UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

 

(Mark One)

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

 

For the quarterly period ended: September 30, 2017March 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 

 

(GRAPHICS) 

 

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

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

Yes ☐  No ☒

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrantRegistrant 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 NovemberMay 14, 2017,2018, the registrant had 164,476,257has 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 – September 30, 2017March 31, 2018 and December 31, 201620173
 Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 20164
 Condensed Consolidated Statement of Stockholders’ Equity – NineThree Months Ended September 30, 2017March 31, 20185
 Condensed Consolidated Statements of Cash Flows – NineThree Months Ended September 30,March 31, 2018 and 2017 and 20166
 Notes to the Condensed Consolidated Financial Statements7
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2720
Item 3.Quantitative and Qualitative Disclosures About Market Risk4229
Item 4.Controls and Procedures4330
   
PART II — OTHER INFORMATION 
Item 1.Legal Proceedings4431
Item 1A.Risk Factors4431
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds4531
Item 3.Defaults Upon Senior Securities4732
Item 4.Mine Safety Disclosures4732
Item 5.Other Information4732
Item 6.Exhibits4833
Signatures4934

PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

GLYECO, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

September 30, 2017March 31, 2018 and December 31, 20162017

 

 September 30, December 31,  March 31, December 31, 
 2017 2016  2018  2017 
 (unaudited)     (unaudited)     
ASSETS              
             
Current Assets                
Cash $181,671  $1,413,999  $404,290  $111,302 
Cash - restricted  22,435   76,552      6,642 
Accounts receivable, net  1,561,422   1,096,713   1,146,652   1,546,367 
Prepaid expenses  288,133   340,899   473,135   360,953 
Inventories  905,297   644,522   632,550   564,133 
Total current assets  2,958,958   3,572,685   2,656,627   2,589,397 
                
Property, plant and equipment, net  4,072,413   3,657,839   3,990,351   3,897,950 
                
Other Assets                
Deposits  436,450   387,035   436,450   436,450 
Goodwill  3,822,583   3,693,083   3,822,583   3,822,583 
Other intangible assets, net  2,398,541   2,794,204   2,144,098   2,266,654 
Total other assets  6,657,574   6,874,322   6,403,131   6,525,687 
                
Total assets $13,688,945  $14,104,846  $13,050,109  $13,013,034 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                
Current Liabilities                
Accounts payable and accrued expenses $2,464,156  $961,010  $3,011,095  $2,921,406 
Due to related parties     6,191 
Contingent acquisition consideration  1,767,458   1,821,575   1,503,113   1,509,755 
Notes payable – current portion, net of debt discount  108,575   2,541,178 
Notes payable – current portion  310,712   297,534 
Capital lease obligations – current portion  365,811   6,838   434,842   377,220 
Total current liabilities  4,706,000   5,336,792   5,259,762   5,105,915 
                
Non-Current Liabilities                
Notes payable – non-current portion  2,978,782   2,963,640 
Notes payable – non-current portion, net of debt discount  3,759,047   2,953,631 
Capital lease obligations – non-current portion  1,185,179   3,371   1,094,814   1,085,985 
Total non-current liabilities  4,163,961   2,967,011   4,853,861   4,039,616 
                
Total liabilities  8,869,961   8,303,803   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 September 30, 2017 and December 31, 2016      
Common stock, 300,000,000 shares authorized; $0.0001 par value; 164,415,465 and 126,156,189 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively  16,442   12,616 
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  45,685,287   42,603,490   46,133,997   45,847,572 
Accumulated deficit  (40,882,745)  (36,815,063)  (43,214,170)  (41,996,598)
Total stockholders’ equity  4,818,984   5,801,043   2,936,486   3,867,503 
                
Total liabilities and stockholders’ equity $13,688,945  $14,104,846  $13,050,109  $13,013,034 

 

See accompanying notes to the condensed consolidated financial statements.


GLYECO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

For the three and nine months ended September 30,March 31, 2018 and 2017 and 2016

 

 Three months ended September
30,
  Nine months ended September
30,
  Three months ended March 31, 
 2017  2016  2017  2016  2018  2017 
 (unaudited) (unaudited) (unaudited) (unaudited)  (unaudited) (unaudited) 
              
Sales, net $3,284,670  $1,388,980  $8,493,088  $4,145,741  $3,001,010  $2,290,321 
Cost of goods sold  2,876,577   1,282,507   7,468,406   3,968,501   2,449,100   2,150,586 
Gross profit  408,093   106,473   1,024,682   177,240   551,910   139,735 
                        
Operating expenses:                        
Consulting fees  149,233   13,479   368,195   114,902   48,591   53,426 
Share-based compensation  129,707   258,613   361,241   856,848   119,888   136,986 
Salaries and wages  539,651   277,058   1,246,252   816,069   662,231   343,055 
Legal and professional  152,797   50,255   501,528   192,152   330,439   160,991 
Tank remediation  780,000      780,000    
General and administrative  411,966   200,421   1,112,307   736,802   482,032   357,213 
Total operating expenses  2,163,354   799,826   4,369,523   2,716,773   1,643,181   1,051,671 
                        
Loss from operations  (1,755,261)  (693,353)  (3,344,841)  (2,539,533)  (1,091,271)  (911,936)
                        
Other (income) and expenses:                
Interest income     (108)     (326)
Loss on debt extinguishment  146,564      146,564    
Other expense:        
Interest expense  154,068   5,761   573,671   17,739   109,050   196,218 
Gain on settlement of note payable           (15,000)
Total other expense, net  300,632   5,653   720,235   2,413 
Total other expense  109,050   196,218 
                        
Loss before provision for income taxes  (2,055,893)  (699,006)  (4,065,076)  (2,541,946)  (1,200,321)  (1,108,154)
                        
Provision for income taxes  653   85   2,606   6,031   17,251   756 
                        
Net loss $(2,056,546) $(699,091) $(4,067,682) $(2,547,977) $(1,217,572) $(1,108,910)
                        
Basic and diluted loss per share $(0.01) $(0.01) $(0.03) $(0.02) $(0.01) $(0.01)
                        
Weighted average number of common shares outstanding - basic and diluted  148,727,226   118,838,577   134,709,077   106,102,370   165,424,728   126,269,222 

 

 See accompanying notes to the condensed consolidated financial statements. 


