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GLYE > SEC Filings for GLYE > Form 10-K on 16-Apr-2013All Recent SEC Filings

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Form 10-K for GLYECO, INC.


16-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our results of operations and financial condition for the years ended December 31, 2012, and December 31, 2011, with the audited Consolidated Financial Statements and related notes included elsewhere herein. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs, and which involve numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A, "Risk Factors." Actual results may differ materially from those contained in any forward-looking statements.

Company Overview

We are a green chemistry company that collects and recycles waste glycol into a reusable product that is sold to third party customers in the automotive and industrial end-markets. Our proprietary technology, GlyEco TechnologyTM, allows us to recycle all five types of waste glycol into a virgin-quality product usable for any glycol application. We are dedicated to conserving natural resources, limiting cradle to grave liability for waste generators, safeguarding the environment, and creating valuable green products.

We currently operate at six facilities in the United States, with a combined recycling capacity over 7 million gallons per year. The facilities are located in (1) Minneapolis, Minnesota, (2) Indianapolis, Indiana, (3) Elizabeth, New Jersey (the "New Jersey Facility), (4) Rock Hill, South Carolina, (5) Tea, South Dakota, and (6) Newell, West Virginia (the "West Virginia Facility"). Our facilities in New Jersey and West Virginia are glycol concentrate facilities that receive shipments of waste glycol by third-party rail or truck carriers and recycle the waste glycol into a concentrate glycol. Normally, the waste glycol will be 65 to 70 percent glycol before being recycled into a concentrate. Our facilities in Minnesota, South Carolina, Indiana, and South Dakota are 50/50 antifreeze facilities that employ truck drivers to pick up waste antifreeze from vehicle repair shops and other waste antifreeze producers, transport the material to their recycling facilities, recycle the material into a 50/50 antifreeze, and resell the material often to the same customers that generates waste antifreeze. The waste glycol is normally between 40 to 48 percent glycol concentration at our 50/50 antifreeze facilities. At times, we receive material that is unable to be recycled into a reusable product, which is disposed in compliance with the relevant regulations.

During 2013, we plan to integrate and increase the sales of our recent acquisitions while implementing our GlyEco Technology™ at the New Jersey Facility to produce Type I glycol in commercial quantities. Implementation of the GlyEco TechnologyTM requires a retrofit to the existing New Jersey Facility. The retrofit costs approximately $2,000,000, and we expect to complete the process in 2013. Upon completion of the retrofit, we anticipate to ramp up our volumes and plan to run a processing capacity run rate of 10 million gallons per year at the New Jersey Facility. We plan to upgrade, expand, and implement the GlyEco TechnologyTM at the other facilities as feedstock sources and volumes expand.

The New Jersey Facility is operated at our direction by Full Circle Manufacturing Group, Inc., a New Jersey corporation ("Full Circle"), per the terms of a Manufacturing and Distribution Agreement (the "M&D Agreement") entered into on December 10, 2012, between Full Circle and GlyEco Acquisition Corp. #4, an Arizona corporation and wholly-owned subsidiary of the Company ("Acquisition Sub #4). Once implemented, Full Circle will operate the GlyEco Technology™ at our instruction to produce Type 1 glycol for our sole benefit (see Transaction with Full Circle Manufacturing Group, Inc. - New Jersey Facility above).


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In addition to integrating our recent acquisitions and implementing our GlyEco Technology™ at the New Jersey Facility, we continue to explore additional acquisitions and seek to create strategic alliances with companies producing or aggregating waste glycol. In the United States, we have entered into a preliminary agreement to acquire a company in Norcross, Georgia (see below), a definitive asset purchase agreement with a company in Lakeland, Florida (see below), and we are in ongoing discussions with a number of other companies to acquire their glycol recycling businesses. Internationally, we are exploring several different strategic partnerships and business models to implement our GlyEco Technology™. in Europe, China, Southeast Asia, Mexico, and South America.

Strategy

Our strategy is to continue to expand our customer base, both in the regions we currently serve and in new regions across North America and abroad. The principal elements of our business strategy are to:

Integrate and Increase Profits. We intend to fully integrate and implement best practices across all aspects of our operating facilities, including financial, staffing, technology, products and packaging, and compliance. Our customers and partners require high levels of regulatory and environmental compliance, which we intent to emphasize through employee training, facility policies and procedures, and ongoing analysis of operating performance. We intend to implement new accounting, invoicing, and logistics management systems. We intend to implement the full GlyEcoTM brand via marketing initiatives and product packaging. We believe all of these measures will increase the quality service we can provide to customers, increase the visibility of the Company, and maximize profitability.

