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: JuneSeptember 30, 2018

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

For the transition period from _______________ to ______________

Commission file number:  000-30396 

GLYECO, INC.

(Exact name of registrant as specified in its charter)

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, a smaller reporting company or an “emerging growth company”. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Yes ☐  No ☒

As of AugustNovember 13, 2018, the registrant has 1,348,2921,358,597 shares of Common Stock, par value $0.0001 per share, issued and outstanding.

PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements

GLYECO, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

JuneSeptember 30, 2018 and December 31, 2017

See accompanying notes to the condensed consolidated financial statements.

GLYECO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

For the three and sixnine months ended JuneSeptember 30, 2018 and 2017

 See accompanying notes to the condensed consolidated financial statements.  

GLYECO, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

For the sixnine months ended JuneSeptember 30, 2018

See accompanying notes to the condensed consolidated financial statements.

GLYECO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the sixnine months ended JuneSeptember 30, 2018 and 2017

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

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

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 our processing and distribution centers. We currently have six (6) processing and distribution centers, which are located in (1) Minneapolis, Minnesota, (2) Indianapolis, Indiana, (3) Lakeland, Florida, (4) Rock Hill, South California, (5) Tea, South Dakota, and (6) Landover, Maryland, andwhich are held in six (6) subsidiaries under the names of GlyEco Acquisition Corp. #1 through GlyEco Acquisition Corp. #7, excluding #4.

Stock Split

On July 10, 2018, the Companyeffected a reverse stock split of its common stock, immediately followed by a forward stock split of its common stock. The ratio for the reverse stock split is fixed at 1-for-500 and the ratio for the forward stock split is fixed at 4-for-1, resulting in a net reverse split of 125 for 1.125-for-1. All share and per share information in this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the reverse stock split.

Going Concern

The condensed consolidated financial statements as of JuneSeptember 30, 2018 and December 31, 2017 and for the three and sixnine months ended JuneSeptember 30, 2018 and 2017 have been prepared assuming that the Company will continue as a going concern. As of JuneSeptember 30, 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 sixnine months ended JuneSeptember 30, 2018 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2017, filed with the United States Securities and Exchange Commission (the “SEC”) on April 2, 2018.

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”).SEC.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation on an interim basis. The operating results for the sixnine months ended JuneSeptember 30, 2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018.

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

Principles of Consolidation

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

Noncontrolling Interests

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

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

Noncontrolling interests were not significant as of JuneSeptember 30, 2018 and December 31, 2017.

Operating Segments

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

Use of Estimates

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

Revenue Recognition

The Company’s significant accounting policy for revenue was updated as a result of the adoption of ASUAccounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) in the first quarter of 2018. 

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

Costs

Cost of goods sold includes all direct material and labor costs and those indirect costs of bringing raw materials to sale condition, including depreciation of equipment used in manufacturing and shipping and handling costs. Selling, general, and administrative costs are charged to operating expenses as incurred. Research and development costs are expensed as incurred, are included in operating expenses and were insignificant in the three and sixnine months ended JuneSeptember 30, 2018 and 2017. Advertising costs are expensed as incurred.

Accounts Receivable

Accounts receivable are recognized and carried at the original invoice amount less an allowance for expected uncollectible amounts. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s willingness or ability to pay, the Company’s compliance with customer invoicing requirements, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. We do not charge interest on past due balances. The Company writes off trade receivables when all reasonable collection efforts have been exhausted. Bad debt expense is reflected as a component of general and administrative expenses in the condensed consolidated statements of operations. The allowance for doubtful accounts totaled $96,922$77,277 and $213,136 as of JuneSeptember 30, 2018 and December 31, 2017, respectively.