GLYECO, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

For the ninethree months ended September 30, 2017 March 31, 2018

 

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

See accompanying notes to the condensed consolidated financial statements. 


GLYECO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2017 and 2016

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


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.


GLYECO, INC. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 1 – Organization and Nature of Business

 

GlyEco, Inc. (the “Company”, “we”, or “our”)is a specialty chemical company formed developer, manufacturer and distributor of performance fluids for the automotive, commercial and industrial markets. We specializein 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 Stateprocess. Our network of Nevada on October 21, 2011. We have two segments, Consumerfacilities, develop, manufacture and Industrial (see Note 7).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;industries, and purchased 96%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, (“Dow”), located in Institute, West Virginia (the “Dow Assets”). During the three months ended March 31,first quarter of fiscal year 2017, the Company acquired the remaining 4%purchased an additional 2.9% of RS&T not already owned by the Company.(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 September 30, 2017March 31, 2018 and December 31, 20162017 and for the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, have been prepared assuming that the Company will continue as a going concern. As of September 30, 2017,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”).


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 ninethree months ended September 30, 2017March 31, 2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017.2018.

 

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, 2016,2017, 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.

 

 7

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.

 

 8

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, weWe have two operating segments, the Consumer and Industrial.Industrial segments (See Note 7)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 allocation of the purchase price in the Company’s acquisitions, the recoverability of property, plant and equipment, goodwill, other intangibles and the determination of their estimated useful lives, contingent liabilities, and environmental and asset retirement obligations. Due to the uncertainties inherent in the formulation of accounting estimates, it is reasonable to expect that these estimates could be materially revised within the next year.


Revenue Recognition

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

 

The Company recognizes revenue when (1) deliveryits customer obtains control of product has occurredpromised goods or services have been rendered,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) there is persuasive evidence of a sale arrangement,identify the performance obligations in the contract, (3) selling prices are fixed or determinable, anddetermine the transaction price, (4) collectability fromallocate 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 deliveredtransaction price to the customerperformance obligations in the contract and (5) recognize revenue when title has passed. Revenue is recorded net of estimated cash discounts. The Company estimates and accrues an allowance(or as) the entity satisfies a performance obligation. See Note 3 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. 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 20172018 and 2016.2017. 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 $133,126$134,339 and $80,207$213,136 as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.

Inventories

 

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

 


Property, Plant and Equipment

 

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


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

 

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

 

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,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.

 

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 relatedrelate 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 20172018 and 20162017 would be anti-dilutive. At September 30,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 5,648,124common stock and stock options to purchase 7,950,093 shares of 4,872,621Common Stock for a total of 10,520,745.  At September 30, 2016, these potentially dilutive securities included warrants19,266,967 shares of 8,266,137 and stock options of 7,935,093 for a total of 16,201,230.common stock.  

 

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


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

 

Recently Issued Accounting Pronouncements

 

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

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No.first quarter of 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). This updated guidanceCustomers (Topic 606),” which is the new comprehensive revenue recognition standard that supersedes the current revenue recognition guidance, including industry-specificrequirements in Topic 605, “Revenue Recognition,” and most industry specific guidance. The updated guidance introducesstandard’s core principle is that a five-step model to achieve its core principal of the entity recognizingcompany will recognize revenue to depict the transfer ofwhen it transfers promised goods or services to customers ata customer in an amount that reflects the consideration to which the entitycompany 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 updatednew guidance iswas effective for interimannual and annualinterim 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 chooseCompany elected to adopt the standardnew guidance using the modified retrospective transition method for all contracts not completed as of the original effective date.date of adoption. The Company hasadoption of the new guidance did not yet selectedhave a transition methodmaterial impact on the consolidated financial statements. See the Revenue Recognition sub header and is currently assessingNote 3 for additional disclosures regarding the Company’s contracts with customers as well as the impact the adoption of ASU 2014-09 will have on its condensed consolidated financial statements and disclosures.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 towill 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 its condensedthe consolidated financial statements and disclosures.statements.

 

In January 2017,August 2016, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill2016-18, “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 Other (Topic 350): Simplifyingamounts 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 Test for Goodwill Impairment”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 simplifiesrequired the accounting for goodwill impairment by eliminating Step 2following 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 current goodwill impairment test.  Goodwill impairment will nowCompany’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.


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 amount bytime 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 reporting unit’s carrying value exceeds its fair value, limitedrange 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 carrying valuecustomer (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 goodwill. ASU 2017-04 is effective for fiscal years beginning afterCompany 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 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any impairment tests performed after January 1,31, 2017. The Company has not yet decided if it will early adoptutilized the provisions in this ASU for its annual goodwill impairment test during 2017.practical expedient which enables the Company to expense commissions when incurred as they would be amortized over one year or less.