Expand Feedstock Supply Volume. We intend to expand our feedstock supply volume by growing our relationships with direct waste generators and indirect waste collectors. We plan to increase the volume we collect from direct waste generators in the following ways: stress segregation from other liquid wastes and a focus on waste glycol recovery to our existing customers; attract new waste generator customers by displacing incumbent waste collector through product quality and customer service value propositions; and attract new waste generators in territories that we do not currently serve. We plan to increase the volume we collect from indirect waste collectors by implementing specific sales programs and increasing personnel dedicated to sales generation.

Complete Retrofit and Upgrade at the New Jersey Facility. We intend to upgrade and expand the New Jersey Facility to produce commercial volumes of Type 1 material. While the facility continues to operate in its previous state, we are currently in the process of fully implementing the GlyEco TechnologyTM-consisting of a $2 million investment in equipment and build-out services to upgrade and expand the facility.

Pursue Selective Strategic Relationships or Acquisitions. In addition to the current acquisition targets that we have come to agreement with, we intend to grow our market share by consolidating feedstock supply through partnering with waste collection companies or acquiring other glycol recycling companies. We plan to focus on partnerships and acquisitions that not only add revenue and profitability to our financials but those that have long-term growth potential and fit with the overall goals of the Company.

Enter International Markets. We intend to move our operations and technology into international markets in the next twelve to eighteen months. We have developed several relationships in markets where we believe glycol recycling is an underserved market, including Europe, Asia, Mexico, and South America. We believe that moving into international markets will further establish the Company as a leader in glycol recycling and will add profits to the bottom line.

Results of Operations

Fiscal Year ended December 31, 2012 to Fiscal Year Ended December 31, 2011

Net Sales

For the fiscal year ended December 31, 2012, Net Sales were $1,266,295, compared to $824,289 for the year ended December 31, 2011, an increase of $442,006 or 53.6%. The increase in Net Sales was due to a price increase for the material processed at our facility in West Virginia as well as the associated net sales from the acquisitions of Recycool, Renew Resources and ARI. Net Sales was earned from our existing operations with one customer located in West Virginia and from the operations of the Company's newly acquired wholly-owned subsidiaries:
Recycool, Renew Resources and ARI.


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Cost of Goods Sold

For the fiscal year ended December 31, 2012, our Costs of Good Sold increased to $1,021,332 from $663,689 for the fiscal year ended December 31, 2011, representing an increase of $357,643, or approximately 53.9%. The increase in Cost of Goods Sold was due to the associated Cost of Goods Sold from the acquisitions of Recycool, Renew Resources and ARI, the disposal of waste glycol that could not be processed in the third quarter of 2011, as well as an increase in processing costs at the facility in West Virginia. Costs of Good Sold consist of costs to purchase, transport, store and process the raw materials. We sometimes receive raw materials (used antifreeze) at no cost to the Company. This can have an impact on our reported consolidated gross profit.

Gross Profit

For the fiscal year ended December 31, 2012, we realized a gross profit of $244,963, compared to $160,600 for the year ended December 31, 2011, a positive increase of $84,363 or 52.5%. The increase in Gross Profit was primarily due to the acquisitions of Recycool, Renew, Resources and ARI. Our Gross Profit Margin for the fiscal year ended December 31, 2012 was approximately 19%, compared to approximately 19% for the fiscal year ended December 31, 2011.

Operating Expenses

For the year ended December 31, 2012, operating expenses increased to $1,930,439 from $587,635 for the year ended December 31, 2011, representing an increase of $1,342,804, or approximately 228.5%. Operating expenses consist of Consulting Fees, Legal and Professional Fees and General and Administrative Expenses. The increase is primarily due to a reduction in Legal and Professional Fees as a result of a credit from a service provider in the third quarter of 2011. The increase is also attributable to the Company's expansion through its acquisition strategy and related costs to fund operations.

Consulting Fees consist of marketing, administrative and management fees paid under consulting agreements. Consulting Fees increased to $623,949 for the fiscal year ended December 31, 2012 from $406,790 for the fiscal year ended December 31, 2011, representing an increase of $217,159, or approximately 53.4%. The increase is primarily attributable to the Company's expansion through its acquisition strategy and related costs to fund operations.