Inventories

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

Property, Plant and Equipment

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

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

Impairment of Long-Lived Assets

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

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

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

Net Loss Per Share Calculation

The basic net loss per share of common stock is computed by dividing the net loss available to holders of common stock by the weighted average number of shares of common stock outstanding during a period. Diluted loss per share of common stock is computed by dividing the net loss available to holders of common stock by the weighted average number of shares of common stock outstanding plus potentially dilutive securities. The Company’s potentially dilutive securities outstanding are not shown in the diluted net loss per share calculation because their effect in both the three and sixnine months ended JuneSeptember 30, 2018 and 2017 would be anti-dilutive. At JuneSeptember 30, 2018, these potentially dilutive securities included warrants to purchase 120,285104,957 shares of common stock and stock options to purchase 27,101 shares of common stock for a total of 147,386132,058 shares of common stock. At JuneSeptember 30, 2017, these potentially dilutive securities included warrants to purchase 63,03545,185 shares of common stock and stock options to purchase 60,98038,981 shares of common stock for a total of 124,01584,166 shares of common stock.

Share-based Compensation

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

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

Recently Issued Accounting Pronouncements

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

In the first quarter of 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which is the new comprehensive revenue recognition standard that supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry specific guidance. The core principle of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In 2015 and 2016, FASB issued additional ASUs related to Topic 606 that delayed the effective date of ASU 2014-09 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. ASU 2014-09 was effective for annual and interim periods beginning after December 15, 2017. The Company elected to adopt ASU 2014-09 using the modified retrospective transition method for all contracts not completed as of the date of adoption. The adoption of the new guidance did not have a material impact on the consolidated financial statements. See “Revenue Recognition” in NoteNotes 2 and Note 3 for additional disclosures regarding the Company’s revenue recognition policies and contracts with customers.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company is still evaluating ASU 2016-02, the Company expects the adoption of ASU 2016-02 will not have a material effect on the Company’s consolidated financial condition due to the recognition of the lease rights and obligations as assets and liabilities. The Company has not yet selected a transition method and is currently assessing the impact that the adoption of ASU 2016-02 will have on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows: Classification Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard in the first quarter of 2018 by using the retrospective transition method, which required the following disclosures and changes to the presentation of its consolidated financial statements: cash and restricted cash reported on the condensed consolidated statements of cash flows now includes restricted cash of $76,552, $41,090$22,435 and $6,642 as of December 31, 2016, JuneSeptember 30, 2017 and December 31, 2017, respectively, as well as previously reported cash.

NOTE 3 – Revenue

Revenue Recognition

All of the Company’s revenue is derived from product sales. As of January 1, 2018, the Company accounts for revenue in accordance with Topic 606, “Revenue from Contracts with Customers.”ASU 2014-09. See discussion of the principal activities of 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 time between order confirmation and satisfaction of all performance obligations is less than one year.

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

Disaggregation of Revenue

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

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 JuneSeptember 30, 2018 and December 31, 2017. The Company has utilized the practical expedient which enables the Company to expense commissions when incurred as they would be amortized over one year or less. 

NOTE 4 – Inventories

The Company’s total inventories were as follows:

NOTE 5 – Goodwill and Other Intangible Assets

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

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

NOTE 6 – Property, Plant and Equipment 

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

NOTE 7– Stockholders’ Equity

Preferred Stock

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

As of JuneSeptember 30, 2018, the Company had no shares of preferred stock outstanding. 

Common Stock

As of JuneSeptember 30, 2018, the Company has 1,332,749had 1,348,253 shares of common stock, par value $0.0001 per share, outstanding. The Company’s articles of incorporation authorize the Company to issue up to 300,000,000 shares of common stock. The holders are entitled to one vote for each share on matters submitted to a vote of stockholders, and to share pro rata in all dividends payable on the common stock after payment of dividends on any shares of preferred stock having preference in payment of dividends.

The Company issued 3,778 shares of common stock to employees in connection with our employee stock purchase plan (see below) for total payments of $20,326.

