UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2017

 

☐ TRANSITION REPORT PURSUANT SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to ______________

 

Commission file number:  000-30396 

 

 

 

GLYECO, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		45-4030261
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)
230 Gill Way Rock Hill, South Carolina		29730
(Address of principal executive offices)		(Zip Code)

 

(866) 960-1539

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange ct. (Check one):

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐  (Do not check if a smaller reporting company)	Smaller reporting company ☒

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐  No ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

As of November 14, 2017, the registrant had 164,476,257 shares of Common Stock, par value $0.0001 per share, issued and outstanding.

 

 

TABLE OF CONTENTS
		Page No:
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets – September 30, 2017 and December 31, 2016	3
	Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2017 and 2016	4
	Condensed Consolidated Statement of Stockholders’ Equity – Nine Months Ended September 30, 2017	5
	Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2017 and 2016	6
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	43
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
Signatures		49

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

GLYECO, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

September 30, 2017 and December 31, 2016

 

		September 30,				December 31,
		2017				2016
		(unaudited)
ASSETS
Current Assets
Cash		$	181,671			$	1,413,999
Cash - restricted			22,435				76,552
Accounts receivable, net			1,561,422				1,096,713
Prepaid expenses			288,133				340,899
Inventories			905,297				644,522
Total current assets			2,958,958				3,572,685
Property, plant and equipment, net			4,072,413				3,657,839
Other Assets
Deposits			436,450				387,035
Goodwill			3,822,583				3,693,083
Other intangible assets, net			2,398,541				2,794,204
Total other assets			6,657,574				6,874,322
Total assets		$	13,688,945			$	14,104,846
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses		$	2,464,156			$	961,010
Due to related parties			—				6,191
Contingent acquisition consideration			1,767,458				1,821,575
Notes payable – current portion, net of debt discount			108,575				2,541,178
Capital lease obligations – current portion			365,811				6,838
Total current liabilities			4,706,000				5,336,792
Non-Current Liabilities
Notes payable – non-current portion			2,978,782				2,963,640
Capital lease obligations – non-current portion			1,185,179				3,371
Total non-current liabilities			4,163,961				2,967,011
Total liabilities			8,869,961				8,303,803
Commitments and Contingencies
Stockholders’ Equity
Preferred stock; 40,000,000 shares authorized; $0.0001 par value; no shares issued and outstanding as of September 30, 2017 and December 31, 2016			—				—
Common stock, 300,000,000 shares authorized; $0.0001 par value; 164,415,465 and 126,156,189 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively			16,442				12,616
Additional paid-in capital			45,685,287				42,603,490
Accumulated deficit			(40,882,745	)			(36,815,063	)
Total stockholders’ equity			4,818,984				5,801,043
Total liabilities and stockholders’ equity		$	13,688,945			$	14,104,846

 

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, 2017 and 2016

 

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Sales, net		$	3,284,670			$	1,388,980			$	8,493,088			$	4,145,741
Cost of goods sold			2,876,577				1,282,507				7,468,406				3,968,501
Gross profit			408,093				106,473				1,024,682				177,240
Operating expenses:
Consulting fees			149,233				13,479				368,195				114,902
Share-based compensation			129,707				258,613				361,241				856,848
Salaries and wages			539,651				277,058				1,246,252				816,069
Legal and professional			152,797				50,255				501,528				192,152
Tank remediation			780,000				—				780,000				—
General and administrative			411,966				200,421				1,112,307				736,802
Total operating expenses			2,163,354				799,826				4,369,523				2,716,773
Loss from operations			(1,755,261	)			(693,353	)			(3,344,841	)			(2,539,533	)
Other (income) and expenses:
Interest income			—				(108	)			—				(326	)
Loss on debt extinguishment			146,564				—				146,564				—
Interest expense			154,068				5,761				573,671				17,739
Gain on settlement of note payable			—				—				—				(15,000	)
Total other expense, net			300,632				5,653				720,235				2,413
Loss before provision for income taxes			(2,055,893	)			(699,006	)			(4,065,076	)			(2,541,946	)
Provision for income taxes			653				85				2,606				6,031
Net loss		$	(2,056,546	)		$	(699,091	)		$	(4,067,682	)		$	(2,547,977	)
Basic and diluted loss per share		$	(0.01	)		$	(0.01	)		$	(0.03	)		$	(0.02	)
Weighted average number of common shares outstanding - basic and diluted			148,727,226				118,838,577				134,709,077				106,102,370

 

 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, 2017 

 

										Additional								Total
		Common Stock								Paid -In				Accumulated				Stockholders’
		Shares				Par Value				Capital				Deficit				Equity
Balance, December 31, 2016			126,156,189			$	12,616			$	42,603,490			$	(36,815,063	)		$	5,801,043
Share-based compensation			2,652,514				265				360,976				—				361,241
Offering of common shares, net			8,324,212				832				540,947				—				541,779
Notes payable and accrued interest converted into common stock in connection with rights offering			20,309,300				2,031				1,622,712				—				1,624,743
Notes payable and accrued interest converted into common stock			2,754,500				276				220,084				—				220,360
Exercise of warrants			4,218,750				422				337,078				—				337,500
Net loss			—				—				—				(4,067,682	)			(4,067,682	)
Balance, September 30, 2017			164,415,465			$	16,442			$	45,685,287			$	(40,882,745	)		$	4,818,984

 

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, 2017 and 2016

 

		Nine months ended September 30,
		2017				2016
		(unaudited)				(unaudited)
Net cash flow from operating activities
Net loss		$	(4,067,682	)		$	(2,547,977	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation			360,854				193,775
Amortization			395,663				60,622
Share-based compensation expense			361,241				856,848
Amortization of debt discount			205,180				—
Loss on debt extinguishment			146,564				—
Loss on disposal of equipment			28,446				—
Provision for bad debt			65,946				27,264
Gain on settlement of note payable			—				(15,000	)
Changes in operating assets and liabilities:
Accounts receivable			(530,655	)			122,815
Prepaid expenses			52,766				9,859
Inventories			(260,775	)			144,799
Deposits			(49,415	)			(5,347	)
Accounts payable and accrued expenses			1,588,249				(732,074	)
Due to related parties			(6,191	)			(34,405	)
Net cash used in operating activities			(1,709,809	)			(1,918,821	)
Cash flows from investing activities
Cash paid for acquisition			(129,500	)			(100,000	)
Cash-restricted			—				(100,000	)
Purchases of property, plant and equipment			(687,219	)			(249,698	)
Net cash used in investing activities			(816,719	)			(449,698	)
Cash flows from financing activities
Repayment of notes payable			(1,125,860	)			(125,736	)
Repayment of capital lease obligations			(159,219	)			(8,951	)
Proceeds from sale-leaseback			1,700,000				—
Proceeds from exercise of warrants			337,500				—
Proceeds from sale of common stock, net			541,779				2,936,792
Net cash provided by financing activities			1,294,200				2,802,105
Net change in cash			(1,232,328	)			433,586
Cash at beginning of the period			1,413,999				1,276,687
Cash at end of the period		$	181,671			$	1,710,273
Supplemental disclosure of cash flow information
Interest paid during period		$	46,549			$	17,739
Income taxes paid during period		$	2,606			$	6,031
Supplemental disclosure of non-cash items
Acquisition of equipment with notes payable		$	116,655			$	319,856
Acquisition of equipment included in accounts payable		$	—			$	117,900
Acquisition of equipment with capital lease obligation		$	1,700,000				—
Notes payable and accrued interest converted into shares of common stock		$	1,845,103				—
Reduction in contingent acquisition liability through restricted cash		$	54,117				—

 

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 specialty chemical company formed in the State of Nevada on October 21, 2011. We have two segments, Consumer and Industrial (see Note 7).

 

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% of Recovery Solutions & Technologies Inc. (“RS&T”), a privately-owned company involved in the development and commercialization of glycol recovery technology. On December 28, 2016, the Company purchased certain glycol distillation assets from Union Carbide Corporation (“UCC”), a wholly-owned subsidiary of The Dow Chemical Company (“Dow”), located in Institute, West Virginia (the “Dow Assets”). During the three months ended March 31, 2017, the Company acquired the remaining 4% of RS&T not already owned by the Company.

 

Going Concern

 

The condensed consolidated financial statements as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016, have been prepared assuming that the Company will continue as a going concern. As of September 30, 2017, 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

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States (“GAAP”), and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation on an interim basis. The operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017.

 

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, 2016, including the Company’s audited consolidated financial statements and related notes included therein.

 

Principles of Consolidation

 

These consolidated financial statements include the accounts of GlyEco, Inc., and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated as a result of consolidation.

 

 

Noncontrolling Interests

 

The Company recognizes noncontrolling interests as equity in the consolidated financial statements separate from the parent company’s equity. Noncontrolling interests’ partners have less than 50% share of voting rights at any one of the subsidiary level companies. The amount of net income (loss) attributable to noncontrolling interests is included in consolidated net income (loss) on the face of the consolidated statements of operations. Changes in a parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the noncontrolling equity investment on the deconsolidation date. Additionally, operating losses are allocated to noncontrolling interests even when such allocation creates a deficit balance for the noncontrolling interest partner.

 

The Company provides either in the consolidated statements of stockholders’ equity, if presented, or in the notes to consolidated financial statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest that separately discloses:

 

	(1)	Net income or loss
	(2)	Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners.
	(3)	Each component of other comprehensive income or loss

 

 

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. Prior to the December 2016 acquisitions of WEBA, RS&T and the DOW Assets and through December 31, 2016, the Company operated as one segment. As of January 1, 2017, we have two operating segments, Consumer and Industrial. (See Note 7)

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. Because of the use of estimates inherent within the financial reporting process, actual results may differ significantly from those estimates.  Significant estimates include, but are not limited to, items such as the allowance for doubtful accounts, the value of share-based compensation and warrants, the allocation of the purchase price in the Company’s acquisitions, the recoverability of property, plant and equipment, goodwill, other intangibles and 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 (1) delivery of product has occurred or services have been rendered, (2) there is persuasive evidence of a sale arrangement, (3) selling prices are fixed or determinable, and (4) collectability from the customer (individual customers and distributors) is reasonably assured. Revenue consists primarily of revenue generated from the sale of the Company’s products. This generally occurs either when the Company’s products are shipped from its facility or delivered to the customer when title has passed. Revenue is recorded net of estimated cash discounts. The Company estimates and accrues an allowance for sales returns at the time the product is sold. To date, sales returns have not been material. Shipping costs passed to the customer are included in net sales. 

