Notes
to Condensed Consolidated Financial Statements (Unaudited)
NOTE
1 – Organization and Nature of Business
GlyEco, Inc. (the “Company”, “we”, or “our”)
is a specialty chemical company formed in the State of Nevada on October 21, 2011. We have two segments, Consumer and Industrial
(see Note 7).
On
December 27, 2016, the Company purchased WEBA Technology Corp. (“WEBA”), a privately-owned company that develops,
manufactures and markets additive packages for the antifreeze/coolant, gas patch coolants and heat transfer industries; and purchased
96% of Recovery Solutions & Technologies Inc. (“RS&T”), a privately-owned company involved in the development
and commercialization of glycol recovery technology. On December 28, 2016, the Company purchased certain glycol distillation assets
from Union Carbide Corporation (“UCC”), a wholly-owned subsidiary of The Dow Chemical Company (“Dow”),
located in Institute, West Virginia (the “Dow Assets”). During the three months ended March 31, 2017, the Company
acquired the remaining 4% of RS&T not already owned by the Company.
Going
Concern
The
condensed consolidated financial statements as of September 30, 2017 and December 31, 2016 and for the three and nine months ended
September 30, 2017 and 2016, have been prepared assuming that the Company will continue as a going concern. As of September 30,
2017, the Company has yet to achieve profitable operations and is dependent on its ability to raise capital from stockholders
or other sources to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as
a going concern. Ultimately, we plan to achieve profitable operations through the implementation of operating efficiencies at
our facilities and increased revenue through the offering of additional products and the expansion of our geographic footprint
through acquisitions, broader distribution from our current facilities and/or the opening of additional facilities. The condensed
consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
NOTE
2 – Basis of Presentation and Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying condensed consolidated financial statements have been prepared by the Company in accordance with accounting
principles generally accepted in the United States (“GAAP”), and pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”).
In
the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation on an interim basis. The operating results for the
nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year ending
December 31, 2017.
Certain
information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed
or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This
report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,
including the Company’s audited consolidated financial statements and related notes included therein.
Principles
of Consolidation
These
consolidated financial statements include the accounts of GlyEco, Inc., and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated as a result of consolidation.
Noncontrolling
Interests
The
Company recognizes noncontrolling interests as equity in the consolidated financial statements separate from the parent company’s
equity. Noncontrolling interests’ partners have less than 50% share of voting rights at any one of the subsidiary level
companies. The amount of net income (loss) attributable to noncontrolling interests is included in consolidated net income (loss)
on the face of the consolidated statements of operations. Changes in a parent entity’s ownership interest in a subsidiary
that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial
interest. The Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated. Such gain or loss is
measured using the fair value of the noncontrolling equity investment on the deconsolidation date. Additionally, operating losses
are allocated to noncontrolling interests even when such allocation creates a deficit balance for the noncontrolling interest
partner.
The
Company provides either in the consolidated statements of stockholders’ equity, if presented, or in the notes to consolidated
financial statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net
assets), equity (net assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest that
separately discloses:
|
(1)
|
Net income or loss
|
|
(2)
|
Transactions with
owners acting in their capacity as owners, showing separately contributions from and distributions to owners.
|
|
(3)
|
Each component of
other comprehensive income or loss
|
Operating
Segments
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
on a regular basis by the chief operating decision maker, or decision-making group, in deciding how to allocate resources
to an individual segment and in assessing the performance of the segment. Operating segments may be aggregated into a single operating
segment if the segments have similar economic characteristics, among other criteria. Prior to the December 2016 acquisitions of
WEBA, RS&T and the DOW Assets and through December 31, 2016, the Company operated as one segment. As of January 1, 2017, we
have two operating segments, Consumer and Industrial. (See Note 7)
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported revenues and expenses during the reporting periods. Because of the use of estimates
inherent within the financial reporting process, actual results may differ significantly from those estimates. Significant
estimates include, but are not limited to, items such as the allowance for doubtful accounts, the value of share-based compensation
and warrants, the allocation of the purchase price in the Company’s acquisitions, the recoverability of property, plant
and equipment, goodwill, other intangibles and their estimated useful lives, contingent liabilities, and environmental and asset
retirement obligations. Due to the uncertainties inherent in the formulation of accounting estimates, it is reasonable to expect
that these estimates could be materially revised within the next year.
Revenue
Recognition
The
Company recognizes revenue when (1) delivery of product has occurred or services have been rendered, (2) there is persuasive evidence
of a sale arrangement, (3) selling prices are fixed or determinable, and (4) collectability from the customer (individual customers
and distributors) is reasonably assured. Revenue consists primarily of revenue generated from the sale of the Company’s
products. This generally occurs either when the Company’s products are shipped from its facility or delivered to the customer
when title has passed. Revenue is recorded net of estimated cash discounts. The Company estimates and accrues an allowance for
sales returns at the time the product is sold. To date, sales returns have not been material. Shipping costs passed to the customer
are included in net sales.
Costs
Cost
of goods sold includes all direct material and labor costs and those indirect costs of bringing raw materials to sale condition,
including depreciation of equipment used in manufacturing and shipping and handling costs. Selling, general, and administrative
costs are charged to operating expenses as incurred. Research and development costs are expensed as incurred, are included in
operating expenses and were insignificant in 2017 and 2016. Advertising costs are expensed as incurred.
Accounts
Receivable
Accounts
receivable are recognized and carried at the original invoice amount less an allowance for expected uncollectible amounts. Inherent
in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s
willingness or ability to pay, the Company’s compliance with customer invoicing requirements, the effect of general economic
conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are
considered past due. We do not charge interest on past due balances. The Company writes off trade receivables when all reasonable
collection efforts have been exhausted. Bad debt expense is reflected as a component of general and administrative expenses in
the consolidated statements of operations. The allowance for doubtful accounts totaled $133,126 and $80,207 as of September 30,
2017 and December 31, 2016, respectively.
Inventories
Inventories
are reported at the lower of cost or net realizable value. The cost of raw materials, including feedstocks and additives, is determined
on an average unit cost of the units in a production lot. Work-in-process represents labor, material and overhead costs associated
with the manufacturing costs at an average unit cost of the units in the production lot. Finished goods represents work-in-process
items with additive costs added. The Company periodically reviews its inventories for obsolete or unsalable items and adjusts
its carrying value to reflect estimated realizable values.
