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EX-32.2 - EXHIBIT 32.2 - GlyEco, Inc.s110145_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - GlyEco, Inc.s110145_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - GlyEco, Inc.s110145_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - GlyEco, Inc.s110145_ex31-1.htm

 

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: March 31, 2018

 

 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 
   
  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.

 

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

Yes   No 

 

As of May 14, 2018, the registrant has 166,593,661 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 – March 31, 2018 and December 31, 2017 3
  Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2018 and 2017 4
  Condensed Consolidated Statement of Stockholders’ Equity – Three Months Ended March 31, 2018 5
  Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2018 and 2017 6
  Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 30
     
PART II — OTHER INFORMATION  
Item 1. Legal Proceedings 31
Item 1A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 32
Item 4. Mine Safety Disclosures 32
Item 5. Other Information 32
Item 6. Exhibits 33
Signatures 34

 

2

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

GLYECO, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

March 31, 2018 and December 31, 2017

 

   March 31,   December 31, 
   2018   2017 
   (unaudited)      
ASSETS          
           
Current Assets          
Cash  $404,290   $111,302 
Cash - restricted       6,642 
Accounts receivable, net   1,146,652    1,546,367 
Prepaid expenses   473,135    360,953 
Inventories   632,550    564,133 
Total current assets   2,656,627    2,589,397 
           
Property, plant and equipment, net   3,990,351    3,897,950 
           
Other Assets          
Deposits   436,450    436,450 
Goodwill   3,822,583    3,822,583 
Other intangible assets, net   2,144,098    2,266,654 
Total other assets   6,403,131    6,525,687 
           
Total assets  $13,050,109   $13,013,034 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities          
Accounts payable and accrued expenses  $3,011,095   $2,921,406 
Contingent acquisition consideration   1,503,113    1,509,755 
Notes payable – current portion   310,712    297,534 
Capital lease obligations – current portion   434,842    377,220 
Total current liabilities   5,259,762    5,105,915 
           
Non-Current Liabilities          
Notes payable – non-current portion, net of debt discount   3,759,047    2,953,631 
Capital lease obligations – non-current portion   1,094,814    1,085,985 
Total non-current liabilities   4,853,861    4,039,616 
           
Total liabilities   10,113,623    9,145,531 
           
Commitments and Contingencies          
           
Stockholders’ Equity          
Preferred stock; 40,000,000 shares authorized; $0.0001 par value; no shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively        
Common stock, 300,000,000 shares authorized; $0.0001 par value; 166,593,661 and 165,288,061 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively   16,659    16,529 
Additional paid-in capital   46,133,997    45,847,572 
Accumulated deficit   (43,214,170)   (41,996,598)
Total stockholders’ equity   2,936,486    3,867,503 
           
Total liabilities and stockholders’ equity  $13,050,109   $13,013,034 

 

See accompanying notes to the condensed consolidated financial statements.

 

3

 

 

GLYECO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

For the three months ended March 31, 2018 and 2017

 

   Three months ended March 31, 
   2018   2017 
   (unaudited)   (unaudited) 
         
Sales, net  $3,001,010   $2,290,321 
Cost of goods sold   2,449,100    2,150,586 
Gross profit   551,910    139,735 
           
Operating expenses:          
Consulting fees   48,591    53,426 
Share-based compensation   119,888    136,986 
Salaries and wages   662,231    343,055 
Legal and professional   330,439    160,991 
General and administrative   482,032    357,213 
Total operating expenses   1,643,181    1,051,671 
           
Loss from operations   (1,091,271)   (911,936)
           
Other expense:          
Interest expense   109,050    196,218 
Total other expense   109,050    196,218 
           
Loss before provision for income taxes   (1,200,321)   (1,108,154)
           
Provision for income taxes   17,251    756 
           
Net loss  $(1,217,572)  $(1,108,910)
           
Basic and diluted loss per share  $(0.01)  $(0.01)
           
Weighted average number of common shares outstanding - basic and diluted   165,424,728    126,269,222 

 

 See accompanying notes to the condensed consolidated financial statements. 

 

4

 

 

GLYECO, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

For the three months ended March 31, 2018

 

       Additional       Total 
   Common Stock   Paid -In   Accumulated   Stockholders’ 
   Shares   Par Value   Capital   Deficit   Equity 
                     
Balance, December 31, 2017   165,288,061   $16,529   $45,847,572   $(41,996,598)  $3,867,503 
                          
Share-based compensation   1,305,600    130    119,758        119,888 
                          
Relative fair value of warrants to purchase common stock in connection with notes payable           166,667        166,667 
                          
Net loss               (1,217,572)   (1,217,572)
                          
Balance, March 31, 2018   166,593,661   $16,659   $46,133,997   $(43,214,170)  $2,936,486 

 

See accompanying notes to the condensed consolidated financial statements.

 

5

 

 

GLYECO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2018 and 2017

 

   Three months ended March 31, 
   2018   2017 
   (unaudited)   (unaudited) 
         
Cash flows from operating activities          
Net loss  $(1,217,572)  $(1,108,910)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   153,722    114,024 
Amortization   122,556    131,458 
Share-based compensation expense   119,888    136,986 
Amortization of debt discount       86,734 
Loss on disposal of equipment       28,446 
(Recoveries on) provision for bad debt   (36,123)   14,401 
Changes in operating assets and liabilities:          
Accounts receivable, net   435,838    (45,490)
Prepaid expenses   (46,307)   6,694 
Inventories   (68,417)   (761,063)
Accounts payable and accrued expenses   89,689    886,638 
Due to related parties       (4,375)
           
Net cash used in operating activities   (446,726)   (514,457)
           
Cash flows from investing activities          
Purchases of property, plant and equipment   (83,572)   (318,692)
Cash paid for acquisition       (129,500)
Payment of contingent acquisition consideration   (6,642)   (17,899)
Net cash used in investing activities   (90,214)   (466,091)
           
Cash flows from financing activities          
Repayment of notes payable   (80,614)   (21,410)
Repayment of capital lease obligations   (96,100)   (943)
Proceeds from issuance of notes   1,000,000     
           
Net cash provided by (used in) financing activities   823,286    (22,353)
           
Net change in cash and restricted cash   286,346    (1,002,901)
           
Cash and restricted cash at beginning of the period   117,944    1,490,551 
           
Cash and restricted cash at end of the period  $404,290   $487,650 
           
Supplemental disclosure of cash flow information          
Interest paid during period  $56,049   $9,177 
Income taxes paid during period  $16,429   $756 
           
Reconciliation of cash and restricted cash at end of period:          
Cash  $404,290   $428,997 
Restricted Cash       58,653 
   $404,290   $487,650 
           

Supplemental disclosure of non-cash investing and financing activities

          
Note payable issued for insurance premium  $65,875   $ 
Acquisition of equipment with capital lease obligations  $162,551   $ 
Relative fair value of warrants to purchase common stock issued in connection with notes payable  $166,667   $ 

 

See accompanying notes to the condensed consolidated financial statements.