 

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 2017 and 2016. Advertising costs are expensed as incurred.

 

Accounts Receivable

 

Accounts receivable are recognized and carried at the original invoice amount less an allowance for expected uncollectible amounts. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s willingness or ability to pay, the Company’s compliance with customer invoicing requirements, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. We do not charge interest on past due balances. The Company writes off trade receivables when all reasonable collection efforts have been exhausted. Bad debt expense is reflected as a component of general and administrative expenses in the consolidated statements of operations. The allowance for doubtful accounts totaled $133,126 and $80,207 as of September 30, 2017 and December 31, 2016, respectively.

 

Inventories

 

Inventories are reported at the lower of cost or 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 realizable values.

 

 

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

 

Business Combinations

 

The Company accounts for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair values on the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially with respect to intangible assets, estimated contingent consideration payments and pre-acquisition contingencies. Examples of critical estimates in valuing certain of the intangible assets the Company has acquired or may acquire in the future include but are not limited to:

 

	●	future expected cash flows from product sales, other customer contracts, and
	●	discount rates utilized in valuation estimates.

 

Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimates of relevant revenue or other targets, will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related contingent consideration or the occurrence of events that cause results to differ from our estimates or assumptions could have a material effect on the consolidated financial position, statements of operations or cash flows in the period of the change in the estimate.

 

Goodwill and Intangible Assets

 

Intangible assets that we acquire are recognized separately if they arise from contractual or other legal rights or if they are separable and are recorded at fair value less accumulated amortization. We analyze intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and period at least at each balance sheet date. The effects of any revision are recorded to operations when the change arises. We recognize impairment when the estimated undiscounted cash flow generated by those assets is less than the carrying amounts of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets. The Company’s management believes there is no impairment of long-lived assets as of September 30, 2017. However, market conditions could change or demand for the Company’s products could decrease, which could result in future impairment of long-lived assets

 

 

Goodwill is recorded as the excess of (i) the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquired over the (ii) fair value of the net identifiable assets acquired. We do not amortize goodwill; however, we annually, or whenever there is an indication that goodwill may be impaired, evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the assets exceeds fair value. Any future increases in fair value would not result in an adjustment to the impairment loss that may be recorded in our consolidated financial statements. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events, as well as overall financial performance. Based on our analysis, no impairment loss of goodwill was recorded in 2017 and 2016 as the carrying amount of the reporting unit’s assets did not exceed the estimated fair value determined.

 

Impairment of Long-Lived Assets

 

Property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material.

 

The three levels of inputs that may be used to measure fair value are as follows:

 

	●	Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date;

	●	Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and

●

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions that market participants would use in pricing an asset or liability. Valuation is generated from model-based techniques with the unobservable assumptions reflecting our own estimate of assumptions that market participants would use in pricing the asset or liability.

 

Cash, restricted cash, accounts receivable, accounts payable and accrued expenses, amounts due to related parties and current portion of capital lease obligations and notes payable are reflected in the consolidated balance sheets at their estimated fair values primarily due to their short-term nature. As to long-term capital lease obligations and notes payable, carrying values approximate fair value since the estimated fair values are based on borrowing rates currently available to the Company for loans with similar terms and maturities. 

 

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 related to the relative fair value of warrants issued in conjunction with the debt are also recorded as a reduction to the debt balance and amortized over the expected term of the debt to interest expense using the effective interest method.

 

 

Net Loss Per Share Calculation

 

The basic net loss per common share is computed by dividing the net loss available to common shareholders by the weighted average number of shares outstanding during a period. Diluted loss per common share is computed by dividing the net loss available to common shareholders by the weighted average number of common shares outstanding plus potentially dilutive securities. The Company’s potentially dilutive securities outstanding are not shown in a diluted net loss per share calculation because their effect in both 2017 and 2016 would be anti-dilutive. At September 30, 2017, these potentially dilutive securities included warrants of 5,648,124 and stock options of 4,872,621 for a total of 10,520,745.  At September 30, 2016, these potentially dilutive securities included warrants of 8,266,137 and stock options of 7,935,093 for a total of 16,201,230. 

 

Income Taxes

 

The Company accounts for its income taxes in accordance with Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. An allowance for the deferred tax asset is established if it is more likely than not that the asset will not be realized. 

  

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 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 May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). This updated guidance supersedes the current revenue recognition guidance, including industry-specific guidance. The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updated guidance is effective for interim and annual periods beginning after December 15, 2016, and early adoption is not permitted. In July 2015, the FASB decided to delay the effective date of ASU 2014-09 until December 15, 2017. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The Company has not yet selected a transition method and is currently assessing the impact the adoption of ASU 2014-09 will have on its condensed consolidated financial statements and disclosures.

 

 

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 to 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 is currently assessing the impact of the adoption of ASU 2016-02 will have on its condensed consolidated financial statements and disclosures.

 

In January 2017, the FASB, issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” which simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test.  Goodwill impairment will now be the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company has not yet decided if it will early adopt the provisions in this ASU for its annual goodwill impairment test during 2017.

 

NOTE 3 – Inventories

 

The Company’s total inventories were as follows:

 

		September 30,				December 31,
		2017				2016
Raw materials		$	514,129			$	221,088
Work in process			23,903				172,142
Finished goods			367,265				251,292
Total inventories		$	905,297			$	644,522

 

NOTE 4 – Acquisitions, Goodwill and Other Intangible Assets

 

WEBA 

 

On December 27, 2016, the Company entered into a Stock Purchase Agreement (“WEBA SPA”) with WEBA, a privately-owned company that develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolants and heat transfer industries. Pursuant to the WEBA SPA, the Company acquired all of the WEBA shares from the WEBA sellers for $150,000 in cash and $2.65 million in 8% Promissory Notes (see Note 8). In addition, the WEBA sellers may be entitled to receive earn-out payments of up to an aggregate of $2,500,000 for calendar years 2017, 2018, and 2019 based upon terms set forth in the WEBA SPA. The Company also issued 5,625,000 shares as repayment of $450,000 of notes payable due to the WEBA sellers. The fair market value of the shares was $0.10 on the date of issuance. Following the WEBA acquisition, WEBA became a wholly owned subsidiary of the Company.

 

We accounted for the acquisition of WEBA as required under applicable accounting guidance. Tangible assets acquired are recorded at fair value. Identifiable intangible assets that we acquired are recognized separately if they arise from contractual or other legal rights or if they are separable, and are recorded at fair value. Goodwill is recorded as the excess of the consideration transferred over the fair value of the net identifiable assets acquired. The earn-out payments liability was recorded at their estimated fair value of $1,745,023.

 

 

Although management estimates that certain of the contingent consideration will be paid, it has applied a discount rate to the contingent consideration amounts in determining fair value to represent the risk of these payments not being made. The total acquisition date fair value of the consideration transferred and to be transferred is estimated at approximately $5.1 million, as follows:

 

Cash payment to the WEBA Sellers at closing		$	150,000
Common stock issuance to the WEBA Sellers			562,500
Promissory notes to the WEBA Sellers			2,650,000
Contingent cash consideration to the WEBA Sellers			1,745,023
Total acquisition date fair value		$	5,107,523

 

Allocation of Consideration Transferred

 

The identifiable assets acquired and liabilities assumed were recognized and measured as of the acquisition date based on their estimated fair values as of December 27, 2016, the acquisition date. The excess of the acquisition date fair value of consideration transferred over the estimated fair value of the net tangible assets and intangible assets acquired was recorded as goodwill.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.

 

Cash		$	172,950
Accounts receivable			342,151
Loan receivable from RS&T			500,000
Property and equipment			8,720
Customer list			470,000
Intellectual property			880,000
Trade name			390,000
Non complete agreement			835,000
Total identifiable assets acquired			3,598,821
Accounts payable and accrued expenses			190,527
Deferred tax liability			1,030,000
Total liabilities assumed			1,220,527
Total identifiable assets less liabilities assumed			2,378,294
Goodwill			2,729,229
Net assets acquired		$	5,107,523

 

The Company is amortizing the intangibles (excluding goodwill) over an estimated useful life of five to ten years. The Company will evaluate the fair value of the earn-out liability on a periodic basis and adjust the balance, with an offsetting adjustment to the income statement, as needed. The acquisition was considered to be significant. The Company has included the financial results of the WEBA acquisition in its consolidated financial statements from the acquisition date and the results from WEBA were not material to the Company’s consolidated financial statements for the year ended December 31, 2016.

 

Pro Forma Financial Information

 

The following table presents the Company’s unaudited pro forma results (including WEBA) for the three and nine months ended September 30, 2016 as though the companies had been combined as of the beginning of each of the periods presented. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each period presented, nor is it indicative of results of operations which may occur in the future. The unaudited pro forma results presented include amortization charges for intangible assets and eliminations of intercompany transactions.

 

  

		For the				For the
		Three Months Ended				Nine Months Ended
		September 30, 2016				September 30, 2016
Total revenues		$	1,933,311			$	5,711,266
Net loss		$	(839,801	)		$	(2,773,438	)

 

The Company did not incur material acquisition expenses related to the WEBA acquisition.