Property,
Plant and Equipment
Property,
plant and equipment is stated at cost. The Company provides for depreciation on the cost of its equipment using the straight-line
method over an estimated useful life, ranging from three to twenty years, and zero salvage value. Expenditures for repairs and
maintenance are charged to expense as incurred.
For
purposes of computing depreciation, the useful lives of property, plant and equipment are as follows:
Leasehold improvements
|
|
Lesser of the remaining lease term or
5 years
|
|
|
|
Machinery
and equipment
|
|
3-15
years
|
Business
Combinations
The
Company accounts for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair values on the acquisition date. The purchase price allocation process requires management
to make significant estimates and assumptions, especially with respect to intangible assets, estimated contingent consideration
payments and pre-acquisition contingencies. Examples of critical estimates in valuing certain of the intangible assets the Company
has acquired or may acquire in the future include but are not limited to:
|
●
|
future expected
cash flows from product sales, other customer contracts, and
|
|
|
|
|
●
|
discount rates utilized
in valuation estimates.
|
Unanticipated
events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date,
including changes from events after the acquisition date, such as changes in our estimates of relevant revenue or other targets,
will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related
contingent consideration or the occurrence of events that cause results to differ from our estimates or assumptions could have
a material effect on the consolidated financial position, statements of operations or cash flows in the period of the change in
the estimate.
Goodwill
and Intangible Assets
Intangible
assets that we acquire are recognized separately if they arise from contractual or other legal rights or if they are separable
and are recorded at fair value less accumulated amortization. We analyze intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and period at least
at each balance sheet date. The effects of any revision are recorded to operations when the change arises. We recognize impairment
when the estimated undiscounted cash flow generated by those assets is less than the carrying amounts of such assets. The amount
of impairment is the excess of the carrying amount over the fair value of such assets. The Company’s management believes
there is no impairment of long-lived assets as of September 30, 2017. However, market conditions could change or demand for the
Company’s products could decrease, which could result in future impairment of long-lived assets
Goodwill
is recorded as the excess of (i) the consideration transferred, the amount of any non-controlling interest in the acquiree and
the acquisition date fair value of any previous equity interest in the acquired over the (ii) fair value of the net identifiable
assets acquired. We do not amortize goodwill; however, we annually, or whenever there is an indication that goodwill may be impaired,
evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less
than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment
test. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with
it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment
loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the assets exceeds
fair value. Any future increases in fair value would not result in an adjustment to the impairment loss that may be recorded in
our consolidated financial statements. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment
in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events, as well as overall
financial performance. Based on our analysis, no impairment loss of goodwill was recorded in 2017 and 2016 as the carrying amount
of the reporting unit’s assets did not exceed the estimated fair value determined.
Impairment
of Long-Lived Assets
Property,
plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or
fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale
would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material.
The
three levels of inputs that may be used to measure fair value are as follows:
|
●
|
Level 1
:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access
as of the measurement date;
|
|
|
|
|
●
|
Level 2
:
Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data;
and
|
|
|
|
|
●
|
Level 3
:
Significant unobservable inputs that reflect a reporting entity’s own assumptions that market participants would use
in pricing an asset or liability. Valuation is generated from model-based techniques with the unobservable assumptions reflecting
our own estimate of assumptions that market participants would use in pricing the asset or liability.
|
Cash,
restricted cash, accounts receivable, accounts payable and accrued expenses, amounts due to related parties and current portion
of capital lease obligations and notes payable are reflected in the consolidated balance sheets at their estimated fair values
primarily due to their short-term nature. As to long-term capital lease obligations and notes payable, carrying values approximate
fair value since the estimated fair values are based on borrowing rates currently available to the Company for loans with similar
terms and maturities.
Deferred
Financing Costs, Debt Discount and Detachable Debt-Related Warrants
Costs
incurred in connection with debt are deferred and recorded as a reduction to the debt balance in the accompanying condensed consolidated
balance sheets. The Company amortizes debt issuance costs over the expected term of the related debt using the effective interest
method. Debt discounts related to the relative fair value of warrants issued in conjunction with the debt are also recorded as
a reduction to the debt balance and amortized over the expected term of the debt to interest expense using the effective interest
method.
Net
Loss Per Share Calculation
The
basic net loss per common share is computed by dividing the net loss available to common shareholders by the weighted average
number of shares outstanding during a period. Diluted loss per common share is computed by dividing the net loss available to
common shareholders by the weighted average number of common shares outstanding plus potentially dilutive securities. The Company’s
potentially dilutive securities outstanding are not shown in a diluted net loss per share calculation because their effect in
both 2017 and 2016 would be anti-dilutive. At September 30, 2017, these potentially dilutive securities included warrants of 5,648,124
and stock options of 4,872,621 for a total of 10,520,745. At September 30, 2016, these potentially dilutive securities included
warrants of 8,266,137 and stock options of 7,935,093 for a total of 16,201,230.
Income
Taxes
The
Company accounts for its income taxes in accordance with Financial Accounting Standard Board (“FASB”) Accounting Standards
Codification (“ASC”) 740, “Income Taxes,” which requires recognition of deferred tax assets and liabilities
for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period
that includes the enactment date. An allowance for the deferred tax asset is established if it is more likely than not that the
asset will not be realized.
Share-based
Compensation
All
share-based payments to employees and non-employee directors, including grants of employee stock options, are expensed based on
their estimated fair values at the grant date, in accordance with ASC 718. Compensation expense for share-based payments to employees
and directors is recorded over the vesting period using the estimated fair value on the date of grant, as calculated by the Company
using the Black-Scholes-Merton (“BSM”) option-pricing model or the Monte Carlo Simulation. For awards with only service
conditions that have graded vesting schedules, compensation cost is recorded on a straight-line basis over the requisite service
period for the entire award, unless vesting occurs earlier. For awards with market conditions, compensation cost is recorded on
the accelerated attribution method over the derived service period.
Non-employee
share-based compensation is accounted for based on the fair value of the related stock or options, using the BSM, or the fair
value of the goods or services on the measurement date, whichever is more readily determinable.
Recently
Issued Accounting Pronouncements
There
have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance
to the Company, except as discussed below.