 

6

 

 

GLYECO, INC. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 1 – Organization and Nature of Business

 

GlyEco, Inc. (the “Company”, “we”, or “our”) is a developer, manufacturer and distributor of performance fluids for the automotive, commercial and industrial markets. We specialize in coolants, additives and complementary fluids. We believe our vertically integrated approach, which includes formulating products, acquiring feedstock, managing facility construction and upgrades, operating facilities, and distributing products through our fleet of trucks, positions us to serve our key markets and enables us to capture incremental revenue and margin throughout the process. Our network of facilities, develop, manufacture and distribute high quality products that meet or exceed industry quality standards, including a wide spectrum of ready to use antifreezes and additive packages for antifreeze/coolant, gas patch coolants and heat transfer fluid industries, throughout North America. 

 

On December 27, 2016, the Company purchased WEBA Technology Corp. (“WEBA”), a privately-owned company that develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolants and heat transfer industries, and purchased 96.9% of Recovery Solutions & Technologies Inc. (“RS&T”), a privately-owned company involved in the development and commercialization of glycol recovery technology. On December 28, 2016, the Company purchased certain glycol distillation assets from Union Carbide Corporation (“UCC”), a wholly-owned subsidiary of The Dow Chemical Company, located in Institute, West Virginia (the “Dow Assets”). During the first quarter of fiscal year 2017, the Company purchased an additional 2.9% of RS&T (for a total percentage ownership of 99.8% of RS&T).

 

The Company was formed in the State of Nevada on October 21, 2011.

 

We are currently comprised of the parent corporation GlyEco, Inc., WEBA, RS&T, and our acquisition subsidiaries that were formed to acquire the processing and distribution centers listed above. Our current processing and distribution centers are held in six subsidiaries under the names of GlyEco Acquisition Corp. #1 through GlyEco Acquisition Corp. #7, excluding #4.

   

Going Concern

 

The condensed consolidated financial statements as of March 31, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and 2017, have been prepared assuming that the Company will continue as a going concern. As of March 31, 2018, the Company has yet to achieve profitable operations and is dependent on its ability to raise capital from stockholders or other sources to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Ultimately, we plan to achieve profitable operations through the implementation of operating efficiencies at our facilities and increased revenue through the offering of additional products and the expansion of our geographic footprint through acquisitions, broader distribution from our current facilities and/or the opening of additional facilities. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies

 

The following represents an update for the three months ended March 31, 2018 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

Basis of Presentation

 

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

 

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In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation on an interim basis. The operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, including the Company’s audited consolidated financial statements and related notes included therein.

 

Principles of Consolidation

 

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

 

Noncontrolling Interests

 

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

 

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

 

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

 

Noncontrolling interests were not significant as of March 31, 2018 and December 31, 2017.

 

Operating Segments

 

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision-making group, in deciding how to allocate resources to an individual segment and in assessing the performance of the segment. Operating segments may be aggregated into a single operating segment if the segments have similar economic characteristics, among other criteria. We have two operating segments, the Consumer and Industrial segments (See Note 8).

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. Because of the use of estimates inherent within the financial reporting process, actual results may differ significantly from those estimates.  Significant estimates include, but are not limited to, items such as the allowance for doubtful accounts, the value of share-based compensation and warrants, the recoverability of property, plant and equipment, goodwill, other intangibles and the determination of their estimated useful lives, contingent liabilities, and environmental and asset retirement obligations. Due to the uncertainties inherent in the formulation of accounting estimates, it is reasonable to expect that these estimates could be materially revised within the next year.

 

8

 

 

Revenue Recognition

 

The Company’s significant accounting policy for revenue was updated as a result of the adoption of Topic 606:

 

The Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of Topic 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 3 for additional information on revenue recognition.

 

Costs

 

Cost of goods sold includes all direct material and labor costs and those indirect costs of bringing raw materials to sale condition, including depreciation of equipment used in manufacturing and shipping and handling costs. Selling, general, and administrative costs are charged to operating expenses as incurred. Research and development costs are expensed as incurred, are included in operating expenses and were insignificant in 2018 and 2017. Advertising costs are expensed as incurred.

 

Accounts Receivable

 

Accounts receivable are recognized and carried at the original invoice amount less an allowance for expected uncollectible amounts. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s willingness or ability to pay, the Company’s compliance with customer invoicing requirements, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. We do not charge interest on past due balances. The Company writes off trade receivables when all reasonable collection efforts have been exhausted. Bad debt expense is reflected as a component of general and administrative expenses in the consolidated statements of operations. The allowance for doubtful accounts totaled $134,339 and $213,136 as of March 31, 2018 and December 31, 2017, respectively.

 

Inventories

 

Inventories are reported at the lower of cost and net realizable value. The cost of raw materials, including feedstocks and additives, is determined on an average unit cost of the units in a production lot. Work-in-process represents labor, material and overhead costs associated with the manufacturing costs at an average unit cost of the units in the production lot. Finished goods represents work-in-process items with additive costs added. The Company periodically reviews its inventories for obsolete or unsalable items and adjusts its carrying value to reflect estimated net realizable values.  Net realizable value is the estimated selling price in the ordinary course of business less the cost to sell.

 

Property, Plant and Equipment

 

Property, plant and equipment is stated at cost. The Company provides for depreciation on the cost of its equipment using the straight-line method over an estimated useful life, ranging from three to twenty years, and zero salvage value. Expenditures for repairs and maintenance are charged to expense as incurred. 

 

9

 

 

For purposes of computing depreciation, the useful lives of property, plant and equipment are as follows:

 

Leasehold improvements    Lesser of the remaining lease term or 5 years 
     
Machinery and equipment    3-15 years

 

Impairment of Long-Lived Assets

 

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

  

Deferred Financing Costs, Debt Discount and Detachable Debt-Related Warrants

 

Costs incurred in connection with debt are deferred and recorded as a reduction to the debt balance in the accompanying consolidated balance sheets. The Company amortizes debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts relate to the relative fair value of warrants issued in conjunction with the debt and are also recorded as a reduction to the debt balance and amortized over the expected term of the debt to interest expense using the effective interest method.

 

Net Loss Per Share Calculation

 

The basic net loss per common share is computed by dividing the net loss available to common shareholders by the weighted average number of shares outstanding during a period. Diluted loss per common share is computed by dividing the net loss available to common shareholders by the weighted average number of common shares outstanding plus potentially dilutive securities. The Company’s potentially dilutive securities outstanding are not shown in a diluted net loss per share calculation because their effect in both 2018 and 2017 would be anti-dilutive. At March 31, 2018, these potentially dilutive securities included warrants to purchase of 9,973,124 of common stock and stock options to purchase 3,387,621 shares of common stock for a total of 13,360,745 shares of common stock. At March 31, 2017, these potentially dilutive securities included warrants to purchase 11,316,874 shares of common stock and stock options to purchase 7,950,093 shares of Common Stock for a total of 19,266,967 shares of common stock.  

 

Share-based Compensation

 

All share-based payments to employees and non-employee directors, including grants of employee stock options, are expensed based on their estimated fair values at the grant date, in accordance with Accounting Standards Codification (“ASC”) 718. Compensation expense for share-based payments to employees and directors is recorded over the vesting period using the estimated fair value on the date of grant, as calculated by the Company using the Black-Scholes-Merton (“BSM”) option-pricing model or the Monte Carlo Simulation. For awards with only service conditions that have graded vesting schedules, compensation cost is recorded on a straight-line basis over the requisite service period for the entire award, unless vesting occurs earlier. For awards with market conditions, compensation cost is recorded on the accelerated attribution method over the derived service period.