 

The components of goodwill and other intangible assets related to the WEBA SPA, along with various other business combinations are as follows:

 

				Gross Balance at								Net Balance at												Net Balance at
		Estimated		December 31,				Accumulated				December 31,								Accumulated				September 30,
		Useful Life		2016				Amortization				2016				Additions				Amortization				2017
Finite live intangible assets:
Customer list and tradename		5 years		$	987,500			$	(26,296	)		$	961,204			$	—			$	(176,109	)		$	811,391
Non-compete agreements		5 years			1,199,000				(246,000	)			953,000				—				(425,850	)			773,150
Intellectual property		10 years			880,000				—				880,000				—				(66,000	)			814,000
Total intangible assets				$	3,066,500			$	(272,296	)		$	2,794,204			$	—			$	(667,959	)		$	2,398,541
Goodwill		Indefinite		$	3,693,083			$	—			$	3,693,083			$	129,500			$	—			$	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 5 – Property, Plant and Equipment  

 

The Company’s property, plant and equipment were as follows:

 

		September 30,				December 31,
		2017				2016
Machinery and equipment		$	4,347,950			$	4,154,305
Leasehold improvements			267,421				126,598
Accumulated depreciation			(1,187,815	)			(927,909	)
			3,427,556				3,352,994
Construction in process			644,857				304,845
Total property, plant and equipment, net		$	4,072,413			$	3,657,839

 

NOTE 6– Stockholders’ Equity

 

Preferred Stock

 

The Company’s articles of incorporation authorize the Company to issue up to 40,000,000 shares of $0.0001 par value, preferred shares having preferences to be determined by the board of directors for dividends, and liquidation of the Company’s assets. Of the 40,000,000 preferred shares the Company is authorized by its articles of incorporation, the Board of Directors has designated up to 3,000,000 as Series AA preferred shares. 

 

As of September 30, 2017, the Company had no shares of Preferred Stock outstanding.

 

 

Common Stock

 

As of September 30, 2017, the Company has 164,415,465, $0.0001 par value, shares of common stock (the “Common Stock”) outstanding. The Company’s articles of incorporation authorize the Company to issue up to 300,000,000 shares of the Common Stock. The holders are entitled to one vote for each share on matters submitted to a vote to shareholders, and to share pro rata in all dividends payable on common stock after payment of dividends on any preferred shares having preference in payment of dividends.

 

Equity Incentive Program

 

On December 18, 2014, the Company’s Board of Directors approved an Equity Incentive Program (the “Equity Incentive Program”), whereby the Company’s employees may elect to receive equity in lieu of cash for all or part of their salary compensation.

 

During the nine months ended September 30, 2017, the Company issued the following shares of common stock in connection with financing activities:

 

On August 10, 2017, the Company announced the closing of its rights offering, which expired on August 4, 2017, and raised aggregate gross proceeds of approximately $2.29 million, including $670,000 in cash and $1.6 million in conversion of previously issued 8% notes payable and accrued interest (see Note 8), from the sale of 28.6 million shares of common stock at a price of $0.08 per share. The Company had approximately $0.1 million of costs associated with the offering netted against the cash proceeds. The rights offering was made pursuant to a registration statement on Form S-1 (No. 333-215941) and prospectus on file with the Securities and Exchange Commission. The Company used the net proceeds for general working capital purposes.

 

The Company also extinguished the remaining 8% promissory notes issued in December 2016 through the conversion of indebtedness into shares of its common stock at a per share price of $0.08 and cash repayment. The Company issued 2,754,500 shares for the conversion of a total of $220,360 in principal and accrued interest and repaid the remaining balance in cash in the full amount of $52,467 of principal and accrued interest. As a result of these transactions, the previously issued 8% notes payable have been extinguished in full.

 

During the nine months ended September 30, 2017, the Company issued the following shares of common stock for compensation:

 

On February 13, 2017, the Company issued an aggregate of 160,000 shares of common stock to two employees of the Company at a price of $0.125 per share. 

 

During the quarter ended March 31, 2017, the Company issued an aggregate of 115,503 shares of common stock to employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.12 per share.

 

On March 31, 2017, the Company issued an aggregate of 512,498 shares of common stock to six directors of the Company pursuant to the Company’s FY2017 Director Compensation Plan at a price of $0.12 per share.

 

During the quarter ended June 30, 2017, the Company issued an aggregate of 195,039 shares of common stock to employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.10 per share.

 

On June 30, 2017, the Company issued an aggregate of 627,546 shares of common stock to six directors of the Company pursuant to the Company’s FY2017 Director Compensation Plan at a price of $0.098 per share.

 

During the quarter ended September 30, 2017, the Company issued an aggregate of 238,448 shares of common stock to employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.08 per share.

 

On September 30, 2017, the Company issued an aggregate of 803,480 shares of common stock to six directors of the Company pursuant to the Company’s FY2017 Director Compensation Plan at a price of $0.077 per share.

 

 

Shares of common stock issued for warrant exercise

 

During the nine months ended September 30, 2017, the Company issued an aggregate of 4,218,750 shares of Common Stock to accredited investors in connection with the exercise of warrants at an exercise price of $0.08 per share.

 

Performance and/or market based stock awards

 

In January 2015, the Board of Directors approved the issuance of 940,595 restricted shares of the Company. These shares will be issued to the then members of the Board of Directors upon vesting, which will be when the market price of the Company’s common stock trades at or above $2 for a specified period.

 

The initial value of the restricted stock grant was approximately $38,000, as adjusted for forfeitures resulting from directors who have resigned, which will be amortized over the estimated service period. The Company recorded an expense of $11,547 and $50,565 from the amortization of the unvested restricted shares for the nine months ended September 30, 2017 and 2016, respectively. The shares were valued using a Monte Carlo Simulation with a six-year life, 88.0% volatility and a risk-free interest rate of 1.79%.

 

In February 2016, the Board of Directors approved the issuance of 3,301,358 restricted shares of the Company. These shares will be issued to the then President (1,100,453 shares) and Chief Financial Officer (2,200,905 shares) upon vesting, which will be according to the following terms:

 

	-	20% when the market price of the Company’s common stock trades at or above $0.30 for a specified period.

	-	30% when the market price of the Company’s common stock trades at or above $0.40 for a specified period.

	-	30% when the market price of the Company’s common stock trades at or above $0.50 for a specified period.

-	20% when the market price of the Company’s common stock trades at or above $0.60 for a specified period.

The initial value of the restricted stock grant was approximately $198,000, which was amortized over the estimated service period. The Company recorded an expense of $17,364 and $20,470 from the amortization of the unvested restricted shares for the nine months ended September 30, 2017 and 2016, respectively. The shares were valued using a Monte Carlo Simulation with a six-year life, 91.0% volatility and a risk-free interest rate of 1.34%. In December 2016, the Board of Directors modified the terms of the 1,100,453 shares award in conjunction with the resignation of the President to provide for an expiration date of December 2017. The Company revalued this award based on the new terms and determined the value of the award was approximately $18,000, which is being amortized over the estimated service period.

 

In January 2016, the Board of Directors approved the issuance of 6,281,250 restricted common shares of the Company. These shares will be issued to the then members of the Board of Directors upon vesting, which will be when the market price of the Company’s common stock trades at or above $0.12 for a specified period or if the Company has positive EBITDA (a non GAAP measure) for one quarter in 2016. These shares were issued to the members of the Board on June 13, 2016, when the market price of the Company’s common stock traded at or above $0.12 for a 30-day volume weighted average price.

 

The initial value of the restricted stock grant was $509,000, which has been amortized over the estimated performance period. The Company recorded the entire value as expense from the amortization of the restricted shares for the year ended December 31, 2016, including $381,586 for the nine months ended September 30, 2016. The shares were valued using a Monte Carlo Simulation with a one-year life, 106.0% volatility and a risk-free interest rate of 0.65%.

 

 

In May 2016, the Board of Directors approved the issuance of 1,100,453 restricted shares of the Company. These shares will be issued to the Chief Executive Officer upon vesting, which will be according to the following terms:

 

	-	20% when the market price of the Company’s common stock trades at or above $0.30 for a specified period.

	-	30% when the market price of the Company’s common stock trades at or above $0.40 for a specified period.

	-	30% when the market price of the Company’s common stock trades at or above $0.50 for a specified period.

-

20% when the market price of the Company’s common stock trades at or above $0.60 for a specified period.

 

The initial value of the restricted stock grant was approximately $94,000, which was to be amortized over the estimated service period. In December 2016, the then Chief Executive Officer resigned from the Company; therefore, any recognized expense was reversed and the expense recognized by the Company during the year ended December 31, 2016 was $0. In December 2016, the Board of Directors modified the terms of this award in conjunction with the resignation of the then Chief Executive Officer to provide for an expiration date of December 2017. The Company revalued this award based on the new terms and determined the value of the award was approximately $18,000, which is being amortized over the estimated service period.

 

In September 2016, the Board of Directors approved the issuance of 1,650,680 restricted common shares of the Company. These shares will be issued to the then Vice President of Sales and Marketing upon vesting, which will be according to the following terms:

 

	-	20% when the market price of the Company’s common stock trades at or above $0.30 for a specified period.

	-	30% when the market price of the Company’s common stock trades at or above $0.40 for a specified period.

	-	30% when the market price of the Company’s common stock trades at or above $0.50 for a specified period.

-

20% when the market price of the Company’s common stock trades at or above $0.60 for a specified period.

 

The initial value of the restricted stock grant was approximately $141,000, which was amortized over the estimated service period. Upon the termination of the then Vice President of Sales and Marketing on April 28, 2017, this grant was terminated and the Company reversed all previous expense and is no longer recording expense related to this award. The Company recorded income of $14,802 from the reversal of previous amortization of the unvested restricted shares for the nine months ended September 30, 2017. The shares were valued using a Monte Carlo Simulation with a 6-year life, 92.0% volatility and a risk-free interest rate of 1.35%.

  

In December 2016, the Board of Directors approved the issuance of 6,290,000 restricted common shares of the Company. These shares will be issued to members of the Board of Directors and certain executives and employees upon vesting, which will occur when the price per share of the Company’s common stock, measured and approved based upon a 30-day trading volume weighted average price (“VWAP”), is equal to at least $0.20 per share.

 

The initial value of the restricted stock grant was approximately $430,000, which is being amortized over the estimated service period. The Company recorded an expense of $71,818 from the amortization of the unvested restricted shares for the nine months ended September 30, 2017. The shares were valued using a Monte Carlo Simulation with a 6-year life, 98.0% volatility and a risk- free interest rate of 2.00%.

 

In June 2017, the Board of Directors approved the issuance of 1,000,000 restricted common shares of the Company. The initial value of the restricted stock grant was $72,099, which is being amortized over the estimated service period. These shares will be issued to certain executives upon the Company meeting the following bench marks: 50% will vest when the price per share of the Company’s common stock, based upon a 30-day trading VWAP, is equal to at least $0.20 per share and 50% will vest when the price per share of the Company’s common stock, measured and approved based upon a 30-day trading VWAP, is equal to at least $0.35 per share. The current period expense was $3,004 for the quarter ended September 30, 2017.