Salaries and Wages consist of wages, and taxes paid on behalf of the employee. Salaries and Wages increased to $467,023 for the year ended December 31, 2012 from $0 for the year ended December 31, 2011, representing an increase of $467,023, or 100%. The increase is due to the addition of John Lorenz, CEO, as an employee, three consultants who became employees, and the hiring of a Senior Engineer and a Legal Analyst.

Share-Based Compensation consists of options issued to consultants and employees in consideration for services provided to the Company. Share-Based Compensation increased to $124,660 for the year ended December 31, 2012 from $0 for the year ended December 31, 2011, representing an increase of $124,660, or 100%. Share-Based Compensation is valued according the Black-Scholes Merton ("BSM") option-pricing model. The increase is due to the fact that options issued in 2011 while the Company was privately held were assigned a value of $0 by the BSM. No options were issued in 2011 after the reverse merger by which the Company became a public entity.

Legal and Professional Fees consist of legal, outsourced accounting services, corporate tax and SEC audit services. For the fiscal year ended December 31, 2012, Legal and Professional Fees increased to $300,674 from $39,629 for the fiscal year ended December 31, 2011, representing an increase of $261,045 or approximately 658.7%. The increase is primarily due to a reduction in Legal and Professional Fees as a result of a credit from a service provider in the third quarter of 2011. The increase is also attributable to the Company's expansion through its acquisition strategy and related costs to fund operations.

General and Administrative (G&A) Expenses consist of general operational costs of our business. For the fiscal year ended December 31, 2012, G&A Expenses increased to $414,133 from $141,216 for the fiscal year ended December 31, 2011, representing an increase of $272,917, or approximately 193.3%. This increase is primarily due to the acquisitions of our subsidiaries, Recycool, Renew Resources and ARI, and the associated costs of building out our infrastructure to support future growth of the Company.

Other Income and Expenses

For the fiscal year ended December 31, 2012, Other Income and Expenses increased to $184,354 from $165,136 for the fiscal year ended December 31, 2011, representing an increase of $19,218, or approximately 11.6%. Other Income and Expenses consist of Interest Income, Interest Expense and Gain on the Disposition of Assets.

Interest Income consists of the interest earned on the Company's corporate bank account. Interest Income for the fiscal year ended December 31, 2012 increased to $1,206 from $375 for the fiscal year ended December 31, 2011, representing an increase of $831 or approximately 221.3%. The increase was due to larger cash holdings in a money market account.

Interest Expense consists of accrued and unpaid interest on the Company's outstanding indebtedness. As stated under "Liquidity & Capital Resources" below, 97% of the Company's outstanding indebtedness consists of accrued and unpaid interest on the convertible secured promissory note in the principal amount of $1,000,000 held by Leonid Frenkel (the "Frenkel Convertible Note"), subject to the Company's Second Forbearance Agreement due on March 31, 2012 (discussed below). For the fiscal year ended December 31, 2012, Interest Expense increased to $185,561 from $149,601 for the fiscal year ended December 31, 2011, representing an increase of $4,050 or approximately 2.2%. There was no substantive change in the interest expense.


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Gain on Fixed Assets consists of gains on the sale of equipment that had been previously impaired. For the year ended December 31, 2012 the Gain on Fixed Assets decreased to $0 from $16,000 for the year ended December 31, 2011, representing a decrease of 100%. In the third quarter of 2011, the Company sold equipment that had been previously impaired and assessed to have no value.

Liquidity & Capital Resources; Going Concern

As of December 31, 2012, we had $1,342,173 in current assets, consisting of $1,153,941 in cash, $116,963 in accounts receivable, $12,550 in prepaid expenses, and $58,719 in inventories. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of December 31, 2012, 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 and to ultimately achieve viable operations. These consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Our plans to address these matters include, raising additional financing through offering its shares of capital stock in private and/or public offerings of its 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 its business operation or permit the Company to implement its intended business strategy. The Company plans to become profitable by upgrading the capacity and capabilities at its existing operating facility, continuing to implement its patent-pending technology in international markets, and acquiring profitable glycol recycling companies, which are looking to take advantage of the Company's public company status and improve their profitability through a combined synergy. We have acquired four glycol recycling businesses, and are in discussions with five other companies to acquire their glycol recycling businesses.