NOTE 34 – Inventories

 

The Company’s total inventories were as follows:

 

 September 30, December 31,  March 31, December 31, 
 2017 2016  2018  2017 
Raw materials $514,129 $221,088  $252,130  $241,297 
Work in process 23,903 172,142   20,800   69,991 
Finished goods  367,265  251,292   359,620   252,845 
Total inventories $905,297 $644,522  $632,550  $564,133 

 

NOTE 45 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
         Net
Balance at
 
 Estimated December 31, Accumulated December 31,     Accumulated September 30,  Estimated      Accumulated March 31, 
 Useful Life 2016 Amortization 2016 Additions Amortization 2017  Useful Life Cost  Additions  Amortization  2018 
Finite live
intangible assets:
                                         
Customer list and
tradename
 5 years $987,500  $(26,296) $961,204  $  $(176,109) $811,391  5 years $987,500  $  $(274,952) $712,548 
                                         
Non-compete agreements 5 years  1,199,000   (246,000)  953,000      (425,850)  773,150  5 years  1,199,000      (537,450)  661,550 
                                         
Intellectual property 10 years  880,000      880,000      (66,000)  814,000  10 years  880,000      (110,000)  770,000 
                                         
Total intangible assets  $3,066,500  $(272,296) $2,794,204  $  $(667,959) $2,398,541  $3,066,500  $  $(922,402) $2,144,098 
                                         
Goodwill Indefinite $3,693,083  $  $3,693,083  $129,500  $  $3,822,583  Indefinite $3,822,583  $  $  $3,822,583 

 

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


NOTE 56 – Property, Plant and Equipment 

 

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

 

 September 30, December 31,  March 31, December 31, 
 2017 2016  2018  2017 
Machinery and equipment $4,347,950  $4,154,305  $4,910,771  $4,782,257 
Leasehold improvements 267,421 126,598   275,973   275,973 
Accumulated depreciation  (1,187,815)  (927,909)  (1,489,338)  (1,335,615)
 3,427,556 3,352,994   3,697,406   3,722,615 
Construction in process  644,857  304,845   292,945   175,335 
Total property, plant and equipment, net $4,072,413 $3,657,839  $3,990,351  $3,897,950 

 

NOTE 6–7– 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 September 30, 2017,March 31, 2018, the Company had no shares of Preferred Stockpreferred stock outstanding.

 


Common Stock

 

As of September 30, 2017,March 31, 2018, the Company has 164,415,465, $0.0001 par value,166,593,661 shares of common stock, (the “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.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 Program2017 Employee Stock Purchase Plan

 

On December 18, 2014,September 29, 2017, subject to stockholder approval, the Company’s Board of Directors approved an Equity Incentive Program (the “Equity Incentive Program”), whereby 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 may electthe right to receive equity in lieupurchase our common stock through payroll deductions at a price equal to the lesser of cash for allthe 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 parteighty five percent (85%) of their salary compensation.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 ninethree 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,March 31, 2018, the Company issued the following shares of common stock for compensation:

 

On February 13, 2017,January 8, 2018, the Company issued an aggregate of 160,000150,000 shares of common stock to two employeesone employee of the Company at a price of $0.125$0.06 per share. share for a value of $9,000.

 

During the quarter endedOn March 31, 2017,2018, 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 512,4981,155,600 shares of common stock to six directors of the Company pursuant to the Company’s FY2017FY2018 Director Compensation Plan at a price of $0.12$0.065 per share.

During the quarter ended June 30, 2017, the Company issued an aggregateshare for a value 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.$75,114.

 


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 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
  Number of
Shares
  Weighted-
Average
Grant-Date
Fair Value
per Share
 
Unvested at January 1, 2017 12,691,084 $0.08 
Unvested at January 1, 2018  14,279,498  $0.07 
Restricted stock granted 3,200,000 0.08       
Restricted stock vested         
Restricted stock forfeited  (1,940,680)  0.08   (660,000)  0.07 
             
Unvested at September 30, 2017  13,950,404 $0.08 
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 ninethree months ended September 30, 2017,March 31, 2018, the Company issued 4,218,750 shares of common stock in connection with the exercise of stock5,000,000 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.(See Note 9). 

 

NOTE 78 – Segments

 

Prior toGlyEco conducts its operations in two business segments: the December 2016 acquisitions of WEBA, RS&TConsumer segment and the DOW Assets and through December 31, 2016, the Company operated as oneIndustrial segment. Effective January 1, 2107, we have two segments,The Consumer and Industrial. Consumer’ssegment’s principal business activity is the processingproduction and distribution of waste glycol into high-quality recycledASTM grade glycol products, specifically automotive antifreeze and related specialty blendedspecialty-blended antifreeze, which we sell infor 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. Industrial’s principal business activity consistsThe production capacity of two divisions: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.&T, two of our subsidiaries. WEBA develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolantscoolant and heat transfer industries throughout North America, andAmerica.  RS&T operates a14-20 million gallons per year ASTM E1177 EG-1 glycol re-distillation plant in West Virginia that processes waste glycol intoproduces virgin quality recycled 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.

 


Segment information, and the reconciliation to the Company’s consolidated financial statements, for the three months ended September 30, 2017,March 31, 2018, is presented below:

 

 Consumer  Industrial  Inter Segment
Eliminations
  Corporate  Total  Consumer  Industrial  Inter
Segment
Eliminations
  Corporate  Total 
Sales, net $1,455,849   $2,076,852   $(248,031)    3,284,670  $1,739,584  $1,608,325  $(346,899) $  $3,001,010 
Cost of goods sold  1,307,099   1,817,509   (248,031)      2,876,577   1,569,187   1,226,812   (346,899)     2,449,100 
Gross profit  148,750   259,343          408,093   170,397   381,513         551,910 
                                        
Total operating expenses  713,885   1,144,255      305,214   2,163,354   713,536   392,434      537,211   1,643,181 
                                        
Loss from operations  (565,135)  (884,912)     (305,214)  (1,755,261)  (543,139)  (10,921)     (537,211)  (1,091,271)
                                        
Total other expenses  (152,171)  (49,998)     (98,463)  (300,632)  (5,428)  (44,599)     (59,023)  (109,050)
                                        
Loss before provision for income taxes $(717,306)  $(934,910)  $  (403,677)  $(2,055,893) $(548,567) $(55,520) $  $(596,234) $(1,200,321)


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)

 21

NOTE 89 – Notes Payable

 

Notes payable consist of the following:

 

 September 30, 2017  December 31, 2016  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 $110,822  $   99,157   104,990 
2018 and 2017 Unsecured Note  200,399   188,060 
2016 Secured Notes  326,535   396,562   286,870   308,115 
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   2,650,000   2,650,000 
Total notes payable  3,087,357   5,504,818   4,069,759   3,251,165 
Less current portion  (108,575)  (2,541,178)  (310,712)  (297,534)
Long-term portion of notes payable $2,978,782  $2,963,640  $3,759,047  $2,953,631 

 

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.

