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GLYE > SEC Filings for GLYE > Form 10-Q on 14-Aug-2013All Recent SEC Filings

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Form 10-Q for GLYECO, INC.


14-Aug-2013

Quarterly Report


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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are based on information currently available to management as well as management's assumptions and beliefs. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements identified by the words "may," "will," "should," "plan," "predict," "anticipate," "believe," "intend," "estimate" and "expect" and similar expressions. Such statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions; however, such statements are subject to certain risks and uncertainties. In addition to the specific uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, the risk factors set forth in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012 may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise.

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

The following discussion should be read in conjunction with the information contained in the consolidated financial statements of the Company and the notes which form an integral part of the financial statements which are attached hereto.

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 of 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 entered into on December 10, 2012, between Full Circle and GlyEco Acquisition Corp. #4, an Arizona corporation and wholly-owned subsidiary of the Company. Once implemented, Full Circle will operate the GlyEco Technology™ at our instruction to produce Type 1 glycol for our sole benefit.

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, a definitive asset purchase agreement with a company in Lakeland, Florida, 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.


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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 intend 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 collectors 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 have completed initial technology upgrades and begun producing Type 1 compliant recycled glycol for commercial use. 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.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. We have identified in Note 2 - "Summary of Significant Accounting Policies" to the Financial Statements contained in Part I of this Form 10-Q document certain critical accounting policies that affect the more significant judgments and estimates used in the preparation of the financial statements.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net Sales

For the six months ended June 30, 2013, Net Sales were $2,650,140, compared to $591,934 for the six months ended June 30, 2012, an increase of $2,058,206, or 347.7%. The increase in Net Sales was due to the revenues generated from Acquisition Sub #4, as well as associated net sales from the acquisitions of Renew Resources, LLC, a South Carolina limited liability company ("Renew Resources"), Antifreeze Recycling, Inc., a South Dakota corporation ("ARI"), and Evergreen Recycling, Inc., an Indiana corporation ("Evergreen").


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Cost of Goods Sold

For the six months ended June 30, 2013, our Cost of Goods Sold was $2,107,446, compared to $505,600 for the six months ended June 30, 2012, representing an increase of $1,601,846 or 316.8%. The increase in Cost of Goods Sold was due to the associated Cost of Goods Sold from the acquisitions of Renew Resources, ARI, and Evergreen, as well as those Cost of Goods Sold attributed to Acquisition Sub #4. Cost of Goods 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 six months ended June 30, 2013, we realized a gross profit of $542,694, compared to $86,334 for the six months period ended June 30, 2012, an increase of $456,360, or 528.6%. The increase in gross profit was primarily due to the acquisitions of Renew, Resources, ARI, and Evergreen as well as initiation of operations through Acquisition Sub #4. Our gross profit margin for the six month period ended June 30, 2013 was approximately 20%, compared to approximately 15% for the six month period ended June 30, 2012. We sometimes receive raw materials (used antifreeze) at no cost to the Company. This can have an impact on our reported consolidated gross profit. We anticipate our gross profit margin will grow to 35-40% with the implementation of our GlyEco TechnologyTM.

Operating Expenses

For the six months ended June 30, 2013, operating expenses increased to $1,116,215 from $816,652 for the six months ended June 30, 2012, representing an increase of $299,563, or 36.7%. Operating expenses consist of Consulting Fees, Salaries and Wages, Legal and Professional Fees and General and Administrative Expenses. This increase is 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 $348,715 for the six month period ended June 30, 2013 from $193,357 for the six month period ended June 30, 2012, representing an increase of $155,358, or 80.3%. The increase is primarily due 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 employees. Salaries and Wages increased to $348,557 for the six month period ended June 30, 2013 from $186,060 for the six month period ended June 30, 2012, representing an increase of $162,497, or 87.3%. The increase is due to the addition of three consultants who became employees, and the hiring of a Senior Engineer and Staff Legal Counsel.

Legal and Professional Fees consist of legal, outsourced accounting services, corporate tax and SEC audit services, including SEC filing services. For the six month period ended June 30, 2013, Legal and Professional Fees decreased to $122,176 from $204,933 for the six month period ended June 30, 2012, representing a decrease of $82,757, or (40.4)%. The decrease is due to a reduction in the outsourcing of legal and professional work. This work is now performed by staff internal to the Company.