 

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Non-employee share-based compensation is accounted for based on the fair value of the related stock or options, using the BSM, or the fair value of the goods or services on the measurement date, whichever is more readily determinable.

 

Recently Issued Accounting Pronouncements

 

There have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance to the Company, except as discussed below.

 

In the first quarter of 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is the new comprehensive revenue recognition standard that supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In 2015 and 2016, FASB issued additional ASUs related to Topic 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification of performance obligations, and accounting for licenses, and included other improvements and practical expedients. The new guidance was effective for annual and interim periods beginning after December 15, 2017. The Company elected to adopt the new guidance using the modified retrospective transition method for all contracts not completed as of the date of adoption. The adoption of the new guidance did not have a material impact on the consolidated financial statements. See the Revenue Recognition sub header and Note 3 for additional disclosures regarding the Company’s contracts with customers as well as the impact of adopting Topic 606.

 

In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company is still evaluating ASU 2016-02, the Company expects the adoption of ASU 2016-02 will not have a material effect on the Company’s consolidated financial condition due to the recognition of the lease rights and obligations as assets and liabilities. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. The Company has not yet selected a transition method and is currently assessing the impact of the adoption of ASU 2016-02 will have on the consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows: Classification Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard in the first quarter of 2018 by using the retrospective transition method, which required the following disclosures and changes to the presentation of its consolidated financial statements: cash and restricted cash reported on the condensed consolidated statements of cash flows now includes restricted cash of $76,552, $58,653 and $6,642 as of December 31, 2016, March 31, 2017 and December 31, 2017, respectively, as well as previously reported cash.

 

NOTE 3 – Revenue

 

Revenue Recognition

 

All of the Company’s revenue is derived from product sales. As of January 1, 2018, the Company accounts for revenue in accordance with Topic 606, “Revenue from Contracts with Customers.” See discussion of principal activities for the Company’s operating segments in Note 8.

 

11

 

 

Product sales consist of sales of the Company’s products to manufacturers and distributors. The Company considers order confirmations or purchase orders, which in some cases are governed by master supply agreements, to be contracts with a customer. Product sale contracts are short-term contracts where the time between order confirmation and satisfaction of all performance obligations is less than one year.

 

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, usually upon shipment, with payment terms typically in the range of 30 to 60 days after invoicing, depending on business and geographic region. When the Company performs shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to shipment), these are considered fulfillment activities, and accordingly, the costs are accrued when the related revenue is recognized. The Company has no obligations for returns and warranties. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.

 

Disaggregation of Revenue

 

The Company disaggregates its revenue from contracts with customers by principal product group and geographic region, as the Company believes it best depicts the nature, amount, timing and uncertainty of its revenue and cash flows. See details in the tables below:

 

Net Trade Revenue by Principal Product Group 

Three Months Ended

March 31, 2018

   Consumer   Industrial
Antifreeze  $1,652,196   $— 
 Ethylene Glycol       763,802
Additive       500,196
Windshield Washer fluid   82,174    
Equipment   2,642    
Total  $1,737,012   $1,263,998

 

Net Trade Revenue by Geographic Region 

Three Months Ended

March 31, 2018

 
     
US  $2,663,586 
Canada   316,767 
China   20,658 
Total  $3,001,010 

 

Contract Balances

 

Accounts receivable are recorded when the right to consideration becomes unconditional. The Company does not have any contract assets or liabilities as of March 31, 2018 and December 31, 2017. The Company has utilized the practical expedient which enables the Company to expense commissions when incurred as they would be amortized over one year or less.

 

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NOTE 4 – Inventories

 

The Company’s total inventories were as follows:

 

   March 31,   December 31, 
   2018   2017 
Raw materials  $252,130   $241,297 
Work in process   20,800    69,991 
Finished goods   359,620    252,845 
Total inventories  $632,550   $564,133 

 

NOTE 5 – Goodwill and Other Intangible Assets

 

The components of goodwill and other intangible assets are as follows:

 

                  Net
Balance at
 
   Estimated          Accumulated   March 31, 
   Useful Life  Cost   Additions   Amortization   2018 
Finite live intangible assets:                       
Customer list and tradename  5 years  $987,500   $   $(274,952)  $712,548 
                        
Non-compete agreements  5 years   1,199,000        (537,450)   661,550 
                        
Intellectual property  10 years   880,000        (110,000)   770,000 
                        
Total intangible assets     $3,066,500   $   $(922,402)  $2,144,098 
                        
Goodwill  Indefinite  $3,822,583   $   $   $3,822,583 

 

We compute amortization using the straight-line method over the estimated useful lives of the intangible assets. The Company has no indefinite-lived intangible assets other than goodwill.

 

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NOTE 6 – Property, Plant and Equipment 

 

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

 

   March 31,   December 31, 
   2018   2017 
Machinery and equipment  $4,910,771   $4,782,257 
Leasehold improvements   275,973    275,973 
Accumulated depreciation   (1,489,338)   (1,335,615)
    3,697,406    3,722,615 
Construction in process   292,945    175,335 
Total property, plant and equipment, net  $3,990,351   $3,897,950 

 

NOTE 7– Stockholders’ Equity

 

Preferred Stock

 

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

 

As of March 31, 2018, the Company had no shares of preferred stock outstanding. 

 

Common Stock

 

As of March 31, 2018, the Company has 166,593,661 shares of common stock, par value $0.0001, outstanding. The Company’s articles of incorporation authorize the Company to issue up to 300,000,000 shares of the common stock. The holders are entitled to one vote for each share on matters submitted to a vote to shareholders, and to share pro rata in all dividends payable on common stock after payment of dividends on any preferred shares having preference in payment of dividends.

 

2017 Employee Stock Purchase Plan

 

On September 29, 2017, subject to stockholder approval, the Company’s Board of Directors approved the Company’s 2017 Employee Stock Purchase Plan (the “2017 ESPP”). The 2017 ESPP was approved by the Company’s stockholders at the Company’s 2017 Annual Meeting of Stockholders on November 14, 2017.

  

Under the 2017 ESPP, the Company may grant eligible employees the right to purchase our common stock through payroll deductions at a price equal to the lesser of the eighty five percent (85%) of the fair market value of a share of common stock on the exercise date of the current offering period or eighty five percent (85%) of the fair market value of our common stock on the grant date of the then current offering period. The first offering period began on November 14, 2017. Thereafter, there will be consecutive six-month offering periods until January 2, 2022, or until the Plan is terminated by the Board, if earlier.

 

The Company recorded stock-based compensation expense related to the ESPP of $9,000 during the three months ended March 31, 2018.

 

During the three months ended March 31, 2018, the Company issued the following shares of common stock for compensation:

 

On January 8, 2018, the Company issued 150,000 shares of common stock to one employee of the Company at a price of $0.06 per share for a value of $9,000.

 

On March 31, 2018, the Company issued an aggregate of 1,155,600 shares of common stock to six directors of the Company pursuant to the Company’s FY2018 Director Compensation Plan at a price of $0.065 per share for a value of $75,114.