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”
(“ASU 2014-09”). This updated guidance supersedes the current revenue recognition guidance, including industry-specific
guidance. The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to
depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. The updated guidance is effective for interim and annual periods beginning
after December 15, 2016, and early adoption is not permitted. In July 2015, the FASB decided to delay the effective date of ASU
2014-09 until December 15, 2017. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective
date. The Company has not yet selected a transition method and is currently assessing the impact the adoption of ASU 2014-09 will
have on its condensed consolidated financial statements and disclosures.
In
February 2016, the FASB issued ASU 2016-02, “Leases”, which requires the lease rights and obligations arising from
lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. ASU
2016-02 is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company
is still evaluating ASU 2016-02, the Company expects the adoption of ASU 2016-02 to have a material effect on the Company’s
consolidated financial condition due to the recognition of the lease rights and obligations as assets and liabilities. The Company
is currently assessing the impact of the adoption of ASU 2016-02 will have on its condensed consolidated financial statements
and disclosures
.
In
January 2017, the FASB, issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment” which simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill
impairment test. Goodwill impairment will now be the amount by which the reporting unit’s carrying value exceeds its
fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for fiscal years beginning after December
15, 2019, and interim periods within those fiscal years, with early adoption permitted for any impairment tests performed after
January 1, 2017. The Company has not yet decided if it will early adopt the provisions in this ASU for its annual goodwill
impairment test during 2017.
NOTE
3 – Inventories
The
Company’s total inventories were as follows:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
514,129
|
|
|
$
|
221,088
|
|
Work in process
|
|
|
23,903
|
|
|
|
172,142
|
|
Finished goods
|
|
|
367,265
|
|
|
|
251,292
|
|
Total inventories
|
|
$
|
905,297
|
|
|
$
|
644,522
|
|
NOTE 4
– Acquisitions, Goodwill and Other Intangible Assets
WEBA
On
December 27, 2016, the Company entered into a Stock Purchase Agreement (“WEBA SPA”) with WEBA, a privately-owned company
that develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolants and heat transfer industries.
Pursuant to the WEBA SPA, the Company acquired all of the WEBA shares from the WEBA sellers for $150,000 in cash and $2.65 million
in 8% Promissory Notes (see Note 8). In addition, the WEBA sellers may be entitled to receive earn-out payments of up
to an aggregate of $2,500,000 for calendar years 2017, 2018, and 2019 based upon terms set forth in the WEBA SPA. The Company
also issued 5,625,000 shares as repayment of $450,000 of notes payable due to the WEBA sellers. The fair market value of the shares
was $0.10 on the date of issuance. Following the WEBA acquisition, WEBA became a wholly owned subsidiary of the Company.
We
accounted for the acquisition of WEBA as required under applicable accounting guidance. Tangible assets acquired are recorded
at fair value. Identifiable intangible assets that we acquired are recognized separately if they arise from contractual or other
legal rights or if they are separable, and are recorded at fair value. Goodwill is recorded as the excess of the consideration
transferred over the fair value of the net identifiable assets acquired. The earn-out payments liability was recorded at their
estimated fair value of $1,745,023.
Although
management estimates that certain of the contingent consideration will be paid, it has applied a discount rate to the contingent
consideration amounts in determining fair value to represent the risk of these payments not being made. The total acquisition
date fair value of the consideration transferred and to be transferred is estimated at approximately $5.1 million, as follows:
Cash payment to the WEBA
Sellers at closing
|
|
$
|
150,000
|
|
Common stock issuance to the WEBA Sellers
|
|
|
562,500
|
|
Promissory notes to the WEBA Sellers
|
|
|
2,650,000
|
|
Contingent cash consideration to the WEBA Sellers
|
|
|
1,745,023
|
|
Total acquisition
date fair value
|
|
$
|
5,107,523
|
|
Allocation
of Consideration Transferred
The
identifiable assets acquired and liabilities assumed were recognized and measured as of the acquisition date based on their estimated
fair values as of December 27, 2016, the acquisition date. The excess of the acquisition date fair value of consideration transferred
over the estimated fair value of the net tangible assets and intangible assets acquired was recorded as goodwill.
The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
Cash
|
|
$
|
172,950
|
|
Accounts
receivable
|
|
|
342,151
|
|
Loan
receivable from RS&T
|
|
|
500,000
|
|
Property
and equipment
|
|
|
8,720
|
|
Customer
list
|
|
|
470,000
|
|
Intellectual
property
|
|
|
880,000
|
|
Trade
name
|
|
|
390,000
|
|
Non
complete agreement
|
|
|
835,000
|
|
Total
identifiable assets acquired
|
|
|
3,598,821
|
|
Accounts
payable and accrued expenses
|
|
|
190,527
|
|
Deferred
tax liability
|
|
|
1,030,000
|
|
Total
liabilities assumed
|
|
|
1,220,527
|
|
Total
identifiable assets less liabilities assumed
|
|
|
2,378,294
|
|
Goodwill
|
|
|
2,729,229
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
5,107,523
|
|
The
Company is amortizing the intangibles (excluding goodwill) over an estimated useful life of five to ten years. The Company will
evaluate the fair value of the earn-out liability on a periodic basis and adjust the balance, with an offsetting adjustment to
the income statement, as needed. The acquisition was considered to be significant. The Company has included the financial results
of the WEBA acquisition in its consolidated financial statements from the acquisition date and the results from WEBA were not
material to the Company’s consolidated financial statements for the year ended December 31, 2016.
Pro
Forma Financial Information
The
following table presents the Company’s unaudited pro forma results (including WEBA) for the three and nine months ended
September 30, 2016 as though the companies had been combined as of the beginning of each of the periods presented. The pro forma
information is presented for informational purposes only and is not indicative of the results of operations that would have been
achieved if the acquisition had taken place at the beginning of each period presented, nor is it indicative of results of operations
which may occur in the future. The unaudited pro forma results presented include amortization charges for intangible assets and
eliminations of intercompany transactions.
|
|
For
the
|
|
|
For
the
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2016
|
|
|
September
30, 2016
|
|
Total
revenues
|
|
$
|
1,933,311
|
|
|
$
|
5,711,266
|
|
Net
loss
|
|
$
|
(839,801
|
)
|
|
$
|
(2,773,438
|
)
|
The
Company did not incur material acquisition expenses related to the WEBA acquisition.