General and Administrative (G&A) Expenses consist of general operational costs of our business. For the six month period ended June 30, 2013, G&A Expenses increased to $296,767 from $232,302 for the six month period ended June 30, 2012, representing an increase of $64,465, or 27.8%. This increase is primarily due to the acquisition of our subsidiaries, Renew Resources, ARI, and Evergreen, and the associated costs of building out our infrastructure to support future growth of the Company.

Other Income and Expenses

For the six months ended June 30, 2013, Other Income and Expenses increased to $104,842 from $88,500 for the six month period ended June 30, 2012, representing an increase of $16,342, or 18.5%. Other Income and Expenses consist of Interest Income and Interest Expense.

Interest Income consists of the interest earned on the Company's corporate bank account. Interest Income for the six month period ended June 30, 2013 increased to $957 from $386 for the six month period ended June 30, 2012, representing an increase of $571, or 147.9%. The increase was due to larger cash holdings in a money market account.


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Interest Expense consists of accrued, paid and unpaid interest on the Company's outstanding indebtedness. As stated under "Liquidity & Capital Resources" below, 97% of the Company's outstanding indebtedness consisted of accrued and unpaid interest on the convertible secured promissory note in the principal amount of $1,000,000 held by Leonid Frenkel, subject to the Company's Conversion Agreement due on December 31, 2013 (discussed below). For the six month period ended June 30, 2013, Interest Expense increased to $105,799 from $88,886 for the six month period ended June 30, 2012, representing an increase of $16,913 or approximately 19%. The increase was mainly due to the interest expense related to the Company's capital lease obligation for equipment used by Acquisition Sub #4 offset by the decrease in the Frenkel Convertible Note balance. On February 15, 2013, the Company satisfied the terms of the Conversion Agreement, which provided that the note holder 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 2,342,750 shares of Preferred Stock at a price of $0.50 per share.

Net Loss

For the six months ended June 30, 2013, we incurred a loss of $678,363 or $0.02 basic loss per share compared to a loss of $818,818 or $0.03 basic loss per share for the six months ended June 30, 2012. The decrease in the loss is described above in the detailed operating expenses.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Net Sales

For the three months ended June 30, 2013, Net Sales were $1,417,473, compared to $173,117 for the three months ended June 30, 2012, an increase of $1,244,356, or 718.8%. The increase in Net Sales was due to the revenues generated from Acquisition Sub #4, as well as associated net sales from the acquisitions of Renew Resources, ARI and Evergreen.

Cost of Goods Sold

For the three months ended June 30, 2013, our Cost of Goods Sold was $941,864, compared to $136,816 for the three months ended June 30, 2012, representing an increase of $805,048 or 588.4%. The increase in Cost of Goods Sold was due to the associated Cost of Goods Sold from the acquisitions of Renew Resources, ARI, and Evergreen, as well as those Cost of Goods Sold attributed to Acquisition Sub #4. Cost of Goods 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 three months ended June 30, 2013, we realized a gross profit of $475,609, compared to $36,301 for the three months ended June 30, 2012, an increase of $439,308, or 1,210.2%. The increase in gross profit was primarily due to the acquisitions of Renew, Resources, ARI, and Evergreen as well as initiation of operations through Acquisition Sub #4. Our gross profit margin for the three month period ended June 30, 2013 was approximately 34%, compared to approximately 21% for the three month period ended June 30, 2012. We sometimes receive raw materials (used antifreeze) at no cost to the Company. This can have an impact on our reported consolidated gross profit. We anticipate our gross profit margin will grow to 35-40% with the implementation of our GlyEco TechnologyTM.

Operating Expenses

For the three month period ended June 30, 2013, operating expenses increased to $628,204 from $497,396 for the three month period ended June 30, 2012, representing an increase of $130,808, or 26.3%. Operating expenses consist of Consulting Fees, Salaries and Wages, Legal and Professional Fees and General and Administrative Expenses. This increase is 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 $189,973 for the three month period ended June 30, 2013 from $62,695 for the three month period ended June 30, 2012, representing an increase of $127,278, or 203%. The increase is primarily due 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 employees. Salaries and Wages increased to $191,040 for the three month period ended June 30, 2013 from $134,520 for the three month period ended June 30, 2012, representing an increase of $56,520, or 42%. The increase is due to the addition of three consultants who became employees, and the hiring of a Senior Engineer and Staff Legal Counsel.