 

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A summary of the Company’s performance and market-based restricted stock awards (including shares approved but not issued) is presented below:

 

   Number of
Shares
   Weighted-
Average
Grant-Date
Fair Value
per Share
 
Unvested at January 1, 2018   14,279,498   $0.07 
Restricted stock granted        
Restricted stock vested        
Restricted stock forfeited   (660,000)   0.07 
           
Unvested at March 31, 2018   13,619,498   $0.07 

  

During the three months ended March 31, 2018 and 2017, the Company recorded $26,774 and $34,126, respectively, related to the performance and market based restricted stock awards. 

 

Options and warrants

 

During the three months ended March 31, 2018, the Company issued 5,000,000 warrants (See Note 9). 

 

NOTE 8 – Segments

 

GlyEco conducts its operations in two business segments: the Consumer segment and the Industrial segment. The Consumer segment’s principal business activity is the production and distribution of ASTM grade glycol products, specifically automotive antifreeze and specialty-blended antifreeze, for sale into the automotive and industrial end markets. The Consumer segment operates a full lifecycle business, picking up waste antifreeze and producing finished antifreeze from both recycled and virgin glycol sources. We operate six processing and distribution centers located in the eastern region of the United States. The production capacity of the Consumer segment is approximately 90,000 gallons per month of ready to use (50/50) antifreeze. Operations in our Industrial segment are conducted through WEBA and RS&T, two of our subsidiaries. WEBA develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolant and heat transfer industries throughout North America.  RS&T operates a glycol re-distillation plant in West Virginia that produces virgin quality glycol for sale to industrial customers worldwide. The production capacity of the RS&T facility is approximately 1.5 million gallons per month of concentrated ethylene glycol. The RS&T facility current produces antifreeze and industrial grade ethylene glycol.

 

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

 

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

 

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Segment information, and the reconciliation to the Company’s consolidated financial statements, for the three months ended March 31, 2018, is presented below:

 

   Consumer   Industrial   Inter
Segment
Eliminations
   Corporate   Total 
Sales, net  $1,739,584   $1,608,325   $(346,899)  $   $3,001,010 
Cost of goods sold   1,569,187    1,226,812    (346,899)       2,449,100 
Gross profit   170,397    381,513            551,910 
                          
Total operating expenses   713,536    392,434        537,211    1,643,181 
                          
Loss from operations   (543,139)   (10,921)       (537,211)   (1,091,271)
                          
Total other expenses   (5,428)   (44,599)       (59,023)   (109,050)
                          
Loss before provision for income taxes  $(548,567)  $(55,520)  $   $(596,234)  $(1,200,321)

  

NOTE 9 – Notes Payable

 

Notes payable consist of the following:

 

   As of
March 31, 2018
   As of
December 31, 2017
 
2018 10% Related Party Unsecured Notes, net of debt discount of $166,667  $833,333   $ 
2017 Secured Note   99,157    104,990 
2018 and 2017 Unsecured Note   200,399    188,060 
2016 Secured Notes   286,870    308,115 
2016 WEBA Seller Notes   2,650,000    2,650,000 
Total notes payable   4,069,759    3,251,165 
Less current portion   (310,712)   (297,534)
Long-term portion of notes payable  $3,759,047   $2,953,631 

 

2018 Related Party Unsecured Notes

 

10% Notes Issuance

 

On March 29, 2018, the Company entered into a subscription agreement (the “10% Notes Subscription Notes Agreement”) by and between the Company and various funds managed by Wynnefield Capital. The 10% Notes Subscription Agreement was the first tranche of a private placement (see Note 12). Pursuant to the 10% Notes Subscription Agreement, the Company offered and issued $1,000,000 in principal amount of 10% Senior Unsecured Promissory Notes (the “10% Notes”) and (ii) warrants (the “Warrants”) to purchase up to 5,000,000 shares of common stock of the Company. The Company received $1,000,000 in proceeds from the offering. The 10% Notes are scheduled to mature on May 4, 2019 (the “10% Note Maturity Date”). The 10% Notes bear interest at a rate of 10% per annum due on the 10% Note Maturity Date or as otherwise specified by the 10% Notes.

 

The Company allocated the proceeds received to the 10% Notes and the Warrants on a relative fair value basis at the time of issuance. The total debt discount of $166,667 will be amortized over the life of the 10% Notes to interest expense using the effective interest method. Amortization expense during the quarter ended March 31, 2018 was insignificant.

 

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We estimated the fair value of the Warrants on the issuance date using a Black-Scholes pricing model with the following assumptions:

 

 

   Warrants 
Expected term   3 years 
Volatility   143.81%
Risk Free Rate   2.39%

  

The proceeds of the 10% Notes were allocated to the components as follows: 

 

    Proceeds
allocated at
issuance date
 
Notes   $833,333 
Warrants    166,667 
Total   $1,000,000 

  

2018 and 2017 Unsecured Note

 

In October 2017 and later amended in January 2018, the Company entered into an unsecured note with Bank Direct to finance its insurance premiums (the “2018 and 2017 Unsecured Note”). The key terms of the 2018 and 2017 Unsecured Note include: (i) an original principal balance of $242,866, (ii) an interest rate of 5.4%, and (iii) a term of ten months. If the Company should default on the loan, Bank Direct may cancel the Company’s underlying insurance and the Company would only owe any earned but unpaid premium. This would be a minimal amount as deposits and payments are paid in advance to reduce the lender’s risk.

 

NOTE 10 – Related Party Transactions

 

Vice President of U.S. Operations

 

The former Vice President of U.S. Operations is the sole owner of BKB Holdings, LLC, which is the landlord of the property where GlyEco Acquisition Corp #5’s processing and distribution center is located. The Vice President of U.S. Operations also is the sole owner of Renew Resources, LLC, which provides services to the Company as a vendor.

 

   2018   2017 
Beginning Balance as of January 1,  $   $5,123 
Monies owed to related party for services performed   18,780    24,707 
Monies paid   (18,780)   (28,014)
Ending balance as of March 31,  $   $1,816 

 

10% Notes

 

On March 29, 2018, we entered into debt agreements for an aggregate principal amount of $1,000,000 from the offering and issuance of 10% Notes to Wynnefield Partners Small Cap Value I, L.P. and Wynnefield Partners Small Cap Value, L.P, which are under the management of Wynnefield Capital, Inc. (“Wynnefield Capital”), an affiliate of the Company. The Company’s Chairman of the Board, Dwight Mamanteo, is a portfolio manager of Wynnefield Capital. (See Note 9 for additional information).

 

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NOTE 11 – Commitments and Contingencies

 

Litigation

 

The Company may be party to legal proceedings in the ordinary course of business from time to time.  Litigation is subject to inherent uncertainties, and an adverse result in a legal proceeding could arise that may harm our business. Below is an overview of a pending legal proceeding in which an adverse result could have a material adverse effect on our business and results of operations.

 

On December 27, 2017, PSP Falcon Industries, LLC (“PSP Falcon”) filed a civil action against the Company in the Ocean County Superior Court located in Toms River, New Jersey. The civil action relates to an outstanding balance alleged to be due to PSP Falcon from the Company in an amount of $530,633 related to certain construction expenses. The Company believes it has paid PSP Falcon in full for the services rendered and therefore that no outstanding balance remains due. Accordingly, the Company plans to vigorously defend itself from this claim. 