2017 Employee Stock Purchase Plan

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

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

The Company recorded stock-based compensation expense related to the 2017 ESPP of approximately $11,000$1,000 and $20,000$10,000 during the three and sixnine months ended JuneSeptember 30, 2018, respectively.

During the sixnine months ended JuneSeptember 30, 2018, the Company issued the following shares of common stock for compensation:

On January 8, 2018, the Company issued 1,200 shares of common stock to one employee of the Company at a price of $7.50 per share for a value of approximately $9,000.

On March 31, 2018, the Company issued an aggregate of 9,245 shares of common stock to six directors of the Company pursuant to the Company’s FY2017 Director Compensation Plan at a price of $8.13 per share for a value of approximately $75,000. 

On June 30, 2018, the Company expensed the value of an aggregate of 11,766 shares of common stock to six directors of the Company pursuant to the Company’s FY2017 Director Compensation Plan at a price of $6.38 per share totaling approximately $75,000. The shares were issued in July 2018.

On September 30, 2018, the Company expensed the value of approximately $75,000 for 10,344 shares of common stock to six directors of the Company pursuant to the Company’s FY2017 Director Compensation Plan at a price of $7.25 per share. The shares were issued in October 2018.

During the three months ended September 30, 2018, the Company issued an aggregate of 3,778 shares of common stock to employees of the Company pursuant to the Company’s Equity Incentive Program at a price of $5.38 per share.

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

During the three and sixnine months ended JuneSeptember 30, 2018 and 2017, the Company recorded $35,570$41,700 and $62,344$104,044 and $13,545$48,749 and $47,671,$96,420, respectively, related to the performance and market basedmarket-based restricted stock awards. 

Options and Warrants

During the sixnine months ended JuneSeptember 30, 2018, the Company issued warrants to purchase an aggregate of 84,000 shares of common stock in connection with the issuance of notes payable. (Seepayable (see Note 9).

NOTE 8 – Segments

GlyEco conducts its operations in two business segments: the Consumer segment and the Industrial segment. The Consumer segment’s principal business activity is the production and distribution of ASTM (American Society for Testing Materials) grade glycol products, specifically automotive antifreeze and specialty-blended antifreeze, for sale into the automotive and industrial end markets. The Consumer segment operates a full lifecycle business, picking up waste antifreeze and producing finished antifreeze from both recycled and virgin glycol sources. We operate six processing and distribution centers located in the eastern region of the United States. The production capacity of the Consumer segment is approximately 90,000 gallons per month of ready to use (50/50) antifreeze. Operations in our Industrial segment are conducted through WEBA and Glyeco WV, two of our subsidiaries. WEBA develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolant and heat transfer industries throughout North America.  Glyeco WV operates a glycol re-distillation plant in West Virginia that produces virgin quality glycol for sale to industrial customers worldwide. The production capacity of the Glyeco WV facility is approximately 1.5 million gallons per month of concentrated ethylene glycol. The Glyeco WV 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 (benefit from) 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 for reporting purposes. 

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 JuneSeptember 30, 2018 is presented below:

Segment information, and the reconciliation to the Company’s consolidated financial statements, for the sixnine months ended JuneSeptember 30, 2018 is presented below:

NOTE 9 – Notes Payable

Notes payable consist of the following:

2018 Related Party 10% Unsecured Notes

On March 29,April 6, 2018, the Company entered into a subscription agreement (the “10% Notes Subscription Agreement”) by and between the Company and Wynnefield Partners Small Cap Value I, L.P. and Wynnefield Partners Small Cap Value, L.P., (“Wynnefield Funds”) which are under the management of Wynnefield Capital, Inc. (“Wynnefield Capital”). The 10% Notes Subscription Agreement was the first tranche ofcommenced a private placement (“Private Placement”). Pursuant to the 10% Notes Subscription Agreement, the Company offered and issued (i) $1,000,000 in principal amount of 10% Senior Unsecured Promissory Notes (the “10% Notes” or “Institutional Notes”) and (ii) warrants (the “Warrants” or “Institutional Warrants”) to purchase up to 40,000100,000 shares of common stock of the Company. The Company, received $1,000,000 in proceeds from the offering. The first tranche of the 10% Notes is scheduledthat were issued pursuant to mature on May 4, 2019.subscription agreement. The 10% Notes bear interest at a rate of 10% per annum due on the maturity date or as otherwise specified by the 10% Notes. The Warrants have an exercise price per share of $0.05.