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Legal and Professional Fees consist of legal, outsourced accounting services, corporate tax and SEC audit services, including SEC filing services. For the three month period ended June 30, 2013, Legal and Professional Fees decreased to $58,601 from $143,775 for the three month period ended June 30, 2012, representing a decrease of $85,174, or (59.2)%. The decrease is due to a reduction in the outsourcing of legal and professional work. This work is now performed by staff internal to the Company.

General and Administrative (G&A) Expenses consist of general operational costs of our business. For the three month period ended June 30, 2013, G&A Expenses increased to $188,590 from $156,406 for the three month period ended June 30, 2012, representing an increase of $32,184, or 20.6%. This increase is primarily due to the acquisition of our subsidiaries, Renew Resources, ARI, and Evergreen, and the associated costs of building out our infrastructure to support future growth of the Company.

Other Income and Expenses

For the three month period ended June 30, 2013, Other Income and Expenses increased to $46,840 from $45,816 for the three month period ended June 30, 2012, representing an increase of $1,024, or 2.2%. Other Income and Expenses consist of Interest Income and Interest Expense.

Interest Income consists of the interest earned on the Company's corporate bank account. Interest Income for the three month period ended June 30, 2013 increased to $429 from $336 for the three month period ended June 30, 2012, representing an increase of $93, or 27.8%. The increase was due to larger cash holdings in a money market account.

Interest Expense consists of accrued, paid and unpaid interest on the Company's outstanding indebtedness. As stated under "Liquidity & Capital Resources" below, 97% of the Company's outstanding indebtedness consisted of accrued and unpaid interest on the convertible secured promissory note in the principal amount of $1,000,000 held by Leonid Frenkel, subject to the Company's Conversion Agreement due on December 31, 2013 (discussed below). For the three month period ended June 30, 2013, Interest Expense increased to $47,269 from $46,152 for the three month period ended June 30, 2012, representing an increase of $1,117 or approximately 2.4%. The increase was mainly due to the interest expense related to the Company's capital lease obligation for equipment used by Acquisition Sub #4 offset by the decrease in the Frenkel Convertible Note balance. On February 15, 2013, the Company satisfied the terms of the Conversion Agreement, which provided that the note holder 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 2,342,750 shares of Preferred Stock at a price of $0.50 per share

Net Loss

For the three months ended June 30, 2013, we incurred a loss of $199,435 or $0.01 basic loss per share compared to a loss of $506,911 or $0.02 basic loss per share for the three months ended June 30, 2012. The decrease in the loss is described above in the detailed operating expenses.

Liquidity & Capital Resources; Going Concern

As of June 30, 2013, we had $3,229,290 in current assets, consisting of $1,201,597 in cash, $1,503,890 in accounts receivable, $88,189 in prepaid expenses, and $435,614 in inventories. We had total current liabilities of $2,087,272 consisting of accounts payable and accrued expenses of $436,863, due related parties of $1,371,241, notes payable of $6,313, and a capital lease obligation of $272,855. We had total non-current liabilities of $1,348,631 consisting of notes payable of $13,178, and a capital lease obligation of $1,334,453.

During the six months ended June 30, 2013, we raised $1,737,826 equity financing for a total of $1,660,289 net of financing costs of $77,537.


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The table below sets forth certain information about the Company's liquidity and capital resources for the six months ended June 30, 2013 and 2012:

                                                          For the Six Months ended
                                                                  June 30,
                                                             2013             2012
 Net cash used in operating activities                  $   (1,122,660 )   $ (920,991 )
 Net cash used in investing activities                  $     (448,598 )   $   (6,170 )
 Net cash provided by financing activities              $    1,618,914     $  925,000
 Net increase (decrease) in cash and cash equivalents   $       47,656     $   (2,162 )
 Cash - beginning of period                             $    1,153,941     $  577,127
 Cash - end of period                                   $    1,201,597     $  574,965

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.

These factors raise substantial doubt about the Company's ability to continue as a going concern. As such, the Company's independent registered public accounting firm has expressed uncertainty about the Company's ability to continue as a going concern in their opinion attached to the Company's financial statements for the year ended December 31, 2012.

Frenkel Convertible Note

On August 9, 2008, Global Recycling, issued the Frenkel Convertible 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. Interest payments were due semi-annually in cash or shares of Global Recycling common stock. The Frenkel Convertible Note was convertible, 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. 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.

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

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 . . .

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