   

Environmental Matters

 

We are subject to federal, state, and local laws, regulations and ordinances relating to the protection of the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, and occupational health and safety. It is management’s opinion that the Company is not currently exposed to significant environmental remediation liabilities or asset retirement obligations. However, if a release of hazardous substances occurs, or is found on one of our properties from prior activity, we may be subject to liability arising out of such conditions and the amount of such liability could be material. The Company accrues for potential environmental liabilities in a manner consistent with GAAP; that is, when it is probable a liability has been incurred and the amount of the liability is reasonably estimable. The Company reviews the status of its environmental sites on a yearly basis and adjusts its reserves accordingly. Such potential liabilities accrued by the Company do not take into consideration possible recoveries of future insurance proceeds. The Company maintains insurance coverage for unintentional acts that result in environmental remediation liabilities up to $1 million per occurrence; $2 million in the aggregate, with an umbrella liability policy that doubles the coverage. These policies do, however, take into account the likely share other parties will bear at remediation sites. It would be difficult to estimate the Company’s ultimate level of liability due to the number of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and risk assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at the sites, and the often quite lengthy periods over which eventual remediation may occur. The Company does not currently believe that any claims, penalties or costs in connection with known environmental matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

In December 2016, the Company completed the acquisition of certain glycol distillation assets from Union Carbide Corporation in Institute, West Virginia. In order to comply with West Virginia regulations enacted in 2017, the Company has elected to accrue $780,000 for tank remediation. The amount of the accrual is based on various assumptions and estimates and will be periodically reevaluated in light of a variety of future events and contingencies.

 

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NOTE 12 – Subsequent Events

 

Closing of Private Placement

 

On April 6, 2018, the Company closed on a private placement (the “Private Placement”) of up to $2,500,000 million (the “Maximum Offering Amount) in principal amount of 10% Unsecured Promissory Notes (the “Notes”) and common stock purchase warrants to purchase up to 12,500,000 shares of the Company’s common stock pursuant to a Subscription Agreement (the “Subscription Agreement”) by and among the Company and each prospective investor. Each of the Notes will mature thirteen months from their issuance date (each a “Maturity Date”). The Private Placement will continue until the earlier of (a) the date upon which subscriptions for the Maximum Offering Amount have been received and accepted by the Company or (b) April 30, 2018, unless terminated at an earlier time by the Company, or unless extended by the Company in its sole discretion, without notice to or consent by prospective investors, to a date not later than May 15, 2018.

 

The Company closed a subsequent tranche of the Private Placement on April 10, 2018, with one of its directors, Charles F. Trapp (“Trapp”; and together with the Institutional Investors, the “Initial Investors” and each an “Initial Investor”), with respect to a Note with a principal amount of $50,000 (the “Trapp Note”; and together with the Institutional Notes, the “Initial Notes” and each an “Initial Note”) and a Warrant to purchase 250,000 shares of common stock (the “Trapp Warrant”; and together with the Institutional Warrants, the “Initial Warrants”).

 

The Company closed a subsequent tranche of the Private Placement on May 1, 2018, with one of its directors and its Chief Executive Officer, Ian Rhodes (“Rhodes”; and together with the Institutional Investors, the “Initial Investors” and each an “Initial Investor”), with respect to a Note with a principal amount of $50,000 (the “Rhodes Note”; and together with the Institutional Notes, the “Initial Notes” and each an “Initial Note”) and a Warrant to purchase 250,000 shares of common stock (the “Rhodes Warrant”; and together with the Institutional Warrants, the “Initial Warrants”).

 

The Company closed a subsequent tranche of the Private Placement on May 4, 2018, with various funds managed by Wynnefield Capital, for an aggregate principal amount of $1,000,000 of Notes (the “Institutional Notes”) and Warrants to purchase an aggregate of 5,000,000 shares of common stock (the “Institutional Warrants”).

 

The proceeds from the purchase of all Notes and Warrants will be used primarily for working capital and general corporate purposes. The Initial Notes and Initial Warrants were issued pursuant to the Subscription Agreement, by and among the Company and each Initial Investor.

  

The Initial Notes bear interest at a rate of 10% per annum and shall be payable on the relevant Maturity Date along with the principal amount of the Initial Notes, plus any liquidated damages and other amounts due under the Initial Notes. At any time after issuance of the Institutional Notes or the Trapp Note, the Company may deliver to such investor a notice of prepayment with respect to any portion of the principal amount of the relevant Initial Note, and any accrued and unpaid interest thereon. Upon the occurrence of an event of default under the Initial Notes, the Company must repay to the Initial Investors a 125% premium of the outstanding principal amount of the Initial Notes and accrued and unpaid interest thereon, in addition to the payment of all other amounts, costs, expenses and liquidated damages due in respect of the Initial Notes.

 

The Initial Warrants are exercisable to purchase up to an aggregate of 5,250,000 shares of common stock (the “Initial Warrant Shares”; and together with the Initial Notes and the Initial Warrants, the “Initial Securities”) commencing on the date of issuance at an exercise price of $0.05 per share (the “Exercise Price”). The Initial Warrants will expire on the third anniversary of their date of issuance. The Exercise Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. An Initial Investor does not have a right to exercise its respective Initial Warrants to the extent that such exercise would result in such Initial Investor being the beneficial owner in excess of 4.99% (or, upon election of such Initial Investor, 9.99%), which beneficial ownership limitation may be increased or decreased up to 9.99% upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following notice to the Company. 

 

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

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements for the fiscal year ended December 31, 2017, and the notes thereto, along with Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed separately with the US Securities and Exchange Commission. This discussion and analysis contains forward-looking statements based upon current beliefs, plans, expectations, intentions and projections that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. We use words such as “anticipate,” “estimate,” “plan, “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, and any updates to those risk factors filed from time in our Quarterly Reports on Form 10-Q including those set forth under Part II, Item 1A of this Quarterly Report on Form 10-Q.

 

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

 

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

 

Company Overview

 

GlyEco is a developer, manufacturer and distributor of performance fluids for the automotive, commercial and industrial markets. We specialize in coolants, additives and complementary fluids. We believe our vertically integrated approach, which includes formulating products, acquiring feedstock, managing facility construction and upgrades, operating facilities, and distributing products through our fleet of trucks, positions us to serve our key markets and enables us to capture incremental revenue and margin throughout the process. Our network of facilities, develop, manufacture and distribute high quality products that meet or exceed industry quality standards, including a wide spectrum of ready to use antifreezes and additive packages for the antifreeze/coolant, gas patch coolants and heat transfer fluid industries, throughout North America.

 

GlyEco conducts its operation in two business segments: the Consumer segment and the Industrial segment. The Consumer segment’s principal business activity is the production and distribution of ASTM grade glycol products, specifically automotive antifreeze and specialty-blended antifreeze, for sale into the automotive and industrial end markets. The Consumer segment operates a full lifecycle business, picking up waste antifreeze and producing finished antifreeze from both recycled and virgin glycol sources. We operate six processing and distribution centers located in the eastern region of the United States. The production capacity of the Consumer segment is approximately 90,000 gallons per month of ready to use (50/50) antifreeze. Operations in our Industrial segment are conducted through WEBA and RS&T, two of our subsidiaries. WEBA develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolant and heat transfer industries throughout North America.  RS&T operates a glycol re-distillation plant in West Virginia that produces virgin quality glycol for sale to industrial customers worldwide. The RS&T facility currently produces antifreeze and industrial grade ethylene glycol. The production capacity of the RS&T facility is approximately 1.5 million gallons per month of concentrated ethylene glycol.