20162018 Related Party Unsecured Notes

 

5%10% Notes Issuance

 

On December 27, 2016,March 29, 2018, the Company entered into a subscription agreement (the “5%“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 5%10% Notes Subscription Agreement, the Company offered and issued $1,000,000 in principal amount of 5%10% Senior Unsecured Promissory Notes (the “5%“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 gross proceeds from the offering. The 5%10% Notes wereare scheduled to mature on May 31, 20174, 2019 (the “5%“10% Note Maturity Date”). The 5%10% Notes borebear interest at a rate of 5%10% per annum due on the 5%10% Note Maturity Date or as otherwise specified by the 5%10% 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%10% Notes and the warrantsWarrants on a relative fair value basis at the time of issuance. The total debt discount wasof $166,667 will be amortized over the life of the 8%10% Notes to interest expense.expense using the effective interest method. Amortization expense during the nine monthsquarter ended September 30, 2017March 31, 2018 was $205,180. Oninsignificant.


We estimated the fair value of the Warrants on the issuance date using a Black-Scholes pricing model with the debt was converted into common stock or repaid,following assumptions:

Warrants
Expected term3 years
Volatility143.81%
Risk Free Rate2.39%

The proceeds of the remaining unamortized debt discount was expensed and recorded10% Notes were allocated to the components 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.follows: 

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

  

WEBA Seller Notes2018 and 2017 Unsecured Note

 

In connection with the WEBA acquisition (see Note 4)October 2017 and later amended in January 2018, the Company issued $2.65 million in 8% promissory notes (“Seller Notes”entered into an unsecured note with Bank Direct to finance its insurance premiums (the “2018 and 2017 Unsecured Note”). The Seller Notes mature on December 27, 2021. The Seller Notes bearkey terms of the 2018 and 2017 Unsecured Note include: (i) an original principal balance of $242,866, (ii) an interest at a rate of 8% per annum payable on5.4%, and (iii) 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 eventsterm of default.

NOTE 9 – Capital Lease

On April 13, 2017,ten months. If the Company closed an amended sale-leaseback transaction with NFS Leasing, Inc. (“NFS”), whereinshould default on the loan, Bank Direct may cancel the Company’s underlying insurance and the Company sold $1,700,000 of certain operational equipment usedwould only owe any earned but unpaid premium. This would be a minimal amount as deposits and payments are paid in advance to reduce 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. 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.

 

 2017  2016  2018  2017 
Beginning Balance as of January 1, $5,123  $2,791  $  $5,123 
Monies owed to related party for services performed  94,441   73,749   18,780   24,707 
Monies paid  (99,564)  (75,667)  (18,780)  (28,014)
Ending Balance as of September 30, payable (receivable) $  $873 
Ending balance as of March 31, $  $1,816 

 

5%10% Notes

 

On December 27, 2016,March 29, 2018, we entered into debt agreements for an aggregate principal amount of $1,000,000 from the offering and issuance of 5%10% Notes to Wynnefield Partners Small Cap Value I, L.P. and Wynnefield Partners and Wynnefield Offshore, all ofSmall 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(See Note 89 for additional information.information).

 

8% Notes

17 

 

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.business from time to time.  Litigation is subject to inherent uncertainties, and an adverse result in these or other matters maya legal proceeding could arise from time to time that may harm our business. Below is an overview of a recently resolved legal proceeding, one pending legal proceeding in which an adverse result could have a material adverse effect on our business and one outstanding alleged claim.results of operations.

 


On January 8, 2016, Acquisition Sub. #4December 27, 2017, PSP Falcon Industries, LLC (“PSP Falcon”) filed a civil action against Onyxx Group LLCthe Company in the CircuitOcean County Superior Court of Hillsborough County, Florida. Thislocated in Toms River, New Jersey. The civil action relates to an outstanding balance alleged to be due from Onyxx Group LLC to Acquisition Sub. #4. In September 2016,PSP Falcon from the Company received a favorable judgment regarding this civil action in thean 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$530,633 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.certain construction expenses. 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 addressedpaid PSP Falcon in full for the environmental issues by removingservices rendered and disposing of the waste from the facility and cleaning the storage tanks. Additionally, as of November 14, 2017,therefore that no outstanding balance remains due. Accordingly, the Company has paid in full the agreed upon $335,000 paymentplans to the landlord.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 accounting principles generally accepted in the United States;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. 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, theSuch potential liabilities accrued by the Company do not take into consideration possible recoveries of future insurance proceeds. We maintainThe 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. We are unableIt would be difficult to estimate the Company’s ultimate costlevel 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 believesThe Company does not currently believe that the provision that weany claims, penalties or costs in connection with known environmental matters will have established is reasonable. Our management is exploring and considering a number of alternatives to mitigate thepotential impact of this remediationmaterial adverse effect on the Company.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.


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 IssuancesClosing of Private Placement

 

Since October 1, 2017,On April 6, 2018, the Company has issuedclosed 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 aggregateearlier 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 60,792the 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 Company’s Equity Incentive Program.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. 


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

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements for the fiscal year ended December 31, 2016,2017, 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, 2016,2017, 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, 2016,2017, 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 leading specialty chemical company, leveraging technologydeveloper, manufacturer and innovation to focus ondistributor of performance fluids for the automotive, commercial and industrial markets. We specialize incoolants, additives and complementary fluids.We believe our vertically integrated eco-friendly manufacturing, customer serviceapproach, which includes formulating products, acquiring feedstock, managing facility construction and distribution solutions.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 eightnetwork of facilities, including the recently acquired 14-20 million gallons per year, ASTM E1177 EG-1, glycol re-distillation plant in West Virginia, deliver superiordevelop, manufacture and distribute high quality glycol products that meet or exceed ASTMindustry 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 industry,industries, throughout North America. Our team’s extensive experience in the chemical field, including direct experience with reclamation of all types of glycols, gives us the ability to process a wide range of feedstock streams, formulate and produce unique products and has earned us an outstanding reputation in our markets.