The
components of goodwill and other intangible assets related to the WEBA SPA, along with various other business combinations are
as follows:
|
|
|
|
Gross
Balance at
|
|
|
|
|
|
Net
Balance at
|
|
|
|
|
|
|
|
|
Net
Balance
at
|
|
|
|
Estimated
|
|
December 31,
|
|
|
Accumulated
|
|
|
December 31,
|
|
|
|
|
|
Accumulated
|
|
|
September
30,
|
|
|
|
Useful Life
|
|
2016
|
|
|
Amortization
|
|
|
2016
|
|
|
Additions
|
|
|
Amortization
|
|
|
2017
|
|
Finite
live
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
list and
tradename
|
|
5 years
|
|
$
|
987,500
|
|
|
$
|
(26,296
|
)
|
|
$
|
961,204
|
|
|
$
|
—
|
|
|
$
|
(176,109
|
)
|
|
$
|
811,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements
|
|
5 years
|
|
|
1,199,000
|
|
|
|
(246,000
|
)
|
|
|
953,000
|
|
|
|
—
|
|
|
|
(425,850
|
)
|
|
|
773,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual
property
|
|
10 years
|
|
|
880,000
|
|
|
|
—
|
|
|
|
880,000
|
|
|
|
—
|
|
|
|
(66,000
|
)
|
|
|
814,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
|
|
$
|
3,066,500
|
|
|
$
|
(272,296
|
)
|
|
$
|
2,794,204
|
|
|
$
|
—
|
|
|
$
|
(667,959
|
)
|
|
$
|
2,398,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Indefinite
|
|
$
|
3,693,083
|
|
|
$
|
—
|
|
|
$
|
3,693,083
|
|
|
$
|
129,500
|
|
|
$
|
—
|
|
|
$
|
3,822,583
|
|
We
compute amortization using the straight-line method over the estimated useful lives of the intangible assets. The Company has
no indefinite-lived intangible assets other than goodwill.
NOTE
5 – Property, Plant and Equipment
The
Company’s property, plant and equipment were as follows:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Machinery and equipment
|
|
$
|
4,347,950
|
|
|
$
|
4,154,305
|
|
Leasehold improvements
|
|
|
267,421
|
|
|
|
126,598
|
|
Accumulated depreciation
|
|
|
(1,187,815
|
)
|
|
|
(927,909
|
)
|
|
|
|
3,427,556
|
|
|
|
3,352,994
|
|
Construction in
process
|
|
|
644,857
|
|
|
|
304,845
|
|
Total property,
plant and equipment, net
|
|
$
|
4,072,413
|
|
|
$
|
3,657,839
|
|
NOTE 6–
Stockholders’ Equity
Preferred
Stock
The
Company’s articles of incorporation authorize the Company to issue up to 40,000,000 shares of $0.0001 par value, preferred
shares having preferences to be determined by the board of directors for dividends, and liquidation of the Company’s assets.
Of the 40,000,000 preferred shares the Company is authorized by its articles of incorporation, the Board of Directors has designated
up to 3,000,000 as Series AA preferred shares.
As
of September 30, 2017, the Company had no shares of Preferred Stock outstanding.
Common
Stock
As
of September 30, 2017, the Company has 164,415,465, $0.0001 par value, shares of common stock (the “Common Stock”)
outstanding. The Company’s articles of incorporation authorize the Company to issue up to 300,000,000 shares of the Common
Stock. The holders are entitled to one vote for each share on matters submitted to a vote to shareholders, and to share pro rata
in all dividends payable on common stock after payment of dividends on any preferred shares having preference in payment of dividends.
Equity
Incentive Program
On
December 18, 2014, the Company’s Board of Directors approved an Equity Incentive Program (the “Equity Incentive Program”),
whereby the Company’s employees may elect to receive equity in lieu of cash for all or part of their salary compensation.
During
the nine months ended September 30, 2017, the Company issued the following shares of common stock in connection with financing
activities:
On
August 10, 2017, the Company announced the closing of its rights offering, which expired on August 4, 2017, and raised
aggregate gross proceeds of approximately $2.29 million, including $670,000 in cash and $1.6 million in conversion of previously
issued 8% notes payable and accrued interest (see Note 8), from the sale of 28.6 million shares of common stock at a price
of $0.08 per share. The Company had approximately $0.1 million of costs associated with the offering netted against the cash proceeds.
The rights offering was made pursuant to a registration statement on Form S-1 (No. 333-215941) and prospectus on file with the
Securities and Exchange Commission. The Company used the net proceeds for general working capital purposes.
The
Company also extinguished the remaining 8% promissory notes issued in December 2016 through the conversion of indebtedness into
shares of its common stock at a per share price of $0.08 and cash repayment. The Company issued 2,754,500 shares for the conversion
of a total of $220,360 in principal and accrued interest and repaid the remaining balance in cash in the full amount of $52,467
of principal and accrued interest. As a result of these transactions, the previously issued 8% notes payable have been extinguished
in full.
During
the nine months ended September 30, 2017, the Company issued the following shares of common stock for compensation:
On
February 13, 2017, the Company issued an aggregate of 160,000 shares of common stock to two employees of the Company at a price
of $0.125 per share.
During
the quarter ended March 31, 2017, the Company issued an aggregate of 115,503 shares of common stock to employees of the Company
pursuant to the Company’s Equity Incentive Program at a price of $0.12 per share.
On
March 31, 2017, the Company issued an aggregate of 512,498 shares of common stock to six directors of the Company pursuant to
the Company’s FY2017 Director Compensation Plan at a price of $0.12 per share.
During
the quarter ended June 30, 2017, the Company issued an aggregate of 195,039 shares of common stock to employees of the Company
pursuant to the Company’s Equity Incentive Program at a price of $0.10 per share.
On
June 30, 2017, the Company issued an aggregate of 627,546 shares of common stock to six directors of the Company pursuant to the
Company’s FY2017 Director Compensation Plan at a price of $0.098 per share.
During
the quarter ended September 30, 2017, the Company issued an aggregate of 238,448 shares of common stock to employees of the Company
pursuant to the Company’s Equity Incentive Program at a price of $0.08 per share.
On
September 30, 2017, the Company issued an aggregate of 803,480 shares of common stock to six directors of the Company pursuant
to the Company’s FY2017 Director Compensation Plan at a price of $0.077 per share.
Shares
of common stock issued for warrant exercise
During
the nine months ended September 30, 2017, the Company issued an aggregate of 4,218,750 shares of Common Stock to accredited investors
in connection with the exercise of warrants at an exercise price of $0.08 per share.