 

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Consumer Segment

 

Our Consumer segment has processing and distribution centers located in (1) Minneapolis, Minnesota, (2) Indianapolis, Indiana, (3) Lakeland, Florida, (4) Rock Hill, South Carolina, (5) Tea, South Dakota, and (6) Landover, Maryland. The Minneapolis, Minnesota, Lakeland, Florida, Rock Hill, South Carolina and Tea, South Dakota facilities have distillation equipment and operations for recycling waste glycol streams as well as blending equipment and operations for mixing glycol and other chemicals to produce finished products for sale to third party customers, while the Indianapolis, Indiana and Landover, Maryland facilities currently only have blending equipment and operations for mixing glycol and other chemicals to produce finished products for sale to third party customers. We estimate that the monthly processing capacity of our facilities with distillation equipment is approximately 90,000 gallons of ready to use finished products. We have invested significant time and money into increasing the capacity and actual production of our facilities. Our processing and distribution centers utilize a fleet of trucks to deliver glycol products directly to retail end users at their storefronts, which is typically 50-100 gallons per customer order and to collect waste material for processing at our facilities. Collectively, we directly service approximately 5,000 customers. To meet the delivery volume needs of our existing customers, we supplement our collected and processed glycol with new or virgin glycol that we purchase in bulk from various suppliers. In addition to our retail end users, we also sell our recycled products to wholesale or bulk distributors who, in turn, sell to retail end users specifically as automotive or specialty blended antifreeze.

 

We have deployed our technology and processes across our six processing and distribution centers, allowing for safe and efficient handling of waste streams, application of our processing technology and Quality Control & Assurance Program (“QC&A Program”), sales of high-quality glycol products, and data systems allowing for tracking, training, and further development of our products and service.

  

Our Consumer segment product offerings include:

 

Antifreeze/Coolant - We formulate several antifreeze products to meet ASTM and/or Original Equipment Manufacturers (“OEM”) manufacturer specifications for engine coolants. In addition, we custom blend antifreeze to customer specifications.

Heating, Ventilation and Air Conditioning (“HVAC”) Fluids - We formulate HVAC coolant to meet ASTM and/or OEM manufacturer specifications for HVAC fluids. In addition, we custom blend HVAC coolants to customer specifications.

Waste Glycol Disposal Services - Utilizing our fleet of collection/delivery trucks, we collect waste glycol from generators for recycling. We coordinate large batches of waste glycol to be picked up from generators and delivered to our processing and distribution centers for recycling or in some cases to be safely disposed.

 

We currently sell and deliver all of our products in bulk containers (55 gallon barrels, 250 gallon totes, etc.) or variable metered bulk quantities.

 

We began developing new methods for recycling glycols in 1999. We recognized a need in the market to improve the quality of recycled glycol being returned to retail customers. In addition, we believed through process technology, systems, and footprint we could clean more types of waste glycol in a more cost-efficient manner. Each type of industrial waste glycol contains a different list of impurities which traditional waste antifreeze processing does not clean effectively. Additionally, many of the contaminants left behind using these processes - such as esters, organic acids and high dissolved solids - leave the recycled material risky to use in vehicles or machinery.

 

Our patented technology removes difficult pollutants, including esters, organic acids, high dissolved solids and high un-dissolved solids in addition to the benefit of clearing oil/hydrocarbons, additives and dyes that are typically found in used engine coolants. Our QC&A Program seeks to ensure consistently high quality, ASTM standard compliant recycled material. 

 

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Industrial Segment

 

Our Industrial segment consists of two divisions: WEBA, our additives business and RS&T, our glycol re-distillation plant in West Virginia.

 

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

 

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

 

RS&T operates a glycol re-distillation plant in West Virginia, which produces virgin quality glycol for sale to industrial customers worldwide. The RS&T facility currently produces antifreeze and industrial grade ethylene glycol. We believe it is one of the largest glycol re-distillation plants in North America, with production capacity of approximately 1.5 million gallons per month of concentrated ethylene glycol. The RS&T facility, located at the Dow Institute Site at Institute, West Virginia, includes five distillation columns, three wiped-film evaporators, heat exchangers, processing and storage tanks, and other processing equipment. The facility’s tanks include feedstock storage capacity of several million gallons and finished goods storage capacity of several million gallons. The plant is equipped with rail and truck unloading/loading facilities, and on-site barge loading/unloading facilities.

 

Our Strategy

 

We are a vertically integrated specialty chemical company focused on high quality glycol-based and other products where we can be an efficiency leader providing value added products. To deliver value to all of our stakeholders we: develop, manufacture and deliver value-added niche or specialty products, deliver high quality products which meet or exceed industry standards, provide white glove, proactive customer service, effectively manage costs as a low cost manufacturer, operate a dependable low cost distribution network, leverage technology and innovation throughout our company and are eco-friendly.

 

To effectively deliver on our strategy, we offer a broad spectrum of products in our niches, focus on non-standard innovative products, leverage multiple distribution channels and we are market smart in that we maximize less competitive/under-served markets. Our manufacturing operations produce high quality products while effectively managing costs by recycling at high capacity and high up time, driving down raw material costs with focused feedstock streams management and using technology and data to manage our business in real-time. Our distribution operations provide dependable service at a low cost by effectively using know how, technology and data. We leverage technology and innovation to develop a recognized brand and operate certified laboratories and well supported research and development activities. We focus on internal and external training programs. We are also eco-friendly with the products we offer and the way we operate our businesses.  

 

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Critical Accounting Policies

 

We have identified in the consolidated financial statements contained herein certain critical accounting policies that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. Management reviews with the Audit Committee the selection, application and disclosure of critical accounting policies. On an ongoing basis, we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These areas include going concern, collectability of accounts receivable, inventory, impairment of goodwill, carrying amounts and useful lives of intangible assets, fair value of assets acquired and liabilities assumed in business combinations, stock-based compensation expense, and deferred taxes. We base our estimates on historical experience, our observance of trends in particular areas, and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated.

 

We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity:

 

Revenue Recognition

 

The Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of Topic 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 3 for additional information on revenue recognition.

 

Collectability of Accounts Receivable

 

Accounts receivable consist primarily of amounts due from customers from sales of products and are recorded net of an allowance for doubtful accounts. In order to record our accounts receivable at their net realizable value, we assess their collectability. A considerable amount of judgment is required in order to make this assessment, based on a detailed analysis of the aging of our receivables, the credit worthiness of our customers and our historical bad debts and other adjustments. If economic, industry or specific customer business trends worsen beyond earlier estimates, we increase the allowance for uncollectible accounts by recording additional expense in the period in which we become aware of the new conditions.

 

Substantially all our customers are based in the United States. The economic conditions in the United States can significantly impact the recoverability of our accounts receivable.

