lease at inception. Most of our operating leases do not provide an implicit rate so we use our incremental borrowing rate
based on the information available at the commencement date to determine the present value of future payments. We lease
various assets in the ordinary course of business as follows: warehouses to store our materials; office space for
administrative activities to support our business; and certain manufacturing facilities. Leases with an initial term of 12
months or less are not recorded on the consolidated balance sheet as we recognize lease expense for these leases on a
straight-line basis over the lease term.
Most lease agreements include one or more
renewal options, all of which are at our sole discretion. Future renewal options that have not been executed as of the consolidated
balance sheet date are excluded from right-of-use assets and related lease liabilities. Certain leases also include options to
purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term,
unless there is a transfer of title or purchase option reasonably certain of exercise.
Lease Position as of March 31, 2019
|
|
The table below presents the lease-related assets and liabilities recorded on the condensed consolidated balance sheet:
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
Classification
|
|
|
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Non-Current
|
|
|
|
|
|
|
|
|
|
|
Finance
|
|
Property, plant and equipment
|
|
$
|
1,637,753
|
|
|
|
Operating
|
|
Operating lease right-of-use assets
|
|
|
447,094
|
|
|
|
|
|
Total lease assets
|
|
$
|
2,084,847
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating lease liabilities- current portion
|
|
$
|
199,167
|
|
|
|
Finance
|
|
Finance lease obligations- current portion
|
|
|
508,505
|
|
Non-Current
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating lease obligations- non-current portion
|
|
$
|
389,596
|
|
|
|
Finance
|
|
Finance lease obligations- non current portion
|
|
|
617,287
|
|
|
|
|
|
Total lease liabilities
|
|
$
|
1,714,555
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
3.01 years
|
|
|
|
Finance leases
|
|
|
|
|
2.07 years
|
|
Weighted-average discount rate
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
10.82
|
%
|
|
|
Finance leases
|
|
|
|
|
12.5
|
%
|
Lease Costs
The table below presents certain information related to the
lease costs for finance and operating leases during 2019:
|
|
Classification
|
|
Three months ended
March 31, 2019
|
|
Operating lease cost
|
|
Administrative
|
|
$
|
43,862
|
|
Finance lease cost
|
|
|
|
|
|
|
Amortization of leased assets
|
|
Cost of Sales
|
|
|
37,275
|
|
Interest on capital lease obligations
|
|
Interest expense, net
|
|
|
37,637
|
|
Total lease costs
|
|
|
|
$
|
118,774
|
|
Other Information
The table below presents supplemental cash flow information
related to leases during 2019:
|
|
Three months ended
March 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
14,514
|
|
Operating cash flows for finance leases
|
|
|
37,637
|
|
Financing cash flows for finance leases
|
|
|
118,331
|
|
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum finance lease payments as of March 31, 2019 were as follows:
|
|
|
|
|
|
Operating Leases
|
|
|
Finance Leases
|
|
2019 (remaining)
|
|
$
|
199,977
|
|
|
$
|
465,905
|
|
2020
|
|
|
216,396
|
|
|
|
619,355
|
|
2021
|
|
|
218,502
|
|
|
|
198,728
|
|
2022
|
|
|
52,850
|
|
|
|
—
|
|
Total minimum lease payments
|
|
|
687,725
|
|
|
|
1,283,988
|
|
Amount representing interest
|
|
|
(98,962
|
)
|
|
|
(158,196
|
)
|
Present value of future minimum lease obligations
|
|
|
588,763
|
|
|
|
1,125,792
|
|
Current portion
|
|
|
(199,167
|
)
|
|
|
(508,505
|
)
|
|
|
$
|
389,596
|
|
|
$
|
617,287
|
|
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in
excess of one year) and future minimum capital lease payments as of December 31, 2018 as determined prior to the adoption of
ASC 842 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
Capital Leases
|
|
2019
|
|
$
|
220,000
|
|
|
$
|
621,785
|
|
2020
|
|
|
212,000
|
|
|
|
619,355
|
|
2021
|
|
|
213,000
|
|
|
|
198,728
|
|
2022
|
|
|
64,000
|
|
|
|
—
|
|
2023
|
|
|
49,000
|
|
|
|
—
|
|
Total minimum lease payments
|
|
$
|
758,000
|
|
|
|
1,439,868
|
|
Amount representing interest
|
|
|
|
|
|
|
(195,745
|
)
|
Present value of future minimum finance lease obligations
|
|
|
|
|
|
|
1,244,123
|
|
Current portion
|
|
|
|
|
|
|
(494,131
|
)
|
|
|
|
|
|
|
$
|
749,992
|
|
NOTE 9
– Discontinued Operations
On January 11, 2019, we completed the Asset
Sale of the Consumer Segment to the Purchaser pursuant to the terms of an asset purchase agreement, effective as of January 11,
2019 (the “Closing Date”), by and among the Purchaser, the Company and certain subsidiaries of the Company listed therein
(the “Asset Purchase Agreement”). In consideration for the assets, the Purchaser paid the Company a purchase price
of $1,417,000 in cash, which price is subject to adjustment based on the delivered value of the working capital of the Consumer
Segment, to be determined within 90 days after the Closing Date, as well as a $100,000 damage hold back, to be paid to the Company
within 30 days of the closing of the Asset Sale (the “Closing”). Other than the assumption of loan payments related
to certain vehicle financings, no debt or significant liabilities were assumed by the Purchaser in the Asset Sale.