 

 

During the nine months ended September 30, 2017, the Board of Directors approved the issuance of 2,200,000 restricted common shares of the Company. The initial value of the restricted stock grant was $150,258, which is being amortized over the estimated service period. These shares will be issued to certain executives and employees upon vesting, which will occur when the price per share of the Company’s common stock, measured and approved based upon a 30-day trading VWAP, is equal to at least $0.20 per share. The current period expense was insignificant.

 

A summary of the Company’s restricted stock awards is presented below:

 

		Number of Shares				Weighted- Average Grant-Date Fair Value per Share
Unvested at January 1, 2017			12,691,084			$	0.08
Restricted stock granted			3,200,000				0.08
Restricted stock vested			—				—
Restricted stock forfeited			(1,940,680	)			0.08
Unvested at September 30, 2017			13,950,404			$	0.08

 

 

Options and warrants

 

During the nine months ended September 30, 2017, the Company issued 4,218,750 shares of common stock in connection with the exercise of stock warrants at an exercise price of $0.08 per share for total proceeds of $337,500. During the nine months ended September 30, 2016, the Company did not have any issuances or exercises of stock warrants. The Company recognized $7,500 of expense related to the vesting of outstanding options during the nine months ended September 30, 2017.

 

NOTE 7 – Segments

 

Prior to the December 2016 acquisitions of WEBA, RS&T and the DOW Assets and through December 31, 2016, the Company operated as one segment. Effective January 1, 2107, we have two segments, Consumer and Industrial. Consumer’s principal business activity is the processing of waste glycol into high-quality recycled glycol products, specifically automotive antifreeze, and related specialty blended antifreeze, which we sell in the automotive and industrial end markets. We operate six processing and distribution centers located in the eastern region of the United States. Industrial’s principal business activity consists of two divisions: WEBA and RS&T. WEBA develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolants and heat transfer industries throughout North America, and RS&T, operates a 14-20 million gallons per year ASTM E1177 EG-1 glycol re-distillation plant in West Virginia that processes waste glycol into virgin quality recycled glycol for sale to industrial customers worldwide.

 

The Company uses loss before provision for income taxes as its measure of profit/loss for segment reporting purposes. Loss before provision for income taxes by operating segment includes all operating items relating to the businesses, including inter segment transactions. Items that primarily relate to the Company as a whole are assigned to Corporate.

 

Inter segment eliminations present the adjustments for inter segment transactions to reconcile segment information to the Company’s consolidated financial statements.

 

Segment information, and the reconciliation to the Company’s consolidated financial statements, for the three months ended September 30, 2017, is presented below:

 

		Consumer				Industrial				Inter Segment Eliminations				Corporate				Total
Sales, net		$	1,455,849			$	2,076,852			$	(248,031	)		$				$	3,284,670
Cost of goods sold			1,307,099				1,817,509				(248,031	)							2,876,577
Gross profit			148,750				259,343				—								408,093
Total operating expenses			713,885				1,144,255				—				305,214				2,163,354
Loss from operations			(565,135	)			(884,912	)			—				(305,214	)			(1,755,261	)
Total other expenses			(152,171	)			(49,998	)			—				(98,463	)			(300,632	)
Loss before provision for income taxes		$	(717,306	)		$	(934,910	)		$	—			$	(403,677	)		$	(2,055,893	)

 

 

Segment information, and the reconciliation to the Company’s consolidated financial statements, for the nine months ended September 30, 2017, is presented below:

 

		Consumer				Industrial				Inter Segment Eliminations				Corporate				Total
Sales, net		$	4,701,752			$	4,626,034			$	(834,698	)		$	—			$	8,493,088
Cost of goods sold			4,092,801				4,210,303				(834,698	)			—				7,468,406
Gross profit			608,951				415,731				—								1,024,682
Total operating expenses			1,722,774				1,723,606				—				923,143				4,369,523
Loss from operations			(1,113,823	)			(1,307,875	)			—				(923,143	)			(3,344,841	)
Total other expenses			(163,390	)			(80,921	)			—				(475,924	)			(720,235	)
Loss before provision for income taxes		$	(1,277,213	)		$	(1,388,796	)		$	—			$	(1,399,067	)		$	(4,065,076	)

  

 

NOTE 8 – Notes Payable

 

Notes payable consist of the following:

 

		September 30, 2017				December 31, 2016
2017 Secured Note		$	110,822			$	—
2016 Secured Notes			326,535				396,562
2016 5% Related Party Unsecured Notes			—				1,000,000
2016 8% Related Party Unsecured Notes			—				1,458,256
2016 WEBA Seller Notes			2,650,000				2,650,000
Total notes payable			3,087,357				5,504,818
Less current portion			(108,575	)			(2,541,178	)
Long-term portion of notes payable		$	2,978,782			$	2,963,640

 

2017 Secured Note

 

In July 2017, the Company entered into a secured promissory note with PACCAR Financial (the “2017 Secured Note”). The 2017 Secured Note is collateralized by vehicles. The key terms of the 2017 Secured Note includes: (i) an original principal balance of $116,655, (ii) interest rate of 7.95%, and (iii) term of 5 years.

 

2016 Secured Notes

 

In January and April 2016, the Company entered into a secured promissory note with Ascentium Capital. In April 2016, the Company entered into secured promissory notes with Ascentium Capital. In July and September 2016, the Company entered into a secured promissory note with PACCAR Financial. In September 2016, the Company entered into a secured promissory note with PACCAR Financial. In November 2016, the Company entered into secured promissory notes with MHC Financial Services, Inc. (collectively, the “2016 Secured Notes”). The key terms of the 2016 Secured Notes include: (i) an aggregate principal balance of $437,000, (ii) interest rates ranging from 5.8% to 9.0%, and (iii) terms of 4-5 years. The 2016 Secured Notes are collateralized by vehicles and equipment.

 

2016 Related Party Unsecured Notes

 

5% Notes Issuance

 

On December 27, 2016, the Company entered into a subscription agreement (the “5% Notes Subscription Agreement”) by and between the Company and various funds managed by Wynnefield Capital. Pursuant to the 5% Notes Subscription Agreement, the Company offered and issued $1,000,000 in principal amount of 5% Senior Unsecured Promissory Notes (the “5% Notes”). The Company received $1,000,000 in gross proceeds from the offering. The 5% Notes were scheduled to mature on May 31, 2017 (the “5% Note Maturity Date”). The 5% Notes bore interest at a rate of 5% per annum due on the 5% Note Maturity Date or as otherwise specified by the 5% Notes. On April 17, 2017, the Company repaid the 5% Notes in full.

 

 

8% Notes Issuance

 

On December 27, 2016, the Company entered into subscription agreements (the “8% Notes Subscription Agreements”) by and between the Company and certain accredited investors. Pursuant to the 8% Notes Subscription Agreements, the Company offered and issued: (i) $1,810,000 in principal amount of 8% Senior Unsecured Promissory Notes (the “8% Notes”); and (ii) warrants (the “Warrants”) to purchase up to 5,656,250 shares of common stock of the Company (the “Common Stock”). The Company received $1,810,000 in gross proceeds from the offering of which $1,760,000 was received in 2016 and $50,000 was accrued as an other current asset at December 31, 2016 and received in 2017. The 8% Notes were scheduled to mature on December 27, 2017 (the “8% Note Maturity Date”). The 8% Notes bore interest at a rate of 8% per annum due on the 8% Note Maturity Date or as otherwise specified by the 8% Note. The Company also incurred $26,872 of issuance costs, which were recorded as a debt discount and were amortized as interest expense through the 8% Note Maturity Date. The Warrants are exercisable for an aggregate of 5,656,250 shares of Common Stock, beginning on December 27, 2016, and will be exercisable for a period of three years. The exercise price with respect to the warrants is $0.08 per share. The exercise price and the amount of shares of common stock issuable upon exercise of the warrants are subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other similar issuances. On August 4, 2017, the Company redeemed $1,550,000 of the 8% Notes through the issuance of common shares of the Company’s stock through the rights offering that closed on August 4, 2017. On August 10, 2017, the Company repaid the remaining $260,000 of 8% Notes through a conversion of debt and the of issuance of common shares of the Company’s stock and cash repayment. See Note 6 for additional information.

 

The Company allocated the proceeds received to the 8% Notes and the warrants on a relative fair value basis at the time of issuance. The total debt discount was amortized over the life of the 8% Notes to interest expense. Amortization expense during the nine months ended September 30, 2017 was $205,180. On the date the debt was converted into common stock or repaid, the remaining unamortized debt discount was expensed and recorded as a loss on debt extinguishment. The Company recorded $146,564 of loss on debt extinguishment during the three and nine months ended September 30, 2017.

 

WEBA Seller Notes

 

In connection with the WEBA acquisition (see Note 4) the Company issued $2.65 million in 8% promissory notes (“Seller Notes”). The Seller Notes mature on December 27, 2021. The Seller Notes bear interest at a rate of 8% per annum payable on a quarterly basis in arrears. The Seller Notes contain standard default provisions, including: (i) failure to repay the Seller Note when it is due at maturity; (ii) failure to pay any interest payment when due; (iii) failure to deliver financial statements on time; and (iv) other standard events of default.

 

NOTE 9 – Capital Lease

 

On April 13, 2017, the Company closed an amended sale-leaseback transaction with NFS Leasing, Inc. (“NFS”), wherein the Company sold $1,700,000 of certain operational equipment used in the Company’s glycol recovery and recycling operations (the “Equipment”) pursuant to a bill of sale and simultaneously entered into a master equipment lease agreement, as modified (the “Lease Agreement”) with NFS for the lease of the Equipment by the Company. Pursuant to the Lease Agreement, the lease term (the “Lease Term”) is 48 months commencing on May 1, 2017. There was no gain or loss associated with the sale-leaseback. During the Lease Term, the Company is obligated to make monthly rental payments of $44,720 to NFS. The agreements are effective as of March 31, 2017. At the conclusion of the Lease Term, the Company may repurchase the Equipment from NFS for $1. The Company has accounted for this transaction as a capital lease. 