The Company closed athe first tranche of the Private Placement on April 6, 2018, with Wynnefield Partners Small Cap Value I, L.P. and Wynnefield Partners Small Cap Value, L.P., (“Wynnefield Funds”), which are under the management of Wynnefield Capital, Inc. (“Wynnefield Capital”), with respect to 10% Notes with an aggregate principal amount of $1,000,000 and Warrants to purchase an aggregate of 40,000 shares of common stock. This tranche of the Private Placement is scheduled to mature on May 4, 2019.

The Company closed the second tranche of the Private Placement on April 10, 2018, with one of its directors, Charles F. Trapp, , with respect to a 10% noteNote with a principal amount of $50,000 and a warrantWarrant to purchase 2,000 shares of common stock. The secondThis tranche of the Private Placement is scheduled to mature on May 9, 2019. 

The Company closed a third tranche of the Private Placement on May 1, 2018 with Ian Rhodes, the Company’s former Chief Executive Officer and a former director (see Item 5), with respect to a 10% noteNote with a principal amount of $50,000 and a warrantWarrant to purchase 2,000 shares of common stock. The thirdThis tranche of the Private Placement is scheduled to mature on June 1, 2019. 

The Company closed a fourth tranche of the Private Placement on May 4, 2018 with the Wynnefield Funds managed by Wynnefield Capital, for an aggregate principal amount of $1,000,000 of 10% notesNotes and warrantsWarrants to purchase an aggregate of 40,000 shares of common stock. The fourthThis tranche of the Private Placement is scheduled to mature on May 6, 2019.

The Company allocated the proceeds received from the Initial10% Notes and the Initial Warrants on a relative fair value basis at the time of issuance. The total debt discount of $300,298,$313,980, including the relative fair value of the warrantsWarrants and the debt issuance costs will be amortized over the life of the 10% Notes to interest expense using the effective interest method. Amortization expense during the sixnine months ended JuneSeptember 30, 2018 was $66,404.$146,040.

We estimated the fair value of the Initial Warrants on the issuance date using a BSM option pricing model with the following assumptions:

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

2018 Secured Note

In September 2018, the Company entered into a secured promissory note with MHC Financial (the “2018 Secured Note”). The 2018 Secured Note is collateralized by a vehicle. The key terms of the 2018 Secured Note includes: (i) an original principal balance of $74,600, (ii) interest rate of 8.74%, and (iii) term of 3.5 years.

2018 and 2017 Unsecured Note

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

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. The ending balance is included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheet.

10% Notes

In addition, on March 29,On April 6, 2018 and May 4, 2018, the Company entered intoissued the Institutional10% Notes for an aggregate principal amount of $2,000,000 from the offering and issuance of 10% Notes to Wynnefield Partners Small Cap Value I, L.P. and Wynnefield Partners Small Cap Value, L.P, which are under the management of Wynnefield Capital. The Company’s Chairman of the Board, Dwight Mamanteo, is a portfolio manager of Wynnefield Capital. (See Note 9 for additional information).information.)

The Company closed a subsequent tranche of the Private Placement on April 10, 2018, with Charles Trapp with respect to the Trappa 10% Note with a principal amount of $50,000 and the Trappa Warrant to purchase 2,000 shares of common stock. (See Note 9 for additional information).information.)