 

Inventories

 

Inventories consist primarily of feedstock and other raw materials and finished product ready for sale. Inventories are stated at the lower of cost or market with cost recorded on an average cost basis. Costs include purchase costs, fleet and fuel costs, direct labor, transportation costs and production related costs. In determining whether inventory valuation issues exist, we consider various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, historical sales and production usage. Shifts in market trends and conditions, changes in customer preferences or the loss of one or more significant customers are factors that could affect the value of our inventory. These factors could make our estimates of inventory valuation differ from actual results. 

 

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Long-Lived Assets

 

We periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful life of long-lived assets or whether the remaining balance of the long-lived assets should be evaluated for possible impairment. Instances that may lead to an impairment include the following: (i) a significant decrease in the market price of a long-lived asset group; (ii) a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; (iii) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an adverse action or assessment by a regulator; (iv) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or asset group; (v) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or (vi) a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

 

Upon recognition of an event, as previously described, we use an estimate of the related undiscounted cash flows, excluding interest, over the remaining life of the property and equipment and long-lived assets in assessing their recoverability. We measure impairment loss as the amount by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). We primarily employ the two following methodologies for determining the fair value of a long-lived asset: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; or (ii) the present value of expected future cash flows grouped at the lowest level for which there are identifiable independent cash flows.

  

Deferred Financing Costs, Debt Discount and Detachable Debt-Related Warrants

 

Costs incurred in connection with debt are deferred and recorded as a reduction to the debt balance in the accompanying consolidated balance sheets. The Company amortizes debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts relate to the relative fair value of warrants issued in conjunction with the debt are also recorded as a reduction to the debt balance and accreted over the expected term of the debt to interest expense using the effective interest method.

 

Share-Based Compensation

 

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

 

Assumptions used in the calculation were determined as follows:

 

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

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

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

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

 

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Contingencies

 

Litigation

 

The Company may be party to legal proceedings in the ordinary course of business from time to time. Litigation is subject to inherent uncertainties, and an adverse result in a legal proceeding could arise that may harm our business. Below is an overview of a pending legal proceeding in which an adverse result could have a material adverse effect on our business and results of operations.

 

On December 27, 2017, PSP Falcon Industries, LLC (“PSP Falcon”) filed a civil action against the Company in the Ocean County Superior Court located in Toms River, New Jersey. The civil action relates to an outstanding balance alleged to be due to PSP Falcon from the Company in an amount of $530,633 related to certain construction expenses. The Company believes it has paid PSP Falcon in full for the services rendered and therefore that no outstanding balance remains due. Accordingly, the Company plans to vigorously defend itself from this claim.

 

Environmental Matters

 

We are subject to federal, state, and local laws, regulations and ordinances relating to the protection of the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, and occupational health and safety. It is management’s opinion that the Company is not currently exposed to significant environmental remediation liabilities or asset retirement obligations. However, if a release of hazardous substances occurs, or is found on one of our properties from prior activity, we may be subject to liability arising out of such conditions and the amount of such liability could be material.

 

The Company accrues for potential environmental liabilities in a manner consistent with GAAP; that is, when it is probable a liability has been incurred and the amount of the liability is reasonably estimable. The Company reviews the status of its environmental sites on a yearly basis and adjusts its reserves accordingly. Such potential liabilities accrued by the Company do not take into consideration possible recoveries of future insurance proceeds. The Company maintains insurance coverage for unintentional acts that result in environmental remediation liabilities up to $1 million per occurrence and $2 million in the aggregate, with an umbrella liability policy that doubles the coverage. These policies do, however, take into account the likely share other parties will bear at remediation sites. It would be difficult to estimate the Company’s ultimate level of liability due to the number of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and risk assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at the sites, and the often quite lengthy periods over which eventual remediation may occur. Other than as disclosed above with respect to an adverse result regarding the Company’s obligations to address certain environmental clean-up matters at the former New Jersey processing and distribution center, the Company does not currently believe that any claims, penalties or costs in connection with known environmental matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

In December 2016, the Company completed the acquisition of certain glycol distillation assets from Union Carbide Corporation in Institute, West Virginia. In order to comply with West Virginia regulations enacted in 2017, the Company has elected to accrue $780,000 for tank remediation. The amount of the accrual is based on various assumptions and estimates and will be periodically reevaluated in light of a variety of future events and contingencies. 

 

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Results of Operations

 

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

 

Net Sales

 

For the three-month period ended March 31, 2018, Net Sales were $3,001,010 compared to $2,290,321 for the three-month period ended March 31, 2017, representing an increase of $710,689, or approximately 31%. The increase in Net Sales was due to $667,644 of sales related to the Industrial Segment businesses compared to the same period in 2017. Net Sales, including intersegment sales for the three-month period ended March 31, 2018, were $1,739,584 and $1,608,325 for the Consumer and Industrial segments, respectively.

 

Cost of Goods Sold

 

For the three-month period ended March 31, 2018, our Costs of Goods Sold was $2,449,100, compared to $2,150,586 for the three-month period ended March 31, 2017, representing an increase of $298,514, or approximately 14%. The increase in Cost of Goods Sold was primarily due to costs associated with the increase in net sales.

 

Gross Profit

 

For the three-month period ended March 31, 2018, we realized a gross profit of $551,910, compared to a gross profit of $139,735 for the three-month period ended March 31, 2017. Gross profit, including intersegment sales, for the three-month period ended March 31, 2018 was $170,397 and $ 381,513 for the Consumer and Industrial segments, respectively.

 

Our gross profit margin for the three-month period ended March 31, 2018, was approximately 18%, compared to approximately 6% for the three-month period ended March 31, 2017. Gross profit margin, excluding intersegment sales for the three-month period ended March 31, 2018, was 10% and 24% for the Consumer and Industrial segments, respectively. The gross profit margin for the Consumer segment was positively impacted by increased sales and proportionately lower costs.

 

Operating Expenses

 

For the three-month period ended March 31, 2018, operating expenses increased to $1,643,181 from $1,051,671 for the three-month period ended March 31, 2017, representing an increase of $591,510, or approximately 56%. Operating Expenses consist of Consulting Fees, Share-Based Compensation, Salaries and Wages, Legal and Professional Expenses, and General and Administrative Expenses. Our operating expense ratio for the three-month period ended March 31, 2018, was approximately 55%, compared to approximately 46% for the three-month period ended March 31, 2017.

 

Consulting Fees consist of marketing and administrative fees incurred under consulting agreements.  Consulting Fees decreased to $48,591 for the three-month period ended March 31, 2018, from $53,426 for the three-month period ended March 31, 2017, representing a decrease of $4,835 or 9%.

 

Share-Based Compensation consists of stock and options issued to employees in consideration for services provided to the Company. Share-Based Compensation decreased to $119,888 for the three-month period ended March 31, 2018, from $136,986 for the three-month period ended March 31, 2017, representing a decrease of $17,098, or 12%.  

 

Salaries and Wages consist of wages and the related taxes.  Salaries and Wages increased to $662,231 for the three-month period ended March 31, 2018, from $343,055 for the three-month period ended March 31, 2017, representing an increase of $319,176 or 93%.   The increase is due to the addition of employees in such areas as marketing, sales and finance in late 2017.

 

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Legal and Professional Fees consist of legal, accounting, tax and audit services.  For the three-month period ended March 31, 2018, Legal and Professional Fees increased to $330,439 from $160,991 for the three-month period ended March 31, 2017, representing an increase of $169,448. The increase is primarily related to work performed in connection with special projects including tax, audit and IT needs.