We intend to expand customer and supplier bases once operational capacity and capabilities have been upgraded.

As of and for the years ended December 31, 2012 and 2011, our auditors have expressed substantial doubt that the Company will continue as a going concern.

The table below sets forth certain information about the Company's liquidity and capital resources for the fiscal years ended December 30, 2012 and 2011:

                                                  For the Fiscal Year Ended
                                          December 31, 2012       December 31, 2011
 Net cash (used in) operating
 activities                              $        (1,769,669 )   $          (479,122 )
 Net cash (used in) investing
 activities                              $        (2,057,781 )   $                 -
 Net cash provided by financing
 activities                              $         4,404,264     $         1,051,145
 Net increase (decrease) in cash and
 cash equivalents                        $           576,814     $           572,024
 Cash - beginning of period              $           577,127     $             5,103
 Cash - end of period                    $         1,153,941     $           577,127

The Company does not currently have sufficient capital to sustain its operations for the next 12 months. To date, the Company has financed its operations from the Frenkel Convertible Note (as discussed below) and private sales of its securities exempt from the registration requirements of the Securities Act of 1933, as amended. During the fiscal year ended December 31, 2012, the Company raised $4,404,264 from private sales of its securities.

Frenkel Convertible Note

On August 9, 2008, Global Recycling issued a convertible promissory note to Leonid Frenkel, a principal stockholder, registered in the name of "IRA FBO Leonid Frenkel," for $1,000,000 and bearing interest at 10.0% per annum (the "Frenkel Convertible Note"). Interest payments were due semi-annually in cash or shares of Global Recycling common stock. The Frenkel Convertible Note was convertible into 575,350 shares, at any time prior to maturity, at the option of the holder, into Global Recycling common stock at a conversion price of $2.50 per share. The Frenkel Convertible Note was secured by a lien on Global Recycling's provisional patent application, including the GlyEco Technology Patent. The holder was also granted 480,000 warrants at $0.025 per share at the time the Frenkel Convertible Note was issued. The warrants expire on September 8, 2013.

Nonpayment of the principal or interest due and payable within 10 days of such amount being due is an "Event of Default" under the terms of the Frenkel Convertible Note. An Event of Default may also occur if Global Recycling breaches any material terms of the Frenkel Convertible Note, files bankruptcy or ceases operations. In the event of default, at the holder's election, the outstanding principal and unpaid accrued interest of the Frenkel Convertible Note may be due and payable immediately.


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The Frenkel Convertible Note matured on August 9, 2010. However, Global Recycling entered into a Forbearance Agreement, dated August 11, 2010 (the "First Forbearance Agreement"), with Mr. Frenkel. The First Forbearance Agreement extended the maturity date of the Frenkel Convertible Note to March 31, 2012, and the interest rate was retroactively increased to 12.5% per annum, effective March 9, 2010. Also, the First Forbearance Agreement modified the default terms of the Frenkel Convertible Note such that the interest rate on the outstanding principal and unpaid accrued interest under the Frenkel Convertible Note would increase to 18% per annum upon the occurrence of an Event of Default. In connection with the First Forbearance Agreement, the Company issued to Mr. Frenkel warrants to purchase 400,000 share of Global Recycling Common Stock at $.00025 per share with an expiration of December 31, 2011.Mr. Frenkel did not exercise any of these warrants before their expiration.

The First Forbearance Agreement expired on November 30, 2010 because the Company did not pay the interest due by this date. Subsequently, based on the terms of the First Forbearance Agreement, the Frenkel Convertible Note became payable on demand. Mr. Frenkel agreed to extend the expiration date for the payment of the interest due, rather than exercise his right to perfect his interest in the collateral that secures the loan.

On May 25, 2011, Global Recycling entered into a second forbearance agreement (the "Second Forbearance Agreement") with Mr. Frenkel. The terms of the Frenkel Convertible Note, the maturity date of March 31, 2012, and the interest rate of 12.5% per annum remained unchanged from the First Forbearance Agreement. Pursuant to the Second Forbearance Agreement, Global Recycling granted Mr. Frenkel warrants to purchase up to 1,000,000 shares of Global Recycling common stock for $.0001 per share until May 25, 2015. The warrant agreement provides that the warrant shares shall not be reduced for a reverse stock split. The Second Forbearance Agreement expired on December 31, 2011 because the Company did not pay the accrued and payable interest of $431,692. As a result of failing to pay the interest due, the Company is in default on the Frenkel Convertible Note.