The loss from discontinued operations in the condensed consolidated
statements of operations includes the following:
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Net sales
|
|
$
|
149,534
|
|
|
$
|
1,739,585
|
|
Cost of goods sold
|
|
|
(182,630
|
)
|
|
|
(1,579,223
|
)
|
Operating expenses
|
|
|
(77,213
|
)
|
|
|
(221,488
|
)
|
Impairment of operating lease right-of-use assets
|
|
|
(12,745
|
)
|
|
|
—
|
|
Interest expense
|
|
|
(656
|
)
|
|
|
(5,372
|
)
|
Pretax loss from discontinued operations
|
|
|
(123,710
|
)
|
|
|
(66,498
|
)
|
Income tax benefit
|
|
|
25
|
|
|
|
—
|
|
Loss from discontinued operations
|
|
$
|
(123,685
|
)
|
|
$
|
(66,498
|
)
|
The carrying amount of assets and liabilities included in discontinued
operations comprise the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Accounts receivable
|
|
$
|
57,058
|
|
|
$
|
289,967
|
|
Prepaid expenses
|
|
|
—
|
|
|
|
1,693
|
|
Inventories
|
|
|
—
|
|
|
|
399,677
|
|
Property, plant and equipment
|
|
|
—
|
|
|
|
1,031,865
|
|
Deposits
|
|
|
24,917
|
|
|
|
36,898
|
|
Operating lease right-of-use assets
|
|
|
215,106
|
|
|
|
—
|
|
Total assets classified as discontinued operations
|
|
$
|
297,111
|
|
|
$
|
1,760,100
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
245,621
|
|
|
$
|
410,563
|
|
Notes payable
|
|
|
—
|
|
|
|
175,456
|
|
Operating lease liabilities
|
|
|
225,601
|
|
|
|
—
|
|
Total liabilities classified as discontinued operations
|
|
$
|
471,222
|
|
|
$
|
586,019
|
|
NOTE 10
– Notes Payable
Notes payable consist of the following:
|
|
As of
March 31, 2018
|
|
|
As of
December 31, 2018
|
|
2019 Unsecured Note
|
|
$
|
62,768
|
|
|
$
|
—
|
|
2018 Related Party 10% Unsecured Notes, net of debt discount of $8,669 and $83,743, respectively
|
|
|
2,091,331
|
|
|
|
2,016,257
|
|
2018 Secured Note
|
|
|
63,689
|
|
|
|
68,431
|
|
2017 Secured Note
|
|
|
—
|
|
|
|
81,659
|
|
2016 Secured Notes
|
|
|
47,261
|
|
|
|
47,468
|
|
2016 WEBA Seller Notes
|
|
|
2,650,000
|
|
|
|
2,650,000
|
|
Total notes payable
|
|
|
4,915,049
|
|
|
|
4,863,815
|
|
Less current portion
|
|
|
(2,200,026
|
)
|
|
|
(2,080,071
|
)
|
Long-term portion of notes payable
|
|
$
|
2,715,023
|
|
|
$
|
2,783,744
|
|
2019 Unsecured
Note
In March 2019, the Company entered
into an unsecured note with Bank Direct to finance its insurance premiums (the “2019 Unsecured Note”). The key terms
of the 2019 Unsecured Note include: (i) an original principal balance of $69,549, (ii) an interest rate of 6.74%, and (iii) a term
of ten months.