 

General and Administrative (G&A) Expenses consist of general operational costs of our business. For the three-month period ended March 31, 2018, G&A Expenses increased to $482,032 from $357,213 for the three-month period ended March 31, 2017, representing an increase of $124,819, or approximately 35%. The increase is due to expenses related to the build out of our sales team, including the associated travel and training expenses.

 

Other Expense

 

For the three-month period ended March 31, 2018, Other Expense was $109,050 compared to $196,218 for the three-month period ended March 31, 2017, representing a decrease of $87,168. Other Expense consists of Interest Expense.

 

Adjusted EBITDA

 

Presented below is the non-GAAP financial measure representing earnings before interest, taxes, depreciation, amortization and share-based compensation (which we refer to as “Adjusted EBITDA”). Adjusted EBITDA should be viewed as supplemental to, and not as an alternative for, net income (loss) and cash flows from operations calculated in accordance with GAAP.

 

Adjusted EBITDA is used by our management as an additional measure of our Company’s performance for purposes of business decision-making, including developing budgets, managing expenditures, and evaluating potential acquisitions or divestitures. Period-to-period comparisons of Adjusted EBITDA help our management identify additional trends in our Company’s financial results that may not be shown solely by period-to-period comparisons of net income (loss) and cash flows from operations. In addition, we may use Adjusted EBITDA in the incentive compensation programs applicable to many of our employees in order to evaluate our Company’s performance. Further, we believe that the presentation of Adjusted EBITDA is useful to investors in their analysis of our results and helps investors make comparisons between our company and other companies that may have different capital structures, different effective income tax rates and tax attributes, different capitalized asset values and/or different forms of employee compensation. Our management recognizes that Adjusted EBITDA has inherent limitations because of the excluded items, particularly those items that are recurring in nature. In order to compensate for those limitations, management also reviews the specific items that are excluded from Adjusted EBITDA, but included in net income (loss), as well as trends in those items. The amounts of those items are set forth, for the applicable periods, in the reconciliations of Adjusted EBITDA to net loss below. 

 

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RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA

 

   Three Months Ended March 31, 
   2018   2017 
GAAP net loss  $(1,217,572)  $(1,108,910)
           
Interest expense   109,050    196,218 
Income tax expense   17,251    756 
Depreciation and amortization   276,278    245,482 
Share-based compensation   119,888    136,986 
Adjusted EBITDA  $(695,105)  $(529,468)

 

Liquidity & Capital Resources; Going Concern

 

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

 

For the three months ended March 31, 2018 and 2017, net cash used in operating activities was $446,726 and $514,457 respectively.  The decrease in cash used in operating activities is due to the significant period over period changes in accounts receivable, inventories and accounts payable and accrued expenses.

 

For the three months ended March 31, 2018, the Company used $90,214 in cash for investing activities, compared to the $466,091 used in the prior year’s period.  These amounts were comprised of capital expenditures for equipment.

 

For the three months ended March 31, 2018, net cash from financing activities was $823,286, which was comprised of $1,000,000 proceeds from a note payable, offset by payments made on other notes payable and capital lease obligations. For the three months ended March 31, 2017, we paid $22,353, in cash related to financing activities, primarily related to period debt payments.

 

As of March 31, 2018, we had $2,656,627 in current assets, including $404,290 in cash, $1,146,652 in accounts receivable and $632,550 in inventories. Cash increased from $111,302 as of December 31, 2017, to $404,290 as of March 31, 2018, primarily due to the timing of payments.

 

As of March 31, 2018, we had total current liabilities of $5,259,762 consisting primarily of accounts payable and accrued expenses of $3,011,095, contingent acquisition consideration of $1,503,113, and the current portion of notes payable of $310,712. As of March 31, 2018, we had total non-current liabilities of $4,853,861, consisting primarily of the non-current portion of our notes payable and capital lease obligations. 

 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of March 31, 2018, the Company has yet to achieve profitable operations and is dependent on our ability to raise capital from stockholders or other sources to sustain operations and to ultimately achieve profitable operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date of this filing.

 

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

 

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In their report dated April 2, 2018 with respect to our consolidated financial statements for the years ended December 31, 2017 and 2016, KMJ Corbin & Company LLP, our independent registered public accounting firm, expressed substantial doubt about our ability to continue as a going concern as a result of our recurring losses from operations and our dependence on our ability to raise capital, among other factors. 

 

Cash Flows

 

The table below sets forth certain information about the Company’s cash flows for the three months ended March 31, 2018 and 2017:

 

   For the Three Months Ended 
   March 31, 2018   March 31, 2017 
Net cash used in operating activities  $(446,726)  $(514,457)
Net cash used in investing activities   (90,214)   (466,091)
Net cash provided (used in) by financing activities   823,286    (22,353)
Net change in cash and restricted cash   286,346    (1,002,901)
Cash and restricted cash - beginning of period   117,944    1,490,551 
Cash and restricted cash - end of period  $404,290   $487,650 

 

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

 

Off-balance Sheet Arrangements

 

None.

 

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. 

 

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Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2018, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and (ii) 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.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the 2013 Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on our evaluation under the criteria set forth in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of March 31, 2018.

  

This Report on Form 10-Q does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Report on Form 10-Q.

 

Inherent Limitations on Internal Control

 

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 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, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors. 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 is also 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. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Changes in Internal Control Over Financial Reporting

 

During the fiscal quarter ended March 31, 2018, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

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PART II—OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

The Company may be party to legal proceedings in the ordinary course of business from time to time.  Litigation is subject to inherent uncertainties, and an adverse result in a legal proceeding could arise that may harm our business. Below is an overview of a pending legal proceeding in which an adverse result could have a material adverse effect on our business and results of operations.

 

On December 27, 2017, PSP Falcon Industries, LLC (“PSP Falcon”) filed a civil action against the Company in the Ocean County Superior Court located in Toms River, New Jersey. The civil action relates to an outstanding balance alleged to be due to PSP Falcon from the Company in an amount of $530,633 related to certain construction expenses. The Company believes it has paid PSP Falcon in full for the services rendered and therefore that no outstanding balance remains due. Accordingly, the Company plans to vigorously defend itself from this claim.

 

Item 1A.  Risk Factors.

 

There have been no changes that constitute a material change from the risk factors previously disclosed in our 2017 Annual Report on Form 10-K filed on April 2, 2018.

 

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

 

For the three months ended March 31, 2018, the Company issued unregistered securities as follows:

 

On January 8, 2018, the Company issued 150,000 shares of common stock to one employee of the Company at a price of $0.06 per share.  The shares were issued pursuant to Section 4(a)(2) because the employee 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, 2018, the Company issued an aggregate of 1,155,600 shares of common stock to six directors of the Company pursuant to the Company’s FY2018 Director Compensation Plan at a price of $0.065 per share. 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. 

 

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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. 

 

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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.

 

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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: May 15, 2018 By: /s/ Ian Rhodes
  Ian Rhodes
  Chief Executive Officer
  (Principal Executive Officer)
   
Date: May 15, 2018 By: /s/ Brian Gelman
  Brian Gelman
  Chief Financial Officer
 

(Principal Financial Officer)

 

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