Performance
and/or market based stock awards
In
January 2015, the Board of Directors approved the issuance of 940,595 restricted shares of the Company. These shares will be issued
to the then members of the Board of Directors upon vesting, which will be when the market price of the Company’s common
stock trades at or above $2 for a specified period.
The
initial value of the restricted stock grant was approximately $38,000, as adjusted for forfeitures resulting from directors who
have resigned, which will be amortized over the estimated service period. The Company recorded an expense of $11,547 and $50,565
from the amortization of the unvested restricted shares for the nine months ended September 30, 2017 and 2016, respectively. The
shares were valued using a Monte Carlo Simulation with a six-year life, 88.0% volatility and a risk-free interest rate of 1.79%.
In
February 2016, the Board of Directors approved the issuance of 3,301,358 restricted shares of the Company. These shares will be
issued to the then President (1,100,453 shares) and Chief Financial Officer (2,200,905 shares) upon vesting, which will be according
to the following terms:
|
-
|
20% when the market
price of the Company’s common stock trades at or above $0.30 for a specified period.
|
|
|
|
|
-
|
30% when the market
price of the Company’s common stock trades at or above $0.40 for a specified period.
|
|
|
|
|
-
|
30% when the market
price of the Company’s common stock trades at or above $0.50 for a specified period.
|
|
|
|
-
|
20% when the market
price of the Company’s common stock trades at or above $0.60 for a specified period.
|
|
|
The
initial value of the restricted stock grant was approximately $198,000, which was amortized over the estimated service period.
The Company recorded an expense of $17,364 and $20,470 from the amortization of the unvested restricted shares for the nine months
ended September 30, 2017 and 2016, respectively. The shares were valued using a Monte Carlo Simulation with a six-year life, 91.0%
volatility and a risk-free interest rate of 1.34%. In December 2016, the Board of Directors modified the terms of the 1,100,453
shares award in conjunction with the resignation of the President to provide for an expiration date of December 2017. The Company
revalued this award based on the new terms and determined the value of the award was approximately $18,000, which is being amortized
over the estimated service period.
In
January 2016, the Board of Directors approved the issuance of 6,281,250 restricted common shares of the Company. These shares
will be issued to the then members of the Board of Directors upon vesting, which will be when the market price of the Company’s
common stock trades at or above $0.12 for a specified period or if the Company has positive EBITDA (a non GAAP measure) for one
quarter in 2016. These shares were issued to the members of the Board on June 13, 2016, when the market price of the Company’s
common stock traded at or above $0.12 for a 30-day volume weighted average price.
The
initial value of the restricted stock grant was $509,000, which has been amortized over the estimated performance period. The
Company recorded the entire value as expense from the amortization of the restricted shares for the year ended December 31, 2016,
including $381,586 for the nine months ended September 30, 2016. The shares were valued using a Monte Carlo Simulation with a
one-year life, 106.0% volatility and a risk-free interest rate of 0.65%.
In
May 2016, the Board of Directors approved the issuance of 1,100,453 restricted shares of the Company. These shares will be issued
to the Chief Executive Officer upon vesting, which will be according to the following terms:
|
-
|
20% when the market
price of the Company’s common stock trades at or above $0.30 for a specified period.
|
|
|
|
|
-
|
30% when the market
price of the Company’s common stock trades at or above $0.40 for a specified period.
|
|
|
|
|
-
|
30% when the market
price of the Company’s common stock trades at or above $0.50 for a specified period.
|
|
|
|
|
-
|
20% when the market
price of the Company’s common stock trades at or above $0.60 for a specified period.
|
The
initial value of the restricted stock grant was approximately $94,000, which was to be amortized over the estimated service period.
In December 2016, the then Chief Executive Officer resigned from the Company; therefore, any recognized expense was reversed and
the expense recognized by the Company during the year ended December 31, 2016 was $0. In December 2016, the Board of Directors
modified the terms of this award in conjunction with the resignation of the then Chief Executive Officer to provide for an expiration
date of December 2017. The Company revalued this award based on the new terms and determined the value of the award was approximately
$18,000, which is being amortized over the estimated service period.
In
September 2016, the Board of Directors approved the issuance of 1,650,680 restricted common shares of the Company. These shares
will be issued to the then Vice President of Sales and Marketing upon vesting, which will be according to the following terms:
|
-
|
20% when the market
price of the Company’s common stock trades at or above $0.30 for a specified period.
|
|
|
|
|
-
|
30% when the market
price of the Company’s common stock trades at or above $0.40 for a specified period.
|
|
|
|
|
-
|
30% when the market
price of the Company’s common stock trades at or above $0.50 for a specified period.
|
|
|
|
|
-
|
20% when the market
price of the Company’s common stock trades at or above $0.60 for a specified period.
|
The
initial value of the restricted stock grant was approximately $141,000, which was amortized over the estimated service period.
Upon the termination of the then Vice President of Sales and Marketing on April 28, 2017, this grant was terminated and the Company
reversed all previous expense and is no longer recording expense related to this award. The Company recorded income of $14,802
from the reversal of previous amortization of the unvested restricted shares for the nine months ended September 30, 2017. The
shares were valued using a Monte Carlo Simulation with a 6-year life, 92.0% volatility and a risk-free interest rate of 1.35%.
In
December 2016, the Board of Directors approved the issuance of 6,290,000 restricted common shares of the Company. These shares
will be issued to members of the Board of Directors and certain executives and employees upon vesting, which will occur when the
price per share of the Company’s common stock, measured and approved based upon a 30-day trading volume weighted average
price (“VWAP”), is equal to at least $0.20 per share.
The
initial value of the restricted stock grant was approximately $430,000, which is being amortized over the estimated service period.
The Company recorded an expense of $71,818 from the amortization of the unvested restricted shares for the nine months ended September
30, 2017. The shares were valued using a Monte Carlo Simulation with a 6-year life, 98.0% volatility and a risk- free interest
rate of 2.00%.
In
June 2017, the Board of Directors approved the issuance of 1,000,000 restricted common shares of the Company. The initial value
of the restricted stock grant was $72,099, which is being amortized over the estimated service period. These shares will be issued
to certain executives upon the Company meeting the following bench marks: 50% will vest when the price per share of the Company’s
common stock, based upon a 30-day trading VWAP, is equal to at least $0.20 per share and 50% will vest when the price per share
of the Company’s common stock, measured and approved based upon a 30-day trading VWAP, is equal to at least $0.35 per share.