The Company closed a subsequent tranche of the Private Placement on May 1, 2018, with Ian Rhodes with respect to the Rhodesa 10% Note with a principal amount of $50,000 and the Rhodesa Warrant to purchase 2,000 shares of common stock. (See Note 9 for additional information).information.)

NOTE 11 – Commitments and Contingencies

Litigation

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

On December 27, 2017,Since the Company’s Quarterly Report on Form 10-Q that the Company filed with the SEC on August 14, 2018 (the “Prior 10-Q”), there have been no material developments with respect to the civil action filed by PSP Falcon Industries, LLC (“PSP Falcon”) filed a civil action against the Company in the Ocean County Superior Court located in Toms River, New Jersey. The civilFor additional information regarding the foregoing action, relates to an outstanding balance alleged to be due to PSP Falcon fromplease see the Company in an amount of $530,633 related to certain construction expenses. The Company believes it has paid PSP Falcon in full for the services rendered and therefore that no outstanding balance remains due. Accordingly, the Company plans to vigorously defend itself from this claim. Prior 10-Q.

Environmental Matters

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

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

During early August 2018, the Company experienced an environmental issue related to the processing of feedstock at its Institute, WV facility, which resulted in the Company shutting down production at the facility. The Company is working with regulatory agencies, its landlordwas back in operation before the last week of August. The WVDEP and site services provider,USEPA investigated the incident, and determined the Company had done everything correctly, and no citations or fines were issued. The feedstock suppliers involved have made concessions to address this issue and currently expects production to resume in late August or early September. At this time, the Company cannot estimate the cost, if any,compensate us for our related to the issue.costs. 

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

The following discussion and analysis of our financial condition and results of operations for the three and sixnine months ended JuneSeptember 30, 2018 should be read together with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report. This discussion contains forward-looking statements and information relating to our business that reflect our current views and assumptions with respect to future events and are subject to risks and uncertainties that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These forward-looking statements speak only as of the date of this report. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or achievements. Except as required by applicable law, including the securities laws of the United States, we expressly disclaim any obligation or undertaking to disseminate any update or revisions of any of the forward-looking statements to reflect any change in our expectations with regard thereto or to conform these statements to actual results.

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.

Company Overview

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

GlyEco conducts its operation in two business segments: the Consumer segment and the Industrial segment. The Consumer segment’s principal business activity is the production and distribution of American Society for Testing Materials (“ASTM”)-grade glycol products, specifically automotive antifreeze and specialty-blended antifreeze, for sale into the automotive and industrial end markets. The Consumer segment operates a full lifecycle business, picking up waste antifreeze and producing finished antifreeze from both recycled and virgin glycol sources. We operate six processing and distribution centers located in the eastern region of the United States. The production capacity of the Consumer segment is approximately 90,000 gallons per month of ready to use (50/50) antifreeze. Operations in our Industrial segment are conducted through WEBA Technology Corp. (“WEBA”) and Glyeco West Virginia, two of our subsidiaries. WEBA develops, manufactures and markets additive packages for the antifreeze/coolant, gas patch coolant and heat transfer industries throughout North America.  Glyeco WV operates a glycol re-distillation plant in West Virginia that produces virgin quality glycol for sale to industrial customers worldwide. The Glyeco WV facility currently produces antifreeze and industrial grade ethylene glycol. The production capacity of the Glyeco WV facility is approximately 1.5 million gallons per month of concentrated ethylene glycol.

Consumer Segment

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

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

Our Consumer segment product offerings include:

We currently sell and deliver all of our products in bulk containers (55-gallon barrels, 250- gallon250-gallon totes, etc.) or variable metered bulk quantities.

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

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

Industrial Segment

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

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

All of the METALGUARD® products are tested at our in-house laboratory facility and by third-party laboratories to assure conformance. We use the standards set by the ASTM 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.