 

 

NOTE 10 – Related Party Transactions 

 

Vice President of U.S. Operations

 

The 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 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.

 

		2017				2016
Beginning Balance as of January 1,		$	5,123			$	2,791
Monies owed to related party for services performed			94,441				73,749
Monies paid			(99,564	)			(75,667	)
Ending Balance as of September 30, payable (receivable)		$	—			$	873

 

5% Notes

 

On December 27, 2016, we entered into debt agreements for an aggregate principal amount of $1,000,000 from the offering and issuance of 5% Notes to Wynnefield Partners I, Wynnefield Partners and Wynnefield Offshore, all of which are under the management of Wynnefield Capital, Inc. (“Wynnefield Capital”), an affiliate of the Company. The Company’s Chairman of the Board, Dwight Mamanteo, is a portfolio manager of Wynnefield Capital. See Note 8 for additional information.

 

8% Notes

 

On December 27, 2016, we entered into debt agreements for an aggregate principal amount of $1,810,000 from the offering and issuance of 8% Notes and warrants to purchase up to 5,656,250 shares of our common stock. The 8% Notes and warrants were sold to certain officers and directors and their immediate families of the Company as well as Wynnefield Capital, an affiliate of the Company. See Note 8 for additional information.

 

NOTE 11 – Commitments and Contingencies

 

Litigation

 

The Company may be party to legal proceedings in the ordinary course of business.  The Company believes that the nature of these proceedings (collection actions, etc.) are typical for a Company of our size and scope of operations. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Below is an overview of a recently resolved legal proceeding, one pending legal proceeding, and one outstanding alleged claim.

 

 

On January 8, 2016, Acquisition Sub. #4 filed a civil action against Onyxx Group LLC in the Circuit Court of Hillsborough County, Florida. This civil action relates to an outstanding balance due from Onyxx Group LLC to Acquisition Sub. #4. In September 2016, the Company received a favorable judgment regarding this civil action in the amount of $95,000.

 

On March 22, 2016, Acquisition Sub. #4 filed a civil action against Encore Petroleum, LLC in the Superior Court of New Jersey Law Division, Hudson County. This civil action relates to an outstanding balance due from Encore Petroleum to Acquisition Sub. #4. In August 2017, the Company reached a settlement with Encore Petroleum.

 

The Company is also aware of one matter that involves an alleged claim against the Company, and it is at least reasonably possible that the claim will be pursued. The claim involves contracts with our former director and his related entities that provided services and was our landlord for the Company’s former processing facility in New Jersey. In this matter, the landlord of the Company’s formerly leased property claims back rent is due for property used by the Company outside of the scope of its lease agreement. During the quarter ended March 31, 2015, the former landlord denied the Company access to the New Jersey facility and prepared an eviction notice. The Company negotiated a payment in the amount of $250,000 to regain access to the facility, and reached an accord to negotiate with the landlord to resolve the outstanding issues by May 31, 2015. On December 28, 2015, the Company ultimately approved the termination of the lease agreements related to the New Jersey facility, thereby ceasing all operations at that particular facility. This termination was prompted by the former landlord’s demand for payment of approximately $2.3 million to maintain access to the facility. In September 2016, the Company reached an agreement with the landlord. The agreement required the Company to resolve certain environmental issues regarding the former processing facility and make certain payments to the landlord. The Company, the landlord and their related entities also agreed to a full and final settlement of existing and possible future claims between the parties. As of November 14, 2017, the Company believes it has addressed the environmental issues by removing and disposing of the waste from the facility and cleaning the storage tanks. Additionally, as of November 14, 2017, the Company has paid in full the agreed upon $335,000 payment to the landlord.

 

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 accounting principles generally accepted in the United States; 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. In December 2016, the Company completed an acquisition of certain glycol distillation assets from Union Carbide Corporation at 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. For example, subsequent to the completion of the tank remediation we expect to have feedstock, which, depending on pricing at the time, may have a value of up to $300,000.

 

Additionally, the potential liabilities accrued by the Company do not take into consideration possible recoveries of future insurance proceeds. We maintain 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. We are unable to estimate the ultimate cost of remediation due to a number of unknown factors, including, among others potential 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. Our management believes that the provision that we have established is reasonable. Our management is exploring and considering a number of alternatives to mitigate the potential impact of this remediation on the Company.

 

 

The Company is aware of one environmental remediation issue related to our former leased property in New Jersey, which is currently subject to a remediation stemming from the sale of property by the previous owner in 2008 to the current landlord. To Management’s knowledge, the former landlord has engaged a licensed site remediation professional and had assumed responsibility for this remediation. In our management’s opinion the liability for this remediation is the responsibility of the former landlord. However, the former landlord has disputed this position and it is an open issue subject to negotiation. Currently, we have no knowledge as to the scope of the landlord’s former remediation obligation.

 

NOTE 12 – Subsequent Events

 

Recent Stock Issuances

 

Since October 1, 2017, the Company has issued an aggregate of 60,792 shares of common stock pursuant to the Company’s Equity Incentive Program.

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements for the fiscal year ended December 31, 2016, and the notes thereto, along with Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed separately with the US Securities and Exchange Commission. This discussion and analysis contains forward-looking statements based upon current beliefs, plans, expectations, intentions and projections that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. We use words such as “anticipate,” “estimate,” “plan, “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and any updates to those risk factors filed from time in our Quarterly Reports on Form 10-Q including those set forth under Part II, Item 1A of this Quarterly Report on Form 10-Q.

 

Unless otherwise noted herein, terms such as the “Company,” “GlyEco,” “we,” “us,” “our” and similar terms refer to GlyEco, Inc., a Nevada corporation, and our subsidiaries.

 

In addition, the following discussion should be read in conjunction with the information contained in the condensed consolidated financial statements of the Company and related notes included elsewhere herein.

 

Company Overview

 

GlyEco is a leading specialty chemical company, leveraging technology and innovation to focus on vertically integrated, eco-friendly manufacturing, customer service and distribution solutions. Our eight facilities, including the recently acquired 14-20 million gallons per year, ASTM E1177 EG-1, glycol re-distillation plant in West Virginia, deliver superior quality glycol products that meet or exceed ASTM quality standards, including a wide spectrum of ready to use antifreezes and additive packages for antifreeze/coolant, gas patch coolants and heat transfer fluid industry, throughout North America. Our team’s extensive experience in the chemical field, including direct experience with reclamation of all types of glycols, gives us the ability to process a wide range of feedstock streams, formulate and produce unique products and has earned us an outstanding reputation in our markets.

 

Prior to the December 2016 acquisitions of WEBA, RS&T and the DOW Assets and through December 31, 2016, the Company operated as one segment. Effective January 1, 2017, GlyEco has two segments: Consumer and Industrial. Consumer’s principal business activity is the processing of waste glycol into high-quality recycled glycol products, specifically automotive antifreeze, and related specialty blended antifreeze, which we sell in the automotive and industrial end markets. We operate six processing and distribution centers located in the eastern region of the United States. Industrial’s principal business activity consists of two divisions: WEBA and RS&T. WEBA develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolants and heat transfer industries throughout North America, and RS&T, which operates a 14-20 million gallons per year ASTM E1177 EG-1 glycol re-distillation plant in West Virginia that processes waste glycol into virgin quality recycled glycol for sale to industrial customers worldwide.

 

 

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 four facilities with distillation equipment is approximately 100,000 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 average monthly production was approximately 44,000 gallons in the first quarter of 2016 as compared to approximately 80,000 gallons in the first quarter of 2017. Our processing and distribution centers utilize a fleet of trucks to collect waste material for processing and delivering recycled glycol products directly to retail end users at their storefront, which is typically 50-100 gallons per customer order. Collectively, we directly service approximately 5,000 generators of waste glycol. 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 glycol products to wholesale or bulk distributors who, in turn, sell to retail end users specifically as automotive or specialty blended antifreeze. In certain markets we also sell windshield washer fluids which we do not recycle.

 

We have deployed our proprietary technology across our six processing distribution centers, allowing for safe and efficient handling of waste streams, application of our processing technology and Quality Control & Assurance Program (“QC&A”), 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:

 

	●	High-Quality Recycled Glycols - Our technology allows us to produce glycols which meet ASTM standards and can be used in any industrial application.
	●	Recycled Antifreeze - We formulate several universal recycled antifreeze products to meet ASTM and/or OEM manufacturer specifications for engine coolants. In addition, we custom blend recycled antifreeze to customer specifications.
	●	Recycled HVAC Fluids - We formulate a universal recycled HVAC coolant to meet ASTM and/or OEM manufacturer specifications for heating, ventilation and air conditioning fluids. In addition, we custom blend recycled 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 centers for recycling or in some cases to be safely disposed.
	●	Windshield Washer Fluid - In certain markets we sell windshield washer fluids which we do not recycle.

 

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 innovative 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 proprietary and 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 (Quality Control & Assurance) seeks to ensure consistently high quality, ASTM (American Society for Testing and Materials) standard compliant recycled material. Our products are trusted in all vehicle makes and models, regional fleet, local auto, and national retailers. Our proprietary 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 RS&T, our glycol re-distillation plant in West Virginia.

 

WEBA develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolants and heat transfer industries throughout North America. We believe WEBA is one of the largest companies serving the North American additive market. WEBA’s METALGUARD® additive package product line includes one-step inhibitor systems, which give our customers the ability to easily make various types of antifreeze concentrate and 50/50 coolants for all automobiles, heavy-duty diesel engines, stationary engines in gas patch and other applications. METALGUARD additive packages cover the entire range of coolant types from basic green conventional to the newest extended life OAT antifreezes of all colors. Our heat transfer fluid additives allow our customers to make finished heat transfer fluids for most industry applications including all-aluminum systems. The METALGUARD heat transfer fluids include light and heavy-duty fluids, both propylene and ethylene glycol based, for various operating temperatures. These inhibitors cover the industry standard of phosphate-based inhibitors as well as all-organic (OAT) inhibitors for specific pH range and aluminum system requirements.

 

All of the METALGUARD products are tested at our in-house laboratory facility and by third-party laboratories to assure conformance. We use the standards set by ASTM (American Society of Testing Materials) for all of our products. All of our products pass the most current ASTM standards and testing for each type of product. Our manufacturing facility conforms to the highest levels of process quality control including ISO 9001 certification.