The current period expense was $3,004 for the quarter ended September 30, 2017.
During
the nine months ended September 30, 2017, the Board of Directors approved the issuance of 2,200,000 restricted common shares of
the Company. The initial value of the restricted stock grant was $150,258, which is being amortized over the estimated service
period. These shares will be issued to certain executives and employees upon vesting, which will occur when the price per share
of the Company’s common stock, measured and approved based upon a 30-day trading VWAP, is equal to at least $0.20 per share.
The current period expense was insignificant.
A
summary of the Company’s restricted stock awards is presented below:
|
|
Number
of
Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
per Share
|
|
Unvested
at January 1, 2017
|
|
|
12,691,084
|
|
|
$
|
0.08
|
|
Restricted
stock granted
|
|
|
3,200,000
|
|
|
|
0.08
|
|
Restricted
stock vested
|
|
|
—
|
|
|
|
—
|
|
Restricted
stock forfeited
|
|
|
(1,940,680
|
)
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Unvested
at September 30, 2017
|
|
|
13,950,404
|
|
|
$
|
0.08
|
|
Options
and warrants
During
the nine months ended September 30, 2017, the Company issued 4,218,750 shares of common stock in connection with the exercise
of stock warrants at an exercise price of $0.08 per share for total proceeds of $337,500. During the nine months ended September
30, 2016, the Company did not have any issuances or exercises of stock warrants. The Company recognized $7,500 of expense related
to the vesting of outstanding options during the nine months ended September 30, 2017.
NOTE 7
– Segments
Prior
to the December 2016 acquisitions of WEBA, RS&T and the DOW Assets and through December 31, 2016, the Company operated as
one segment. Effective January 1, 2107, we have two segments, Consumer and Industrial. Consumer’s principal business activity
is the processing of waste glycol into high-quality recycled glycol products, specifically automotive antifreeze, and related
specialty blended antifreeze, which we sell in the automotive and industrial end markets. We operate six processing and distribution
centers located in the eastern region of the United States. Industrial’s principal business activity consists of two divisions:
WEBA and RS&T. WEBA develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolants and
heat transfer industries throughout North America, and RS&T, operates a
14-20 million gallons
per year ASTM E1177 EG-1 glycol re-distillation plant in West Virginia that
processes waste glycol into virgin quality
recycled glycol for sale to industrial customers worldwide.
The
Company uses loss before provision for income taxes as its measure of profit/loss for segment reporting purposes. Loss before
provision for income taxes by operating segment includes all operating items relating to the businesses, including inter segment
transactions. Items that primarily relate to the Company as a whole are assigned to Corporate.
Inter
segment eliminations present the adjustments for inter segment transactions to reconcile segment information to the Company’s
consolidated financial statements.
Segment
information, and the reconciliation to the Company’s consolidated financial statements, for the three months ended September
30, 2017, is presented below:
|
|
Consumer
|
|
|
Industrial
|
|
|
Inter
Segment
Eliminations
|
|
|
Corporate
|
|
|
Total
|
|
Sales,
net
|
|
$
|
1,455,849
|
|
|
$
|
2,076,852
|
|
|
$
|
(248,031
|
)
|
|
$
|
|
|
|
$
|
3,284,670
|
|
Cost
of goods sold
|
|
|
1,307,099
|
|
|
|
1,817,509
|
|
|
|
(248,031
|
)
|
|
|
|
|
|
|
2,876,577
|
|
Gross
profit
|
|
|
148,750
|
|
|
|
259,343
|
|
|
|
—
|
|
|
|
|
|
|
|
408,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
713,885
|
|
|
|
1,144,255
|
|
|
|
—
|
|
|
|
305,214
|
|
|
|
2,163,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(565,135
|
)
|
|
|
(884,912
|
)
|
|
|
—
|
|
|
|
(305,214
|
)
|
|
|
(1,755,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
(152,171
|
)
|
|
|
(49,998
|
)
|
|
|
—
|
|
|
|
(98,463
|
)
|
|
|
(300,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
$
|
(717,306
|
)
|
|
$
|
(934,910
|
)
|
|
$
|
—
|
|
|
$
|
(403,677
|
)
|
|
$
|
(2,055,893
|
)
|
Segment
information, and the reconciliation to the Company’s consolidated financial statements, for the nine months ended September
30, 2017, is presented below:
|
|
Consumer
|
|
|
Industrial
|
|
|
Inter
Segment
Eliminations
|
|
|
Corporate
|
|
|
Total
|
|
Sales,
net
|
|
$
|
4,701,752
|
|
|
$
|
4,626,034
|
|
|
$
|
(834,698
|
)
|
|
$
|
—
|
|
|
$
|
8,493,088
|
|
Cost
of goods sold
|
|
|
4,092,801
|
|
|
|
4,210,303
|
|
|
|
(834,698
|
)
|
|
|
—
|
|
|
|
7,468,406
|
|
Gross
profit
|
|
|
608,951
|
|
|
|
415,731
|
|
|
|
—
|
|
|
|
|
|
|
|
1,024,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,722,774
|
|
|
|
1,723,606
|
|
|
|
—
|
|
|
|
923,143
|
|
|
|
4,369,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,113,823
|
)
|
|
|
(1,307,875
|
)
|
|
|
—
|
|
|
|
(923,143
|
)
|
|
|
(3,344,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
(163,390
|
)
|
|
|
(80,921
|
)
|
|
|
—
|
|
|
|
(475,924
|
)
|
|
|
(720,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
$
|
(1,277,213
|
)
|
|
$
|
(1,388,796
|
)
|
|
$
|
—
|
|
|
$
|
(1,399,067
|
)
|
|
$
|
(4,065,076
|
)
|
NOTE 8
– Notes Payable
Notes
payable consist of the following:
|
|
September
30, 2017
|
|
|
December 31, 2016
|
|
2017
Secured Note
|
|
$
|
110,822
|
|
|
$
|
—
|
|
2016
Secured Notes
|
|
|
326,535
|
|
|
|
396,562
|
|
2016
5% Related Party Unsecured Notes
|
|
|
—
|
|
|
|
1,000,000
|
|
2016
8% Related Party Unsecured Notes
|
|
|
—
|
|
|
|
1,458,256
|
|
2016
WEBA Seller Notes
|
|
|
2,650,000
|
|
|
|
2,650,000
|
|
Total
notes payable
|
|
|
3,087,357
|
|
|
|
5,504,818
|
|
Less
current portion
|
|
|
(108,575
|
)
|
|
|
(2,541,178
|
)
|
Long-term
portion of notes payable
|
|
$
|
2,978,782
|
|
|
$
|
2,963,640
|
|
2017
Secured Note
In
July 2017, the Company entered into a secured promissory note with PACCAR Financial (the “2017 Secured Note”). The
2017 Secured Note is collateralized by vehicles. The key terms of the 2017 Secured Note includes: (i) an original principal balance
of $116,655, (ii) interest rate of 7.95%, and (iii) term of 5 years.