 

Prior toGlyEco conducts its operation in two business segments: the December 2016 acquisitions of WEBA, RS&TConsumer segment and the DOW Assets and through December 31, 2016, the Company operated as oneIndustrial segment. Effective January 1, 2017, GlyEco has two segments:The Consumer and Industrial. Consumer’ssegment’s principal business activity is the processingproduction and distribution of waste glycol into high-quality recycledASTM grade glycol products, specifically automotive antifreeze and related specialty blendedspecialty-blended antifreeze, which we sell infor 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. Industrial’s principal business activity consistsThe production capacity of two divisions: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.&T, two of our subsidiaries. WEBA develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolantscoolant and heat transfer industries throughout North America, andAmerica.  RS&T which operates a14-20 million gallons per year ASTM E1177 EG-1 glycol re-distillation plant in West Virginia thatprocesses waste glycol into produces virgin quality recycled 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.

 


Consumer segmentSegment

 

Our Consumer segment has processing and distribution centers located in (1) Minneapolis, Minnesota, (2) Indianapolis, Indiana, (3) Lakeland, Florida, (4) Rock Hill, South Carolina, (5) Tea, South Dakota, and (6) Landover, Maryland. The Minneapolis, Minnesota, Lakeland, Florida, Rock Hill, South Carolina and Tea, South Dakota facilities have distillation equipment and operations for recycling waste glycol streams as well as blending equipment and operations for mixing glycol and other chemicals to produce finished products for sale to third party customers, while the Indianapolis, Indiana and Landover, Maryland facilities currently only have blending equipment and operations for mixing glycol and other chemicals to produce finished products for sale to third party customers. We estimate that the monthly processing capacity of our four facilities with distillation equipment is approximately 100,00090,000 gallons of ready to use finished products. We have invested significant time and money into increasing the capacity and actual production of our facilities. Our average monthly production was approximately 44,000 gallons in the first quarter of 2016 as compared to approximately 80,000 gallons in the first quarter of 2017. Our processing and distribution centers utilize a fleet of trucks to collect waste material for processing and delivering recycleddeliver glycol products directly to retail end users at their storefront,storefronts, which is typically 50-100 gallons per customer order.order and to collect waste material for processing at our facilities. Collectively, we directly service approximately 5,000 generators of waste glycol.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 glycol products to wholesale or bulk distributors who, in turn, sell to retail end users specifically as automotive or specialty blended antifreeze. In certain markets we also sell windshield washer fluids which we do not recycle.

 

We have deployed our proprietary technology 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”&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:

 

High-Quality Recycled Glycols - Our technology allows us to produce glycols which meet ASTM standards and can be used in any industrial application.
Recycled AntifreezeAntifreeze/Coolant - We formulate several universal recycled antifreeze products to meet ASTM and/or OEMOriginal Equipment Manufacturers (“OEM”) manufacturer specifications for engine coolants. In addition, we custom blend recycled antifreeze to customer specifications.

Recycled HVACHeating, Ventilation and Air Conditioning (“HVAC”) Fluids - We formulate a universal recycled HVAC coolant to meet ASTM and/or OEM manufacturer specifications for heating, ventilation and air conditioningHVAC fluids. In addition, we custom blend recycled HVAC coolants to customer specifications.

Waste Glycol Disposal Services - Utilizing our fleet of collection/delivery trucks, we collect waste glycol from generators for recycling. We coordinate large batches of waste glycol to be picked up from generators and delivered to our processing and distribution centers for recycling or in some cases to be safely disposed.
Windshield Washer Fluid - In certain markets we sell windshield washer fluids which we do not recycle.

 

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

 

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

 


Our proprietary and patented technology removes difficult pollutants, including esters, organic acids, high dissolved solids and high un-dissolved solids in addition to the benefit of clearing oil/hydrocarbons, additives and dyes that are typically found in used engine coolants. Our QC&A program (Quality Control & Assurance)Program seeks to ensure consistently high quality, ASTM (American Society for Testing and Materials) standard compliant recycled material. Our products are trusted in all vehicle makes and models, regional fleet, local auto, and national retailers. Our proprietary QC&A program is managed and supported by dedicated process and chemical engineering staff and requires periodic onsite field audits, and ongoing training by our facility managing partners.

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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. METALGUARDMETALGUARD® 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 METALGUARDMETALGUARD® 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 METALGUARDMETALGUARD® 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 14-20 million gallons per year, ASTM E1177 EG-1, glycol re-distillation plant in West Virginia, which processes waste glycol intoproduces virgin quality recycled glycol for sale to industrial customers worldwide. The RS&T facility currently produces antifreeze and industrial grade ethylene glycol. We believe it is uniquely designed to process industrial waste glycol. It utilizes the only currently active process that produces a product that both meets the virgin glycol antifreeze grade specification, ASTM E1177 EG-1, and achieves the important aesthetic requirement for most applicationsone of having no odor. It is the largest glycol re-distillation plantplants in North America, with aproduction capacity of 14-20approximately 1.5 million gallons per year, several times higher processing capacity than the next largest glycol recycling facility.month of concentrated ethylene glycol. The RS&T facility, located at the Dow Institute Site inat 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 superiorwhite 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. We provide white glove proactive customer service. Our manufacturing operations produce the highesthigh quality products while effectively managing costs by recycling at high capacity and high up time, driving down raw material costs with focused feedstock streams management and using technology and data to manage our business in real-time. Our distribution operations provide dependable service at a low cost by effectively using know how, technology and data. We leverage technology and innovation to develop a recognized brand and operate certified laboratories and well supported research and development activities. Similarly, weWe focus on internal and external training programs. We are also eco-friendly with the products we offer and the way we operate our businesses.