 

RS&T operates a 14-20 million gallons per year, ASTM E1177 EG-1, glycol re-distillation plant in West Virginia, which processes waste glycol into virgin quality recycled glycol for sale to industrial customers worldwide. The facility is uniquely designed to process industrial waste glycol. It utilizes the only currently active process that produces a product that both meets the virgin glycol antifreeze grade specification, ASTM E1177 EG-1, and achieves the important aesthetic requirement for most applications of having no odor. It is the largest glycol re-distillation plant in North America, with a capacity of 14-20 million gallons per year, several times higher processing capacity than the next largest glycol recycling facility. The facility, located at the Dow Institute Site in Institute, West Virginia, includes five distillation columns, three wiped-film evaporators, heat exchangers, processing and storage tanks, and other processing equipment. The facility’s tanks include feedstock storage capacity of several million gallons and finished goods storage capacity of several million gallons. The plant is equipped with rail and truck unloading/loading facilities, and on-site barge loading/unloading facilities.

 

 Our Strategy

 

We are a vertically integrated specialty chemical company focused on high quality glycol-based and other products where we can be an efficiency leader providing value added products. To deliver value to all of our stakeholders we: develop, manufacture and deliver value-added niche or specialty products, deliver high quality products which meet or exceed industry standards, provide superior 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. We provide white glove proactive customer service. Our manufacturing operations produce the highest 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. Similarly, we focus on internal and external training programs. We are eco-friendly with the products we offer and the way we operate our businesses.

 

 

Critical Accounting Policies

 

We have identified in the condensed 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 (1) delivery of product has occurred or services have been rendered, (2) there is persuasive evidence of a sale arrangement, (3) selling prices are fixed or determinable, and (4) collectability from the customer (individual customers and distributors) is reasonably assured. Revenue consists primarily of revenue generated from the sale of the Company’s products. This generally occurs either when the Company’s products are shipped from its facility or delivered to the customer when title has passed. Revenue is recorded net of estimated cash discounts. The Company estimates and accrues an allowance for sales returns at the time the product is sold. To date, sales returns have not been material. Shipping costs passed to the customer are included in the net sales.

 

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 used glycol to be recycled, recycled glycol for resale and supplies used in the recycling process. Inventories are stated at the lower of cost or net realizable value 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 property and equipment and intangible 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.

 

Goodwill

 

As of September 30, 2017, goodwill and net intangible assets recorded on our consolidated balance sheet aggregated to $6,221,124 of which $3,822,583 is goodwill that is not subject to amortization.  We perform an annual impairment review in the fourth quarter of each year. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other, we perform goodwill impairment testing at least annually, unless indicators of impairment exist in interim periods. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment in evaluating economic conditions: industry and market conditions, cost factors, and entity-specific events, as well as overall financial performance. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit (including any unrecognized intangibles) as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.

 

In addition to the required goodwill impairment analysis, we also review the recoverability and estimated useful life of our net intangibles with finite lives when an indicator of impairment exists. When we acquire intangible assets, management determines the estimated useful life, expected residual value if any and appropriate allocation method of the asset value based on the information available at the time. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets. Our assumptions with respect to expected future cash flows relating to intangible assets is impacted by our assessment of (i) the proprietary nature of our recycling process combined with (ii) the technological advances we have made allowing us to recycle all five major types of waste glycol into a virgin-quality product usable in any glycol application along with (iii) the fact that the market is currently served by primarily smaller local processors. If our assumptions and related estimates change in the future, or if we change our reporting structure or other events and circumstances change, we may be required to record impairment charges of goodwill and intangible assets in future periods and we may need to change our estimated useful life of amortizing intangible assets. Any impairment charges that we may take in the future or any change to amortization expense could be material to our results of operations and financial condition.

 

 

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 related to the relative fair value of warrants issued in conjunction with the debt are also recorded as a reduction to the debt balance and accreted over the expected term of the debt to interest expense using the effective interest method.

 

Share-based Compensation

 

We use the Black-Scholes-Merton option-pricing model to estimate the value of options and warrants issued to employees and consultants as compensation for services rendered to the Company. This model uses estimates of volatility, risk- free interest rate and the expected term of the options or warrants, along with the current market price of the underlying stock, to estimate the value of the options and warrants on the date of grant. In addition, the calculation of compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of the stock-based awards is amortized over the vesting period of the awards. For stock-based awards that vest based on performance conditions, expense is recognized when it is probable that the conditions will be met. For stock-based awards that vest based on market conditions, expense is recognized on the accelerated attribution method over the derived service period.

 

Assumptions used in the calculation were determined as follows:

 

●	Expected term is generally determined using the weighted average of the contractual term and vesting period of the award;

●	Expected volatility of award grants made under the Company’s plans is measured using the historical daily changes in the market price of the Company, over the expected term of the award;

●	Risk-free interest rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards; and

●	Forfeitures are based on the history of cancellations of awards granted by the Company and management’s analysis of potential forfeitures.

 

 

Accounting for Income Taxes

 

We use the asset and liability method to account for income taxes. Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets. In preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, depreciation on property, plant and equipment, intangible assets, goodwill and losses for tax and accounting purposes. These differences result in deferred tax assets, which include tax loss carry-forwards, and liabilities, which are included within our consolidated balance sheets. We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely or there is insufficient operating history, a valuation allowance is established. To the extent a valuation allowance is established or increased in a period, we include an adjustment within the tax provision of our consolidated statements of operations. As of September 30, 2017 and 2016, we had established a full valuation allowance for all deferred tax assets.

 

As of September 30, 2017, and December 31, 2016, we did not recognize any assets or liabilities relative to uncertain tax positions, nor do we anticipate any significant unrecognized tax benefits will be recorded during the next 12 months. Any interest or penalties related to unrecognized tax benefits is recognized in income tax expense. Since there are no unrecognized tax benefits as a result of tax positions taken, there are no accrued penalties or interest.

 

Contingencies

 

Litigation

 

The Company may be party to legal proceedings in the ordinary course of business.  The Company believes that the nature of these proceedings (collection actions, etc.) are typical for a Company of our size and scope of operations. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Below is an overview of a recently resolved legal proceeding, one pending legal proceeding, and one outstanding alleged claim.

 

On January 8, 2016, Acquisition Sub. #4 filed a civil action against Onyxx Group LLC in the Circuit Court of Hillsborough County, Florida. This civil action relates to an outstanding balance due from Onyxx Group LLC to Acquisition Sub. #4. In September 2016, the Company received a favorable judgment regarding this civil action in the amount of $95,000.

 

On March 22, 2016, Acquisition Sub. #4 filed a civil action against Encore Petroleum, LLC in the Superior Court of New Jersey Law Division, Hudson County. This civil action relates to an outstanding balance due from Encore Petroleum to Acquisition Sub. #4. In August 2017, the Company reached a settlement with Encore Petroleum.

 

The Company is also aware of one matter that involves an alleged claim against the Company, and it is at least reasonably possible that the claim will be pursued. The claim involves contracts with our former director and his related entities that provided services and was our landlord for the Company’s former processing facility in New Jersey. In this matter, the landlord of the Company’s formerly leased property claims back rent is due for property used by the Company outside of the scope of its lease agreement. During the quarter ended March 31, 2015, the former landlord denied the Company access to the New Jersey facility and prepared an eviction notice. The Company negotiated a payment in the amount of $250,000 to regain access to the facility, and reached an accord to negotiate with the landlord to resolve the outstanding issues by May 31, 2015. On December 28, 2015, the Company ultimately approved the termination of the lease agreements related to the New Jersey facility, thereby ceasing all operations at that particular facility. This termination was prompted by the former landlord’s demand for payment of approximately $2.3 million to maintain access to the facility. In September 2016, the Company reached an agreement with the landlord. The agreement required the Company to resolve certain environmental issues regarding the former processing facility and make certain payments to the landlord. The Company, the landlord and their related entities also agreed to a full and final settlement of existing and possible futures claims between the parties. As of November 14, 2017, the Company believes it has addressed the environmental issues by removing and disposing of the waste from the facility and cleaning the storage tanks. Additionally, as of November 14, 2017 the Company has paid in full the agreed upon $335,000 payment to the landlord.

 

 

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 accounting principles generally accepted in the United States; 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. In December 2016, the Company completed an acquisition of certain glycol distillation assets from Union Carbide Corporation at 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.  For example, subsequent to the completion of the tank remediation we expect to have feedstock, which, depending on pricing at the time, may have a value of up to $300,000.  

 

Additionally, the potential liabilities accrued by the Company do not take into consideration possible recoveries of future insurance proceeds. We maintain 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. We are unable to estimate the  ultimate cost of remediation due to a number of unknown factors, including, among others potential 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. Our management believes that the provision that we have established is reasonable. Our management is exploring and considering a number of alternatives to mitigate the potential impact of this remediation on the Company.

 

The Company is aware of one environmental remediation issue related to our former leased property in New Jersey, which is currently subject to a remediation stemming from the sale of property by the previous owner in 2008 to the current landlord. To Management’s knowledge, the former landlord has engaged a licensed site remediation professional and had assumed responsibility for this remediation. In Management’s opinion the liability for this remediation is the responsibility of the former landlord. However, the former landlord has disputed this position and it is an open issue subject to negotiation. Currently, we have no knowledge as to the scope of the landlord’s former remediation obligation.

 

Results of Operations

 

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

 

Net Sales

 

For the nine-month period ended September 30, 2017, Net Sales were $8,493,088 compared to $4,145,741 for the nine-month period ended September 30, 2016, representing an increase of $4,347,347, or approximately 105%. The increase in Net Sales was due to organic revenue growth of $556,011, or approximately 13%, and $3,791,336 of sales related to the businesses and assets acquired in December 2016. Net Sales, including intersegment sales for the nine-month period ended September 30, 2017, were $4,701,751 and $4,626,034 for the Consumer and Industrial segments, respectively.

 

 

Cost of Goods Sold

 

For the nine-month period ended September 30, 2017, our Cost of Goods Sold was $7,468,406, compared to $3,968,501 for the nine-month period ended September 30, 2016, representing an increase of $3,499,905 or approximately 88%. The increase in Cost of Goods Sold was primarily due to costs associated with the increase in net sales as well as approximately $200,000 of production costs that were not fully absorbed into inventory, but rather expensed as incurred while the Institute, West Virginia facility was off line during the first two months of the first quarter for infrastructure related capital improvements.