2016
Secured Notes
In
January and April 2016, the Company entered into a secured promissory note with Ascentium Capital. In April 2016, the Company
entered into secured promissory notes with Ascentium Capital. In July and September 2016, the Company entered into a secured promissory
note with PACCAR Financial. In September 2016, the Company entered into a secured promissory note with PACCAR Financial. In November
2016, the Company entered into secured promissory notes with MHC Financial Services, Inc. (collectively, the “2016 Secured
Notes”). The key terms of the 2016 Secured Notes include: (i) an aggregate principal balance of $437,000, (ii) interest
rates ranging from 5.8% to 9.0%, and (iii) terms of 4-5 years. The 2016 Secured Notes are collateralized by vehicles and equipment.
2016
Related Party Unsecured Notes
5%
Notes Issuance
On
December 27, 2016, the Company entered into a subscription agreement (the “5% Notes Subscription Agreement”) by and
between the Company and various funds managed by Wynnefield Capital. Pursuant to the 5% Notes Subscription Agreement, the Company
offered and issued $1,000,000 in principal amount of 5% Senior Unsecured Promissory Notes (the “5% Notes”). The Company
received $1,000,000 in gross proceeds from the offering. The 5% Notes were scheduled to mature on May 31, 2017 (the “5%
Note Maturity Date”). The 5% Notes bore interest at a rate of 5% per annum due on the 5% Note Maturity Date or as otherwise
specified by the 5% Notes. On April 17, 2017, the Company repaid the 5% Notes in full.
8%
Notes Issuance
On
December 27, 2016, the Company entered into subscription agreements (the “8% Notes Subscription Agreements”) by and
between the Company and certain accredited investors. Pursuant to the 8% Notes Subscription Agreements, the Company offered and
issued: (i) $1,810,000 in principal amount of 8% Senior Unsecured Promissory Notes (the “8% Notes”); and (ii) warrants
(the “Warrants”) to purchase up to 5,656,250 shares of common stock of the Company (the “Common Stock”).
The Company received $1,810,000 in gross proceeds from the offering of which $1,760,000 was received in 2016 and $50,000 was accrued
as an other current asset at December 31, 2016 and received in 2017. The 8% Notes were scheduled to mature on December 27, 2017
(the “8% Note Maturity Date”). The 8% Notes bore interest at a rate of 8% per annum due on the 8% Note Maturity Date
or as otherwise specified by the 8% Note. The Company also incurred $26,872 of issuance costs, which were recorded as a debt discount
and were amortized as interest expense through the 8% Note Maturity Date. The Warrants are exercisable for an aggregate of 5,656,250
shares of Common Stock, beginning on December 27, 2016, and will be exercisable for a period of three years. The exercise price
with respect to the warrants is $0.08 per share. The exercise price and the amount of shares of common stock issuable upon exercise
of the warrants are subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications,
mergers or other similar issuances. On August 4, 2017, the Company redeemed $1,550,000 of the 8% Notes through the issuance of
common shares of the Company’s stock through the rights offering that closed on August 4, 2017. On August 10, 2017, the
Company repaid the remaining $260,000 of 8% Notes through a conversion of debt and the of issuance of common shares of the Company’s
stock and cash repayment. See Note 6 for additional information.
The
Company allocated the proceeds received to the 8% Notes and the warrants on a relative fair value basis at the time of issuance.
The total debt discount was amortized over the life of the 8% Notes to interest expense. Amortization expense during the nine
months ended September 30, 2017 was $205,180. On the date the debt was converted into common stock or repaid, the remaining unamortized
debt discount was expensed and recorded as a loss on debt extinguishment. The Company recorded $146,564 of loss on debt extinguishment
during the three and nine months ended September 30, 2017.
WEBA
Seller Notes
In
connection with the WEBA acquisition (see Note 4) the Company issued $2.65 million in 8% promissory notes (“Seller Notes”).
The Seller Notes mature on December 27, 2021. The Seller Notes bear interest at a rate of 8% per annum payable on a quarterly
basis in arrears. The Seller Notes contain standard default provisions, including: (i) failure to repay the Seller Note when it
is due at maturity; (ii) failure to pay any interest payment when due; (iii) failure to deliver financial statements on time;
and (iv) other standard events of default.
NOTE 9
– Capital Lease
On
April 13, 2017, the Company closed an amended sale-leaseback transaction with NFS Leasing, Inc. (“NFS”), wherein the
Company sold $1,700,000 of certain operational equipment used in the Company’s glycol recovery and recycling operations
(the “Equipment”) pursuant to a bill of sale and simultaneously entered into a master equipment lease agreement, as
modified (the “Lease Agreement”) with NFS for the lease of the Equipment by the Company. Pursuant to the Lease Agreement,
the lease term (the “Lease Term”) is 48 months commencing on May 1, 2017. There was no gain or loss associated with
the sale-leaseback. During the Lease Term, the Company is obligated to make monthly rental payments of $44,720 to NFS. The agreements
are effective as of March 31, 2017. At the conclusion of the Lease Term, the Company may repurchase the Equipment from NFS for
$1. The Company has accounted for this transaction as a capital lease.