 


22 

Critical Accounting Policies

 

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

 

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

 

Revenue Recognition

 

The Company recognizes revenue when (1) deliveryits customer obtains control of product has occurredpromised goods or services have been rendered,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) there is persuasive evidence of a sale arrangement,identify the performance obligations in the contract, (3) selling prices are fixed or determinable, anddetermine the transaction price, (4) collectability fromallocate 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 deliveredtransaction price 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 includedperformance obligations in the net sales.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 used glycol to be recycled, recycled glycolfeedstock and other raw materials and finished product ready for resale and supplies used in the recycling process.sale. Inventories are stated at the lower of cost or net realizable valuemarket with cost recorded on an average cost basis. Costs include purchase costs, fleet and fuel costs, direct labor, transportation costs and production related costs. In determining whether inventory valuation issues exist, we consider various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, historical sales and production usage. Shifts in market trends and conditions, changes in customer preferences or the loss of one or more significant customers are factors that could affect the value of our inventory. These factors could make our estimates of inventory valuation differ from actual results.

 


Long-Lived Assets

 

We periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful life of property and equipment and intangiblelong-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.

  

Goodwill

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

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

 31

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 relatedrelate 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-basedShare-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-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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Accounting for Income Taxes

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

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

Contingencies

 

Litigation

 

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

 

On January 8, 2016, Acquisition Sub. #4December 27, 2017, PSP Falcon Industries, LLC (“PSP Falcon”) filed a civil action against Onyxx Group LLCthe Company in the CircuitOcean County Superior Court of Hillsborough County, Florida. Thislocated in Toms River, New Jersey. The civil action relates to an outstanding balance alleged to be due from Onyxx Group LLC to Acquisition Sub. #4. In September 2016,PSP Falcon from the Company received a favorable judgment regarding this civil action in thean 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$530,633 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.certain construction expenses. The agreement required the Company to resolve certain environmental issues regarding the former processing facility and make certain payments to the landlord. The Company, the landlord and their related entities also agreed to a full and final settlement of existing and possible futures claims between the parties. As of November 14, 2017, the Company believes it has addressedpaid PSP Falcon in full for the environmental issues by removingservices rendered and disposing of the waste from the facility and cleaning the storage tanks. Additionally, as of November 14, 2017therefore that no outstanding balance remains due. Accordingly, the Company has paid in full the agreed upon $335,000 paymentplans to the landlord.

vigorously defend itself from this claim.

 

33 

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;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. 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, theSuch potential liabilities accrued by the Company do not take into consideration possible recoveries of future insurance proceeds. We maintainThe Company maintains insurance coverage for unintentional acts that result in environmental remediation liabilities up to $1 million per occurrence;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. We are unableIt would be difficult to estimate the Company’s ultimate costlevel 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 believesOther 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 the provision that weany claims, penalties or costs in connection with known environmental matters will have established is reasonable. Our management is exploring and considering a number of alternatives to mitigate the potential impact of this remediationmaterial adverse effect on the Company.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 Company is aware of one environmental remediation issue related to our former leased property in New Jersey, which is currently subject to a remediation stemming from the sale of property by the previous owner in 2008 to the current landlord. To Management’s knowledge, the former landlord has engaged a licensed site remediation professional and had assumed responsibility for this remediation. In Management’s opinion the liability for this remediation is the responsibilityamount of the former landlord. However, the former landlord has disputed this positionaccrual is based on various assumptions and it is an open issue subject to negotiation. Currently, we have no knowledge as to the scopeestimates and will be periodically reevaluated in light of the landlord’s former remediation obligation.a variety of future events and contingencies. 

 


Results of Operations

 

NineThree Months Ended September 30, 2017March 31, 2018 Compared to NineThree Months Ended September 30, 2016March 31, 2017

 

Net Sales

 

For the nine-monththree-month period ended September 30, 2017,March 31, 2018, Net Sales were $8,493,088$3,001,010 compared to $4,145,741$2,290,321 for the nine-monththree-month period ended September 30, 2016,March 31, 2017, representing an increase of $4,347,347,$710,689, or approximately 105%31%. The increase in Net Sales was due to organic revenue growth of $556,011, or approximately 13%, and $3,791,336$667,644 of sales related to the Industrial Segment businesses and assets acquiredcompared to the same period in December 2016.2017. Net Sales, including intersegment sales for the nine-monththree-month period ended September 30, 2017,March 31, 2018, were $4,701,751$1,739,584 and $4,626,034$1,608,325 for the Consumer and Industrial segments, respectively.

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Cost of Goods Sold

 

For the nine-monththree-month period ended September 30, 2017,March 31, 2018, our CostCosts of Goods Sold was $7,468,406,$2,449,100, compared to $3,968,501$2,150,586 for the nine-monththree-month period ended September 30, 2016,March 31, 2017, representing an increase of $3,499,905$298,514, or approximately 88%14%. The increase in Cost of Goods Sold was primarily due to costs associated with the increase in net sales as well as approximately $200,000 of production costs that were not fully absorbed into inventory, but rather expensed as incurred while the Institute, West Virginia facility was off line during the first two months of the first quarter for infrastructure related capital improvements.sales.

 

Gross Profit

 

For the nine-monththree-month period ended September 30, 2017,March 31, 2018, we realized a gross profit of $1,024,682,$551,910, compared to a gross profit of $177,240$139,735 for the nine-monththree-month period ended September 30, 2016.March 31, 2017. Gross profit, including intersegment sales, for the nine-monththree-month period ended September 30, 2017,March 31, 2018 was $608,951$170,397 and $415,731$ 381,513 for the Consumer and Industrial segments, respectively.

 

Our gross profit margin for the nine-monththree-month period ended September 30, 2017,March 31, 2018, was approximately 12%18%, compared to approximately 4%6% for the nine-monththree-month period ended September 30, 2016.March 31, 2017. Gross profit margin, includingexcluding intersegment sales for the nine-monththree-month period ended September 30, 2017,March 31, 2018, was 13%10% and 9%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. The gross profit margin for the Industrial segment was negatively impacted by approximately $200,000 of production costs that were not fully absorbed into inventory, but rather expensed as incurred while the Institute, West Virginia facility was off line during the first two months of the first quarter for infrastructure related capital improvements as well as certain lower margin business. The Company is currently negotiating pricing changes to this lower margin business.