 

Gross Profit

 

For the nine-month period ended September 30, 2017, we realized a gross profit of $1,024,682, compared to a gross profit of $177,240 for the nine-month period ended September 30, 2016. Gross profit, including intersegment sales for the nine-month period ended September 30, 2017, was $608,951 and $415,731 for the Consumer and Industrial segments, respectively.

 

Our gross profit margin for the nine-month period ended September 30, 2017, was approximately 12%, compared to approximately 4% for the nine-month period ended September 30, 2016. Gross profit margin, including intersegment sales for the nine-month period ended September 30, 2017, was 13% and 9% for the Consumer and Industrial segments, respectively. The gross profit margin for the Consumer segment was positively impacted by increased sales and proportionately lower costs. The gross profit margin for the Industrial segment was negatively impacted by approximately $200,000 of production costs that were not fully absorbed into inventory, but rather expensed as incurred while the Institute, West Virginia facility was off line during the first two months of the first quarter for infrastructure related capital improvements as well as certain lower margin business. The Company is currently negotiating pricing changes to this lower margin business.

 

Operating Expenses

 

For the nine-month period ended September 30, 2017, operating expenses increased to $4,369,523 from $2,716,773 for the nine-month period ended September 30, 2016, representing an increase of $1,652,750, or approximately 61%. Operating Expenses consist of Consulting Fees, Share-Based Compensation, Salaries and Wages, Tank remediation, Legal and Professional, and General and Administrative Expenses. Our operating expense ratio for the nine-month period ended September 30, 2017, was approximately 51%, compared to approximately 66% for the nine-month period ended September 30, 2016.

 

Consulting fees consist of marketing and administrative fees incurred under consulting agreements. Consulting fees increased to $368,195 for the nine-month period ended September 30, 2017, from $114,902 for the nine-month period ended September 30, 2016, representing an increase of $253,293, or 220%. The increase is primarily due to the Company’s use of external specialists to assist with short duration projects.  

 

Share-Based Compensation consists of stock, options and warrants issued to consultants and employees in consideration for services provided to the Company. Share-Based Compensation decreased to $361,241 for the nine-month period ended September 30, 2017, from $856,848 for the nine-month period ended September 30, 2016, representing a decrease of $495,607, or 58%. The decrease is due to a market vesting based stock grant to the Company’s Board of Directors in 2016 that was expensed in full during 2016.

 

Salaries and Wages consist of wages and the related taxes.  Salaries and Wages increased to $1,246,252 for the nine-month period ended September 30, 2017, from $816,069 for the nine-month period ended September 30, 2016, representing an increase of $430,183 or 53%.  The increase is due to the addition of employees in such areas as marketing, sales and finance in late 2016 and 2017 as well as additional employees related to the businesses and assets acquired in late December 2016.

 

Legal and Professional Fees consist of legal, accounting, tax and audit services.  For the nine-month period ended September 30, 2017, Legal and Professional Fees increased to $501,528 from $192,152 for the nine-month period ended September 30, 2016, representing an increase of $309,376 or approximately 161%. The increase is primarily related to work performed that was related to the businesses and assets acquired in late December 2016 as well as other special projects in 2017.

 

General and Administrative (G&A) Expenses consist of general operational costs of our business. For the nine-month period ended September 30, 2017, G&A Expenses increased to $1,112,307 from $736,802 for the nine-month period ended September 30, 2016, representing an increase of $375,505, or approximately 51%.  The increase is due to additional depreciation and amortization of $321,541 related to the property and equipment and intangible assets acquired in late December 2016. 

 

 

Other Income and Expenses

 

For the nine-month period ended September 30, 2017, Other Income and Expenses was an expense of $720,235 compared to an expense of $2,413 for the nine-month period ended September 30, 2016, representing a change of $717,822. Other Income and Expenses consist of Interest Income and Interest Expense. The change was primarily due to interest expense associated with the debt issued in late December 2016 as well as accelerated interest expense as a result of the repayment and conversion of notes payable which was classified as loss on debt extinguishment.

 

Adjusted EBITDA

 

Presented below is the non-GAAP financial measure representing earnings before interest, taxes, depreciation, amortization and stock-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,
		2017				2016
Net loss		$	(4,067,682	)		$	(2,547,977	)
Interest expense, net			573,671				17,413
Loss on debt extinguishment			146,564				—
Tank remediation (1)			780,000				—
Gain on settlement of note payable			—				(15,000	)
Income tax expense			2,606				6,031
Depreciation and amortization			756,517				254,397
Share-based compensation			361,241				856,848
Adjusted EBITDA		$	(1,447,083	)		$	(1,428,288	)

 

(1)

This is an expected one-time expense related to estimated equipment remediation efforts to comply with new West Virginia regulations

 

 

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

 

Net Sales

 

For the three-month period ended September 30, 2017, Net Sales were $3,284,670 compared to $1,388,980 for the three-month period ended September 30, 2016, representing an increase of $1,895,690, or approximately 136%. The increase in Net Sales was due to organic revenue growth of $66,869, or approximately 4%, and $1,828,821 of sales related to the businesses and assets acquired in December 2016. Net Sales, including intersegment sales for the three-month period ended September 30, 2017, were $1,455,849 and $2,076,852 for the Consumer and Industrial segments, respectively.

 

Cost of Goods Sold

 

For the three-month period ended September 30, 2017, our Costs of Goods Sold was $2,876,577, compared to $1,282,507 for the three-month period ended September 30, 2016, representing an increase of $1,594,070, or approximately 124%. The increase in Cost of Goods Sold was primarily due to costs associated with the increase in net sales.

 

 

Gross Profit

 

For the three-month period ended September 30, 2017, we realized a gross profit of $408,093, compared to a gross profit of $106,473 for the three-month period ended September 30, 2016. Gross profit, including intersegment sales for the three-month period ended September 30, 2017, was $148,750 and $259,343 for the Consumer and Industrial segments, respectively.

 

Our gross profit margin for the three-month period ended September 30, 2017, was approximately 12%, compared to approximately 8% for the three-month period ended September 30, 2016. Gross profit margin, including intersegment sales for the three-month period ended September 30, 2017, was 10% and 12% for the Consumer and Industrial segments, respectively. The gross profit margin for the Consumer segment was positively impacted by increased sales and proportionately lower costs. The gross profit margin for the Industrial segment was negatively impacted by certain lower margin business. The Company is currently negotiating pricing changes to this lower margin business.

 

Operating Expenses

 

For the three-month period ended September 30, 2017, operating expenses increased to $2,163,354 from $799,826 for the three-month period ended September 30, 2016, representing an increase of $1,363,528, or approximately 170%. Operating Expenses consist of Consulting Fees, Share-Based Compensation, Salaries and Wages, Tank Remediation, Legal and Professional, and General and Administrative Expenses. Our operating expense ratio for the three-month period ended September 30, 2017, was approximately 66%, compared to approximately 58% for the three-month period ended September 30, 2016.

 

Consulting Fees consist of marketing, administrative and management fees incurred under consulting agreements. Consulting fees increased to $149,233 for the three-month period ended September 30, 2017, from $13,479 for the three-month period ended September 30, 2016, representing an increase of $135,754, or 1,007%. The increase is primarily due to the Company’s use of external specialists to assist with short duration projects.

 

Share-Based Compensation consists of stock, options and warrants issued to consultants and employees in consideration for services provided to the Company. Share-Based Compensation decreased to $129,707 for the three-month period ended September 30, 2017, from $258,613 for the three-month period ended September 30, 2016, representing a decrease of $128,906, or 50%.  The decrease is due to a market vesting based stock grant to the Company’s Board of Directors in 2016.

 

Salaries and Wages consist of wages and the related taxes.  Salaries and Wages increased to $539,651 for the three-month period ended September 30, 2017, from $277,058 for the three-month period ended September 30, 2016, representing an increase of $262,593 or 95%. The increase is due to the addition of employees in such areas as marketing, sales and finance in late 2016 and 2017 as well as additional employees related to the businesses and assets acquired in late December 2016.

 

Legal and Professional Fees consist of legal, accounting, tax and audit services.  For the three-month period ended September 30, 2017, Legal and Professional Fees increased to $152,797 from $50,255 for the three-month period ended September 30, 2016, representing an increase of $102,542. The increase is primarily related to work performed in connection with the businesses and assets acquired in late December 2016 as well as other special projects.

 

 

General and Administrative (G&A) Expenses consist of general operational costs of our business. For the three-month period ended September 30, 2017, G&A Expenses increased to $411,966 from $200,421 for the three-month period ended September 30, 2016, representing an increase of $211,545, or approximately 106%.  The increase is due to additional depreciation and amortization of $131,888 related to the property and equipment and intangible assets acquired in late December 2016.

 

Other Income and Expenses

 

For the three-month period ended September 30, 2017, Other Income and Expenses was an expense of $300,632 compared to an expense of $5,653 for the three-month period ended September 30, 2016, representing a change of $294,979. Other Income and Expenses consist of Interest Income and Interest Expense. The change was primarily due to interest expense associated with the debt issued in late December 2016 as well as 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 stock 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,
		2017				2016
Net loss		$	(2,056,546	)		$	(699,091	)
Interest expense, net			154,068				5,653
Loss on debt extinguishment			146,564				—
Tank remediation (1)			780,000
Income tax expense			653				85
Depreciation and amortization			259,130				98,628
Share-based compensation			129,707				258,613
Adjusted EBITDA		$	(586,424	)		$	(336,112	)

 

(1)

This is an expected one-time expense related to estimated equipment remediation efforts to comply with new West Virginia regulations

 

Liquidity & Capital Resources; Going Concern

 

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures, and acquisitions of businesses and technologies.  Cash provided from financing continues to be the Company’s primary source of funds. We believe that we can raise adequate funds through issuance of equity or debt as necessary to continue to support our planned expansion.