NOTE 10
– Related Party Transactions
Vice
President of U.S. Operations
The
Vice President of U.S. Operations is the sole owner of BKB Holdings, LLC, which is the landlord of the property where GlyEco Acquisition
Corp #5’s processing center is located. The Vice President of U.S. Operations also is the sole owner of Renew Resources,
LLC, which provides services to the Company as a vendor.
|
|
2017
|
|
|
2016
|
|
Beginning
Balance as of January 1,
|
|
$
|
5,123
|
|
|
$
|
2,791
|
|
Monies
owed to related party for services performed
|
|
|
94,441
|
|
|
|
73,749
|
|
Monies
paid
|
|
|
(99,564
|
)
|
|
|
(75,667
|
)
|
Ending
Balance as of September 30, payable (receivable)
|
|
$
|
—
|
|
|
$
|
873
|
|
5%
Notes
On
December 27, 2016, we entered into debt agreements for an aggregate principal amount of $1,000,000 from the offering and issuance
of 5% Notes to Wynnefield Partners I, Wynnefield Partners and Wynnefield Offshore, all of which are under the management of Wynnefield
Capital, Inc. (“Wynnefield Capital”), an affiliate of the Company. The Company’s Chairman of the Board, Dwight
Mamanteo, is a portfolio manager of Wynnefield Capital. See Note 8 for additional information.
8%
Notes
On
December 27, 2016, we entered into debt agreements for an aggregate principal amount of $1,810,000 from the offering and issuance
of 8% Notes and warrants to purchase up to 5,656,250 shares of our common stock. The 8% Notes and warrants were sold to certain
officers and directors and their immediate families of the Company as well as Wynnefield Capital, an affiliate of the Company.
See Note 8 for additional information.
NOTE 11
– Commitments and Contingencies
Litigation
The
Company may be party to legal proceedings in the ordinary course of business. The Company believes that the nature
of these proceedings (collection actions, etc.) are typical for a Company of our size and scope of operations. Litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
Below is an overview of a recently resolved legal proceeding, one pending legal proceeding, and one outstanding alleged claim.
On
January 8, 2016, Acquisition Sub. #4 filed a civil action against Onyxx Group LLC in the Circuit Court of Hillsborough County,
Florida. This civil action relates to an outstanding balance due from Onyxx Group LLC to Acquisition Sub. #4. In September 2016,
the Company received a favorable judgment regarding this civil action in the amount of $95,000.
On
March 22, 2016, Acquisition Sub. #4 filed a civil action against Encore Petroleum, LLC in the Superior Court of New Jersey Law
Division, Hudson County. This civil action relates to an outstanding balance due from Encore Petroleum to Acquisition Sub. #4.
In August 2017, the Company reached a settlement with Encore Petroleum.
The
Company is also aware of one matter that involves an alleged claim against the Company, and it is at least reasonably possible
that the claim will be pursued. The claim involves contracts with our former director and his related entities that provided services
and was our landlord for the Company’s former processing facility in New Jersey. In this matter, the landlord of the Company’s
formerly leased property claims back rent is due for property used by the Company outside of the scope of its lease agreement.
During the quarter ended March 31, 2015, the former landlord denied the Company access to the New Jersey facility and prepared
an eviction notice. The Company negotiated a payment in the amount of $250,000 to regain access to the facility, and reached an
accord to negotiate with the landlord to resolve the outstanding issues by May 31, 2015. On December 28, 2015, the Company ultimately
approved the termination of the lease agreements related to the New Jersey facility, thereby ceasing all operations at that particular
facility. This termination was prompted by the former landlord’s demand for payment of approximately $2.3 million to maintain
access to the facility. In September 2016, the Company reached an agreement with the landlord. The agreement required the Company
to resolve certain environmental issues regarding the former processing facility and make certain payments to the landlord. The
Company, the landlord and their related entities also agreed to a full and final settlement of existing and possible future claims
between the parties. As of November 14, 2017, the Company believes it has addressed the environmental issues by removing and disposing
of the waste from the facility and cleaning the storage tanks. Additionally, as of November 14, 2017, the Company has paid in
full the agreed upon $335,000 payment to the landlord.
Environmental
Matters
We
are subject to federal, state, and local laws, regulations and ordinances relating to the protection of the environment, including
those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, and occupational
health and safety. It is management’s opinion that the Company is not currently exposed to significant environmental remediation
liabilities or asset retirement obligations. However, if a release of hazardous substances occurs, or is found on one of our properties
from prior activity, we may be subject to liability arising out of such conditions and the amount of such liability could be material.
The
Company accrues for potential environmental liabilities in a manner consistent with accounting principles generally accepted in
the United States; that is, when it is probable a liability has been incurred and the amount of the liability is reasonably estimable.
The Company reviews the status of its environmental sites on a yearly basis and adjusts its reserves accordingly. In December
2016, the Company completed an acquisition of certain glycol distillation assets from Union Carbide Corporation at Institute,
West Virginia. In order to comply with West Virginia regulations enacted in 2017, the Company has elected to accrue $780,000 for
tank remediation. The amount of the accrual is based on various assumptions and estimates and will be periodically reevaluated
in light of a variety of future events and contingencies. For example, subsequent to the completion of the tank remediation we
expect to have feedstock, which, depending on pricing at the time, may have a value of up to $300,000.
Additionally,
the potential liabilities accrued by the Company do not take into consideration possible recoveries of future insurance proceeds.
We maintain insurance coverage for unintentional acts that result in environmental remediation liabilities up to $1 million per
occurrence; $2 million in the aggregate, with an umbrella liability policy that doubles the coverage. These policies do, however,
take into account the likely share other parties will bear at remediation sites. We are unable to estimate the ultimate cost of
remediation due to a number of unknown factors, including, among others potential liability due to the number of other parties
that may be involved, the complexity of determining the relative liability among those parties, the uncertainty as to the nature
and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and risk assessment,
the various choices and costs associated with diverse technologies that may be used in corrective actions at the sites, and the
often quite lengthy periods over which eventual remediation may occur. Our management believes that the provision that we have
established is reasonable. Our management is exploring and considering a number of alternatives to mitigate the
potential
impact of this remediation on the Company.
The
Company is aware of one environmental remediation issue related to our former leased property in New Jersey, which is currently
subject to a remediation stemming from the sale of property by the previous owner in 2008 to the current landlord. To Management’s
knowledge, the former landlord has engaged a licensed site remediation professional and had assumed responsibility for this remediation.
In our management’s opinion the liability for this remediation is the responsibility of the former landlord. However,
the former landlord has disputed this position and it is an open issue subject to negotiation. Currently, we have no knowledge
as to the scope of the landlord’s former remediation obligation.
NOTE 12
– Subsequent Events
Recent
Stock Issuances
Since
October 1, 2017, the Company has issued an aggregate of 60,792 shares of common stock pursuant to the Company’s Equity Incentive
Program.