Operating Expenses

 

For the nine-monththree-month period ended September 30, 2017,March 31, 2018, operating expenses increased to $4,369,523$1,643,181 from $2,716,773$1,051,671 for the nine-monththree-month period ended September 30, 2016,March 31, 2017, representing an increase of $1,652,750,$591,510, or approximately 61%56%. Operating Expenses consist of Consulting Fees, Share-Based Compensation, Salaries and Wages, Tank remediation, Legal and Professional Expenses, and General and Administrative Expenses. Our operating expense ratio for the nine-monththree-month period ended September 30, 2017,March 31, 2018, was approximately 51%55%, compared to approximately 66%46% for the nine-monththree-month period ended September 30, 2016.March 31, 2017.

 

Consulting feesFees consist of marketing and administrative fees incurred under consulting agreements.  Consulting fees increasedFees decreased to $368,195$48,591 for the nine-monththree-month period ended September 30, 2017,March 31, 2018, from $114,902$53,426 for the nine-monththree-month period ended September 30, 2016,March 31, 2017, representing an increasea decrease of $253,293,$4,835 or 220%9%. The increase is primarily due to the Company’s use of external specialists to assist with short duration projects.  

 

Share-Based Compensation consists of stock options and warrantsoptions issued to consultants and employees in consideration for services provided to the Company. Share-Based Compensation decreased to $361,241$119,888 for the nine-monththree-month period ended September 30, 2017,March 31, 2018, from $856,848$136,986 for the nine-monththree-month period ended September 30, 2016,March 31, 2017, representing a decrease of $495,607,$17,098, or 58%12%.  The decrease is due to a market vesting based stock grant to the Company’s Board of Directors in 2016 that was expensed in full during 2016.

 

Salaries and Wages consist of wages and the related taxes.  Salaries and Wages increased to $1,246,252$662,231 for the nine-monththree-month period ended September 30, 2017,March 31, 2018, from $816,069$343,055 for the nine-monththree-month period ended September 30, 2016,March 31, 2017, representing an increase of $430,183$319,176 or 53%93%.   The increase is due to the addition of employees in such areas as marketing, sales and finance in late 2016 and 2017 as well as additional employees related to the businesses and assets acquired in late December 2016.2017.

 


Legal and Professional Fees consist of legal, accounting, tax and audit services.  For the nine-monththree-month period ended September 30, 2017,March 31, 2018, Legal and Professional Fees increased to $501,528$330,439 from $192,152$160,991 for the nine-monththree-month period ended September 30, 2016,March 31, 2017, representing an increase of $309,376 or approximately 161%.$169,448. The increase is primarily related to work performed that was related to the businesses and assets acquired in late December 2016 as well as otherconnection with special projects in 2017.including tax, audit and IT needs.

 

General and Administrative (G&A) Expenses consist of general operational costs of our business. For the nine-monththree-month period ended September 30, 2017,March 31, 2018, G&A Expenses increased to $1,112,307$482,032 from $736,802$357,213 for the nine-monththree-month period ended September 30, 2016,March 31, 2017, representing an increase of $375,505,$124,819, or approximately 51%35%. The increase is due to additional depreciation and amortization of $321,541expenses related to the propertybuild out of our sales team, including the associated travel and equipment and intangible assets acquired in late December 2016. training expenses.

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Other Income and ExpensesExpense

 

For the nine-monththree-month period ended September 30, 2017,March 31, 2018, Other Income and ExpensesExpense was an expense of $720,235$109,050 compared to an expense of $2,413$196,218 for the nine-monththree-month period ended September 30, 2016,March 31, 2017, representing a changedecrease of $717,822.$87,168. Other Income and Expenses consistExpense consists of Interest Income and Interest Expense. The change was primarily due to interest expense associated with the debt issued in late December 2016 as well as accelerated interest expense as a result of the repayment and conversion of notes payable which was classified as loss on debt extinguishment.

 

Adjusted EBITDA

 

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

 

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

 


RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA

 

  Nine Months Ended September 30, 
  2017  2016 
Net loss $(4,067,682) $(2,547,977)
         
Interest expense, net  573,671   17,413 
Loss on debt extinguishment  146,564    
Tank remediation (1)  780,000    
Gain on settlement of note payable     (15,000)
Income tax expense  2,606   6,031 
Depreciation and amortization  756,517   254,397 
Share-based compensation  361,241   856,848 
Adjusted EBITDA $(1,447,083) $(1,428,288)

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

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

Net Sales

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

Cost of Goods Sold

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

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Gross Profit

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

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

Operating Expenses

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

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

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

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

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

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

Other Income and Expenses

For the three-month period ended September 30, 2017, Other Income and Expenses was an expense of $300,632 compared to an expense of $5,653 for the three-month period ended September 30, 2016, representing a change of $294,979. Other Income and Expenses consist of Interest Income and Interest Expense. The change was primarily due to interest expense associated with the debt issued in late December 2016 as well as accelerated interest expense as a result of repayment and conversion of notes payable.  

Adjusted EBITDA

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

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

RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA

  Three Months Ended September 30, 
  2017  2016 
Net loss $(2,056,546) $(699,091)
         
Interest expense, net  154,068   5,653 
Loss on debt extinguishment  146,564    
Tank remediation (1)  780,000     
Income tax expense  653   85 
Depreciation and amortization  259,130   98,628 
Share-based compensation  129,707   258,613 
Adjusted EBITDA $(586,424) $(336,112)

(1)This is an expected one-time expense related to estimated equipment remediation efforts to comply with new West Virginia regulations
  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 fromby 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 ninethree months ended September 30,March 31, 2018 and 2017, and 2016, net cash used in operating activities was $1,709,809$446,726 and $1,918,821,$514,457 respectively.  The increasedecrease in cash used in operating activities is due to the increase in our net loss as well as significant period over period changes in accounts receivables,receivable, inventories and accounts payable and accrued expenses.