 

For the nine months ended September 30, 2017 and 2016, net cash used in operating activities was $1,709,809 and $1,918,821, respectively. The increase in cash used in operating activities is due to the increase in our net loss as well as significant period over period changes in accounts receivables, inventories and accounts payable and accrued expenses. For the nine months ended September 30, 2017, the Company used $816,719 in cash for investing activities, compared to the $449,698 used in the prior year’s period.   These amounts were comprised primarily of capital expenditures for equipment. For the nine months ended September 30, 2017 and 2016, we received $1,294,200 and $2,802,105, respectively, in cash from financing activities. The 2016 amount is primarily comprised of the February rights offering. The 2017 amount is primarily comprised of the exercise of warrants and proceeds from a sale-leaseback, partially offset by the repayment of debt, including the 5% Notes as well as our 2017 rights offering.

 

 

As of September 30, 2017, we had $2,958,958 in current assets, including $181,671 in cash, $1,561,422 in accounts receivable and $905,297 in inventories. Cash decreased from $1,413,999 as of December 31, 2016, to $181,671 as of September 30, 2017, primarily due to cash used in operations.

 

As of September 30, 2017, we had total current liabilities of $4,706,000 consisting primarily of accounts payable and accrued expenses of $2,464,156. As of September 30, 2017, we had total non-current liabilities of $4,136,961, consisting primarily of the non-current portion of our notes payable and capital lease obligations.

 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of September 30, 2017, the Company has yet to achieve profitable operations and is dependent on our ability to raise capital from stockholders or other sources to sustain operations and to ultimately achieve profitable operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

Our plans to address these matters include achieving profitable operations, raising additional financing through offering our shares of the Company’s capital stock in private and/or public offerings of our securities and through debt financing if available and needed. There can be no assurances, however, that the Company will be able to obtain any financings or that such financings will be sufficient to sustain our business operation or permit the Company to implement our intended business strategy. We plan to achieve profitable operations through the implementation of operating efficiencies at our facilities and increased revenue through the offering of additional products and the expansion of our geographic footprint through acquisitions, broader distribution from our current facilities and/or the opening of additional facilities.

 

 

In their report dated April 6, 2017, our independent registered public accounting firm included an emphasis-of-matter paragraph with respect to our consolidated financial statements for the year ended December 31, 2016 concerning the Company’s assumption that we will continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of current working capital requirements and recurring losses from operations.

 

The table below sets forth certain information about the Company’s liquidity and capital resources for the nine months ended September 30, 2017 and 2016:

 

		For the Nine Months Ended
		September 30, 2017				September 30, 2016
Net cash used in operating activities		$	(1,709,809	)		$	(1,918,821	)
Net cash used in investing activities			(816,719	)			(449,698	)
Net cash provided by financing activities			1,294,200				2,802,105
Net change in cash and cash equivalents			(1,232,328	)			433,586
Cash - beginning of period			1,413,999				1,276,687
Cash - end of period		$	181,671			$	1,710,273

 

The Company may not have sufficient capital to sustain expected operations for the next twelve months. To date, we financed operations and investing activities through private sales of our securities exempt from the registration requirements of the Securities Act of 1933, as amended. 

 

Off-balance Sheet Arrangements

 

None.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

 

As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this Item.

 

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

As of September 30, 2017, we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the Exchange Act. Based on this evaluation, management concluded that as of September 30, 2017, our disclosure controls and procedures were not effective, based on the criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), version 2013.

 

Our management has previously identified a material weakness regarding a deficiency, or combination of deficiencies, that creates a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected in a timely manner. The material weakness related to our Company was due to not having adequate personnel to address the reporting requirements of a public company and to fully analyze and account for our transactions. The Company made progress to remedy this deficiency through retaining accounting staff members with public company experience. However, due to the limited time that these controls have been in place, we believe that our disclosure controls remain ineffective.

 

Changes in Internal Control Over Financial Reporting

 

During the quarter ended June 30, 2017, the Company hired a new Chief Financial Officer with public company experience. We believe this will help remediate the material weakness identified above.

 

 

PART II—OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

The Company may be party to legal proceedings in the ordinary course of business.  The Company believes that the nature of these proceedings (collection actions, etc.) are typical for a Company of our size and scope of operations. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Below is an overview of a recently resolved legal proceeding, one pending legal proceeding, and one outstanding alleged claim.

 

On January 8, 2016, Acquisition Sub. #4 filed a civil action against Onyxx Group LLC in the Circuit Court of Hillsborough County, Florida. This civil action relates to an outstanding balance due from Onyxx Group LLC to Acquisition Sub. #4. In September 2016, the Company received a favorable judgment regarding this civil action in the amount of $95,000.

 

On March 22, 2016, Acquisition Sub. #4 filed a civil action against Encore Petroleum, LLC in the Superior Court of New Jersey Law Division, Hudson County. This civil action relates to an outstanding balance due from Encore Petroleum to Acquisition Sub. #4. In August 2017, the Company reached a settlement with Encore Petroleum.

 

The Company is also aware of one matter that involves an alleged claim against the Company, and it is at least reasonably possible that the claim will be pursued. The claim involves contracts with our former director and his related entities that provided services and was our landlord for the Company’s former processing facility in New Jersey. In this matter, the landlord of the Company’s formerly leased property claims back rent is due for property used by the Company outside of the scope of its lease agreement. During the quarter ended March 31, 2015, the former landlord denied the Company access to the New Jersey facility and prepared an eviction notice. The Company negotiated a payment in the amount of $250,000 to regain access to the facility, and reached an accord to negotiate with the landlord to resolve the outstanding issues by May 31, 2015. On December 28, 2015, the Company ultimately approved the termination of the lease agreements related to the New Jersey facility, thereby ceasing all operations at that particular facility. This termination was prompted by the former landlord’s demand for payment of approximately $2.3 million to maintain access to the facility. In September 2016, the Company reached an agreement with the landlord. The agreement required the Company to resolve certain environmental issues regarding the former processing facility and make certain payments to the landlord. The Company, the landlord and their related entities also agreed to a full and final settlement of existing and possible futures claims between the parties. As of November 14, 2017, the Company believes it has addressed the environmental issues by removing and disposing of the waste from the facility and cleaning the storage tanks. Additionally, as of November 14, 2017 the Company has paid in full the agreed upon $335,000 payment to the landlord.

 

Item 1A.  Risk Factors.

 

There have been no changes that constitute a material change from the risk factors previously disclosed in our 2016 Annual Report on Form 10-K filed on April 6, 2017.

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

For the nine months ended September 30, 2017, the Company issued unregistered securities as follows:

 

On January 31, 2017, the Company issued an aggregate of 38,401 shares of Common Stock to fourteen employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.12 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted. 

 

On February 13, 2017, the Company issued an aggregate of 160,000 shares of Common Stock to two employees of the Company at a price of $0.125 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale.  The shares of Common Stock issued are restricted. 

 

On February 28, 2017, the Company issued an aggregate of 38,301 shares of Common Stock to fourteen employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.12 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted. 

 

On March 31, 2017, the Company issued an aggregate of 38,801 shares of Common Stock to fourteen employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.12 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted. 

 

On March 31, 2017, the Company issued an aggregate of 512,498 shares of Common Stock to six directors of the Company pursuant to the Company’s FY2017 Director Compensation Plan at a price of $0.12 per share. The shares were issued pursuant to Section 4(a)(2) because the directors had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The directors made representations that the shares were taken for investment purposes and not with a view to resale.

 

On April 30, 2017, the Company issued an aggregate of 44,040 shares of Common Stock to nine employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.10 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted. 

 

On May 11, 2017, the Company issued an aggregate of 3,437,500 shares of Common Stock to three employees in connection with the exercise of warrants at an exercise price of $0.08 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted. 

 

 

On May 31, 2017, the Company issued an aggregate of 44,020 shares of Common Stock to nine employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.10 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted. 

 

On June 30, 2017, the Company issued an aggregate of 106,979 shares of Common Stock to nine employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.10 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale.

 

On June 30, 2017, the Company issued an aggregate of 627,546 shares of Common Stock to six directors of the Company pursuant to the Company’s FY2017 Director Compensation Plan at a price of $0.098 per share. The shares were issued pursuant to Section 4(a)(2) because the directors had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The directors made representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted. 

 

On July 31, 2017, the Company issued an aggregate of 78,973 shares of Common Stock to twelve employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.08 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted. 

 

On August 10, 2017, the Company issued an aggregate of 28,633,511 shares of Common Stock to fourteen accredited investors in connection with the Company’s rights offering at a price of $0.08 per share. The shares were issued pursuant to Section 4(a)(2). The investors made representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted.

 

On August 10, 2017, the Company issued an aggregate of 781,250 shares of Common Stock to four investors in connection with the exercise of warrants at an exercise price of $0.08 per share. The shares were issued pursuant to Section 4(a)(2) because the warrants exercise did not involve any form of general solicitation or general advertising. The investors made investment representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted.

 

On August 23, 2017, the Company issued an aggregate of 2,754,501 shares of Common Stock to three accredited investors in connection with the exercise of warrants at an exercise price of $0.08 per share. The shares were issued pursuant to Section 4(a)(2). The investors each made investment representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted. 

 

 

On August 30, 2017, the Company issued an aggregate of 79,686 shares of Common Stock to twelve employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.08 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale.

 

On September 30, 2017, the Company issued an aggregate of 79,789 shares of Common Stock to twelve employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.08 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale.

 

On September 30, 2017, the Company issued an aggregate of 803,480 shares of Common Stock to six directors of the Company pursuant to the Company’s FY2017 Director Compensation Plan at a price of $0.077 per share. The shares were issued pursuant to Section 4(a)(2) because the directors had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The directors made representations that the shares were taken for investment purposes and not with a view to resale.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information.

 

There have been no material changes to the procedures by which holders may recommend nominees to our Board of Directors.

 

 

Item 6.  Exhibits.

 

No.		Description
31.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
	In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

     

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.

 

	GlyEco, Inc.
Date: November 14, 2017	By: /s/ Ian Rhodes
	Ian Rhodes
	Chief Executive Officer
	(Principal Executive Officer)
Date: November 14, 2017	By: /s/ Brian Gelman
	Brian Gelman
	Chief Financial Officer
	(Principal Financial Officer)