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 $6.25.
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 was scheduled to mature on May 4, 2019 and extension discussions are in
place.
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 was scheduled to
mature on May 9, 2019 and extension discussions are in place.
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, 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 was scheduled to mature on May 6, 2019 and extension discussions are in place.
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 $300,297,
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 three months ended March 31, 2019 and
2018 was $75,074 and insignificant, resprectively.
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
|
|
NOTE 11 – Related Party Transactions
Former 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 one of the Company’s processing and distribution
centers was located. The former Vice President of U.S. Operations also is the sole owner of Renew Resources, LLC, which provided
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.
|
|
2019
|
|
|
2018
|
|
Beginning Balance as of January 1,
|
|
$
|
—
|
|
|
$
|
—
|
|
Monies owed to related party for services performed
|
|
|
22,449
|
|
|
|
18,780
|
|
Monies paid
|
|
|
(15,127
|
)
|
|
|
(18,780
|
)
|
Ending balance as of March 31,
|
|
$
|
4,462
|
|
|
$
|
—
|
|
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 10 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 10 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 10 for additional information.)
NOTE 12 – Commitments and Contingencies
Litigation
The Company may be party to legal proceedings
in the ordinary course of business from time to time. Litigation is subject to inherent uncertainties, and an adverse result
in a legal proceeding could arise that may harm our business. Below is an overview of a pending legal proceeding in which an adverse
result could have a material adverse effect on our business and results of operations.
On December 27, 2017, PSP Falcon Industries,
LLC (“PSP Falcon”) filed a civil action against the Company in the Ocean County Superior Court located in Toms River,
New Jersey. The civil action related to an outstanding balance alleged to be due to PSP Falcon from the Company in an amount of
$530,633 related to certain construction expenses. The Company settled this issue on February 26, 2019 for a minimal amount.
Environmental Matters
We are subject to federal, state, and local
laws, regulations and ordinances relating to the protection of the environment, including those governing discharges to air and
water, handling and disposal practices for solid and hazardous wastes, and occupational health and safety. It is management’s
opinion that the Company is not currently exposed to significant environmental remediation liabilities or asset retirement obligations.
However, if a release of hazardous substances occurs, or is found on one of our properties from prior activity, we may be subject
to liability arising out of such conditions and the amount of such liability could be material. The Company accrues for potential
environmental liabilities in a manner consistent with GAAP; that is, when it is probable a liability has been incurred and the
amount of the liability is reasonably estimable. The Company reviews the status of its environmental sites on a yearly basis and
adjusts its reserves accordingly. Such potential liabilities accrued by the Company do not take into consideration possible recoveries
of future insurance proceeds. The Company maintains insurance coverage for unintentional acts that result in environmental remediation
liabilities up to $1 million per occurrence; $2 million in the aggregate, with an umbrella liability policy that doubles the coverage.
These policies do, however, take into account the likely share other parties will bear at remediation sites. It would be difficult
to estimate the Company’s ultimate level of liability due to the number of other parties that may be involved, the complexity
of determining the relative liability among those parties, the uncertainty as to the nature and scope of the investigations and
remediation to be conducted, the uncertainty in the application of law and risk assessment, the various choices and costs associated
with diverse technologies that may be used in corrective actions at the sites, and the often quite lengthy periods over which eventual
remediation may occur. The Company does not currently believe that any claims, penalties or costs in connection with known environmental
matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
In December 2016, the Company completed
the acquisition of certain glycol distillation assets from Union Carbide Corporation in Institute, West Virginia. In order to comply
with West Virginia regulations enacted in 2017, the Company has elected to accrue $780,000 for tank remediation. The amount of
the accrual is based on various assumptions and estimates and will be periodically reevaluated in light of a variety of future
events and contingencies.
NOTE 13 – Subsequent Events
We have evaluated subsequent events through the filing date
of this Form 10-Q, and determined that no subsequent events have occurred that would require recognition in the condensed consolidated
financial statements or disclosure in the notes thereto other than as discussed in the accompanying notes.