Pursuant to the Merger, the Company assumed the Frenkel Convertible Note, Second Forbearance Agreement and warrants issued by Global Recycling to Mr. Frenkel in connection with the Frenkel Convertible Note.

On April 3, 2012, GlyEco entered into a Note Conversion Agreement (the "Conversion Agreement") with Mr. Frenkel. The terms of the Conversion Agreement extend the maturity date for the Frenkel Convertible Note to December 31, 2013. Interest will continue to accrue at a rate of 12.5% compounding semi-annually. Any and all claims of demand arising from or related to a default on the Frenkel Convertible Note prior to the Conversion Agreement were waived by Mr. Frenkel. The Conversion Agreement further states that Mr. Frenkel will convert all money owed into a combination of Common and Preferred Stock on the date that the Company has received an aggregate of $5,000,000 in equity investment following the date of the Conversion Agreement. Four hundred and seventy thousand dollars ($470,000) of the debt will be converted into common stock at $1.00 per share or the price offered to any investor subsequent to the Conversion Agreement, if lower. The remainder will be converted into Series AA preferred stock at $1.00 per share or the price offered to any investor subsequent to the Conversion Agreement, if lower. The Series AA preferred stock shall in all features be the same as common stock, with two primary exceptions:
(i) the Series AA preferred stock shall accrue a dividend of 12.5% per year, compounded semi-annually; and (ii) the Series AA preferred stock shall have priority in payment upon liquidation over common stock.

On February 15, 2013, the Company satisfied the terms of the Note Conversion Agreement (the "Conversion Agreement"), which provided that the note held by Leonid Frenkel (the "Frenkel Convertible Note") would convert into a combination of Common and Preferred Stock for all money owed on the date that the Company has received an aggregate of $5,000,000 in equity investment following the date of the Conversion Agreement. Upon satisfaction of these terms, the Company issued to the note holder 940,000 shares of Common Stock at a price of $0.50 per share and 2,342,612 shares of Preferred Stock at a price of $0.50 per share

Private Financings

On January 4, 2012, the Company sold an aggregate of 100,000 shares of Common Stock for the exercise of 100,000 warrants in consideration for $50,000 ($0.50 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On January 17, 2012, the Company sold an aggregate of 30,000 shares of Common Stock to two investors in consideration for $15,000 ($0.50 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On February 3, 2012, the Company sold an aggregate of 20,000 shares of Common Stock to a current unaccredited investor in consideration for $10,000 ($0.50 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On March 30, 2012, the Company sold an aggregate of 250,000 shares of Common Stock to one investor in consideration for $250,000 ($1.00 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.


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On April 9, 2012, the Company sold an aggregate of 300,000 shares of Common Stock to one investor in consideration for $300,000 ($1.00 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On April 27, 2012, the Company sold an aggregate of 250,000 shares of Common Stock to one investor in consideration for $250,000 ($1.00 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On April 30, 2012, the Company sold an aggregate of 100,000 shares of Common Stock for the exercise of 100,000 warrants in consideration for $50,000 ($0.50 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On August 3, 2012, the Company sold an aggregate of 200,000 shares of Common Stock to one investor in consideration for $100,000 ($0.50 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On August 28, 2012, the Company sold an aggregate of 600,000 shares of Common Stock to three investors in consideration for $300,000 ($0.50 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On September 4, 2012, the Company sold an aggregate of 400,000 shares of Common Stock to one investor in consideration for $200,000 ($0.50 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On September 12, 2012, the Company sold an aggregate of 50,000 shares of Common Stock to one investor in consideration for $25,000 ($0.50 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On September 17, 2012, the Company sold an aggregate of 50,000 shares of Common Stock to one investor in consideration for $25,000 ($0.50 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On September 28, 2012, the Company sold an aggregate of 80,000 shares of Common Stock to one investor in consideration for $40,000 ($0.50 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On October 5, 2012, the Company sold an aggregate of 440,000 shares of Common Stock to two investors in consideration for $220,000 ($0.50 per share of Common Stock) under Section 4(2) and Rule 506 of Regulation D of the Securities Act.

On October 9, 2012, the Company sold an aggregate of 250,000 shares of Common . . .

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