For the ninethree months ended September 30, 2017,March 31, 2018, the Company used $816,719$90,214 in cash for investing activities, compared to the $449,698$466,091 used in the prior year’s period.  These amounts were comprised primarily of capital expenditures for equipment.

For the ninethree months ended September 30, 2017 and 2016, we received $1,294,200 and $2,802,105, respectively, inMarch 31, 2018, net cash from financing activities. The 2016 amount is primarilyactivities was $823,286, which was comprised of the February rights offering. The 2017 amount is primarily comprised of the exercise of warrants and$1,000,000 proceeds from a sale-leaseback, partiallynote payable, offset by payments made on other notes payable and capital lease obligations. For the repayment of debt, including the 5% Notes as well as our 2017 rights offering.

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As of September 30,three months ended March 31, 2017, we had $2,958,958 in current assets, including $181,671paid $22,353, in cash $1,561,422 in accounts receivable and $905,297 in inventories. Cash decreased from $1,413,999 as of December 31, 2016,related to $181,671 as of September 30, 2017,financing activities, primarily duerelated to cash used in operations.period debt payments.

 

As of September 30,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 $4,706,000$5,259,762 consisting primarily of accounts payable and accrued expenses of $2,464,156.$3,011,095, contingent acquisition consideration of $1,503,113, and the current portion of notes payable of $310,712. As of September 30, 2017,March 31, 2018, we had total non-current liabilities of $4,136,961,$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 September 30, 2017,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.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 6, 2017, our independent registered public accounting firm included an emphasis-of-matter paragraph2, 2018 with respect to our consolidated financial statements for the yearyears ended December 31, 2017 and 2016, concerning the Company’s assumption that we will continue as a going concern. OurKMJ Corbin & Company LLP, our independent registered public accounting firm, expressed substantial doubt about our ability to continue as a going concern is an issue raised as a result of current working capital requirements andour recurring losses from operations.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 liquidity and capital resourcescash flows for the ninethree months ended September 30, 2017March 31, 2018 and 2016:2017:

 

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

 

We maintainOur 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 are designedas of March 31, 2018, our disclosure controls and procedures were effective to ensure that material information required to be disclosed by us in our periodicthe reports filedwe file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’sSEC rules and forms, and to ensure that such information(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 (Principal Executive Officer) and Chief Financial Officer, (Principal 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 expectinclude 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 our disclosure controls and procedures will prevent all errors and all fraud. 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 design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include but are not limited to, the realities that judgments in decision-makingdecision making can be faulty, and that breakdowns can occur because of simple error or mistake.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 is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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

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

 

Changes in Internal Control Over Financial Reporting

 

During the fiscal quarter ended June 30, 2017, the Company hired a new Chief Financial Officer with public company experience. We believe this will help remediate the material weakness identified above.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.  The Company believes that the nature of these proceedings (collection actions, etc.) are typical for a Company of our size and scope of operations.business from time to time.  Litigation is subject to inherent uncertainties, and an adverse result in these or other matters maya legal proceeding could arise from time to time that may harm our business. Below is an overview of a recently resolved legal proceeding, one pending legal proceeding in which an adverse result could have a material adverse effect on our business and one outstanding alleged claim.results of operations.

 

On January 8, 2016, Acquisition Sub. #4December 27, 2017, PSP Falcon Industries, LLC (“PSP Falcon”) filed a civil action against Onyxx Group LLCthe Company in the CircuitOcean County Superior Court of Hillsborough County, Florida. Thislocated in Toms River, New Jersey. The civil action relates to an outstanding balance alleged to be due from Onyxx Group LLC to Acquisition Sub. #4. In September 2016,PSP Falcon from the Company received a favorable judgment regarding this civil action in thean 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$530,633 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.certain construction expenses. The agreement required the Company to resolve certain environmental issues regarding the former processing facility and make certain payments to the landlord. The Company, the landlord and their related entities also agreed to a full and final settlement of existing and possible futures claims between the parties. As of November 14, 2017, the Company believes it has addressedpaid PSP Falcon in full for the environmental issues by removingservices rendered and disposing of the waste from the facility and cleaning the storage tanks. Additionally, as of November 14, 2017therefore that no outstanding balance remains due. Accordingly, the Company has paid in full the agreed upon $335,000 paymentplans to the landlord.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 20162017 Annual Report on Form 10-K filed on April 6, 2017.2, 2018.

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

 

For the ninethree months ended September 30, 2017,March 31, 2018, the Company issued unregistered securities as follows:

 

On January 31, 2017,8, 2018, the Company issued an aggregate of 38,401150,000 shares of Common Stockcommon stock to fourteen employeesone employee of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.12$0.06 per share.  The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted. 

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

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

 

On March 31, 2017,2018, the Company issued an aggregate of 38,8011,155,600 shares of Common Stock to fourteen employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $0.12 per share. The shares were issued pursuant to Section 4(a)(2) because the employees had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form of general solicitation or general advertising. The employees made representations that the shares were taken for investment purposes and not with a view to resale. The shares of Common Stock issued are restricted. 

On March 31, 2017, the Company issued an aggregate of 512,498 shares of Common Stockcommon stock to six directors of the Company pursuant to the Company’s FY2017FY2018 Director Compensation Plan at a price of $0.12$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.

 

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

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

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

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

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

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

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

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

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

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

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

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

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information.

 

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

 

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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: November 14, 2017May 15, 2018By: /s/ Ian Rhodes
 Ian Rhodes
 Chief Executive Officer
 (Principal Executive Officer)
  
Date: November 14, 2017May 15, 2018By: /s/ Brian Gelman
 Brian Gelman
 Chief Financial Officer
 

(Principal Financial Officer)

 

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