Glyeco WV operates a glycol re-distillation plant in West Virginia, which produces virgin quality glycol for sale to industrial customers worldwide. The Glyeco WV facility currently produces antifreeze and industrial grade ethylene glycol. We believe it is one of the largest glycol re-distillation plants in North America, with production capacity of approximately 1.5 million gallons per month of concentrated ethylene glycol. The Glyeco WV facility, located at the Dow Institute Site at Institute, West Virginia, includes five distillation columns, three wiped-film evaporators, heat exchangers, processing and storage tanks, and other processing equipment. The facility’s tanks include feedstock storage capacity of several million gallons and finished goods storage capacity of several million gallons. The plant is equipped with rail and truck unloading/loading facilities and on-site barge loading/unloading facilities.

Our Strategy

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

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

Critical Accounting Policies

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

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

Revenue Recognition

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

Collectability of Accounts Receivable

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

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

Inventories

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

Long-Lived Assets

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

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

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

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

Share-Based Compensation

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

Assumptions used in the calculation were determined as follows:

Contingencies

Litigation

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

On December 27, 2017,Since the Company’s Quarterly Report on Form 10-Q that the Company filed with the SEC on August 14, 2018 (the “Prior 10-Q”), there have been no material developments with respect to the civil action filed by PSP Falcon Industries, LLC (“PSP Falcon”) filed a civil action against the Company in the Ocean County Superior Court located in Toms River, New Jersey. The civilFor additional information regarding the foregoing action, relates to an outstanding balance alleged to be due to PSP Falcon fromplease see the Company in an amount of $530,633 related to certain construction expenses. The Company believes it has paid PSP Falcon in full for the services rendered and therefore that no outstanding balance remains due. Accordingly, the Company plans to vigorously defend itself from this claim.Prior 10-Q.

Environmental Matters

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

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

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

During early August 2018, the Company experienced an environmental issue related to the processing of feedstock at its Institute, WV facility, which resulted in the Company shutting down production at the facility. The Company is working with regulatory agencies, its landlordwas back in operation before the last week of August. The WVDEP and site services provider,USEPA investigated the incident, and determined the Company had done everything correctly, and no citations or fines were issued. The feedstock suppliers involved have made concessions to address this issue and currently expects production to resume in late August or early September. At this time, the Company cannot estimate the cost, if any,compensate us for our related to the issue.costs. 

Results of Operations

SixNine Months Ended JuneSeptember 30, 2018 Compared to SixNine Months Ended JuneSeptember 30, 2017

Net Sales

For the sixnine months ended JuneSeptember 30, 2018, Net Sales were $6,468,390$9,364,148 compared to $5,208,418$8,493,088 for the sixnine months ended JuneSeptember 30, 2017, representing an increase of $1,259,972,$871,060, or approximately 24%10%. The increase in Net Sales was due to an increase of $1,336,836$1,050,739 of sales related to the Industrial Segment businesses during the nine months ended September 30, 2018, compared to the same period innine months ended September 30, 2017. The WV facility in the Industrial Segment did not commence operations until March of 2017, impacting sales in the six-monthsnine months ended JuneSeptember 30, 2017. Net Sales, including intersegment sales for the sixnine months ended JuneSeptember 30, 2018, were $3,147,460$4,545,773 and $3,886,019$5,676,773 for the Consumer and Industrial segments, respectively.

Cost of Goods Sold

For the sixnine months ended JuneSeptember 30, 2018, our Costs of Goods Sold was $5,522,041,$8,254,589, compared to $4,591,829$7,468,406 for the sixnine months ended JuneSeptember 30, 2017, representing an increase of $930,212,$786,183, or approximately 20%11%. The increase in Cost of Goods Sold was primarily due to costs associated with the increase in net sales. The Consumer segment also incurred increased Cost of Goods Sold due toin the Consumer segment were impacted for the nine months ended September 30, 2018 by increased feedstock costscost, increased bulk transportation rates and one-time machine repair costs.costs compared with nine months ended September 30, 2017.

Gross Profit (Loss)