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GLYE > SEC Filings for GLYE > Form 10-Q on 18-Nov-2013All Recent SEC Filings

Show all filings for GLYECO, INC.

Form 10-Q for GLYECO, INC.


18-Nov-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 eight facilities in the United States. The facilities are located in (1) Minneapolis, Minnesota, (2) Indianapolis, Indiana, (3) Lakeland, Florida, (4) Elizabeth, New Jersey (the "New Jersey Facility"), (5) Rock Hill, South Carolina, (6) Tea, South Dakota, (7) Landover, Maryland, and
(8) 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. Our facilities in Minnesota, Indiana, Florida, South Carolina, South Dakota, and Maryland 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.

We continue to integrate and increase the sales of our 50/50 antifreeze recycling facilities. We have completed initial GlyEco TechnologyTM upgrades and are producing ASTM E1177 Type 1 recycled glycol at the New Jersey facility. As we continue to enhance the New Jersey facility, we anticipate an increase in the production of Type 1 and other glycol products. We plan to upgrade, expand, and implement the GlyEco TechnologyTM at the other facilities as feedstock sources and volumes expand.

In the United States, we continue to explore additional acquisitions and seek to create strategic alliances with companies producing or aggregating waste glycol. 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 continue integrating and implementing 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.

Further Upgrade the New Jersey Facility. We have completed initial technology upgrades and are producing Type 1 compliant recycled glycol for commercial use. We are currently in the process of fully implementing the GlyEco TechnologyTM - consisting of an investment in equipment and build-out services to upgrade and expand the facility.

Pursue Selective Strategic Relationships or Acquisitions. 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. 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.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Net Sales

For the nine months ended September 30, 2013, Net Sales were $3,813,747, compared to $895,390 for the nine months ended September 30, 2012, an increase of $2,918,357, or 325.9%. 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 nine months ended September 30, 2013, our Cost of Goods Sold was $3,310,686, compared to $738,780 for the nine months ended September 30, 2012, representing an increase of $2,571,906 or 348.1%. 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 consists of all costs of sales, including costs to purchase, transport, store and process the raw materials, and overhead related to product manufacture and sale. 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 nine months ended September 30, 2013, we realized a gross profit of $503,061, compared to $156,610 for the nine months period ended September 30, 2012, an increase of $346,451, or 221.2%. 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 nine month period ended September 30, 2013 was approximately 13.2%, compared to approximately 17.5% for the nine month period ended September 30, 2012. The decrease in gross profit margin is primarily attributable to additional, one-time costs for the integration of our facilities, which were expensed as Cost of Goods Sold in compliance with GAAP absorption costing. The additional costs caused the production costs per unit to exceed the revenues per unit produced.

Operating Expenses

For the nine months ended September 30, 2013, operating expenses increased to $2,496,990 from $1,287,231 for the nine months ended September 30, 2012, representing an increase of $1,209,759, or 94.0%. Operating expenses consist of Consulting Fees, Share-Based Compensation, 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 $510,054 for the nine month period ended September 30, 2013 from $358,457 for the nine month period ended September 30, 2012, representing an increase of $151,597, or 42.3%. The increase is primarily due to the Company's expansion through its acquisition strategy and related costs to integrate operations.

Share-Based Compensation is the expense for options and warrants issued to consultants or employees for work performed or as incentive for future performance. Share-Based Compensation increased to $839,210 for the nine month period ended September 30, 2013 from $0 for the nine month period ended September 30, 2012, representing an increase of $839,210, or 100.0%. The increase is due to an increase in the fair market value of the Company's common stock and the issuance of 1,640,500 compensatory options and 283,500 compensatory warrants.

Salaries and Wages consist of wages and taxes paid on behalf of employees. Salaries and Wages increased to $545,117 for the nine month period ended September 30, 2013 from $355,034 for the nine month period ended September 30, 2012, representing an increase of $190,083, or 53.5%. The increase is due to the additional hiring of employees and salary increases.

Legal and Professional Fees consist of legal, outsourced accounting services, corporate tax and SEC audit services, including SEC filing services. For the nine month period ended September 30, 2013, Legal and Professional Fees decreased to $185,636 from $265,361 for the nine month period ended September 30, 2012, representing a decrease of $79,725, or (30.0)%. The decrease is due to a reduction in the outsourcing of legal and professional work. This work is now increasingly performed by staff internal to the Company.

General and Administrative (G&A) Expenses consist of general operational costs of our business. For the nine month period ended September 30, 2013, G&A Expenses increased to $416,973 from $308,379 for the nine month period ended September 30, 2012, representing an increase of $108,594, or 35.2%. This increase is primarily due to the acquisition of our subsidiaries, Renew Resources, ARI, Evergreen, and GSS Automotive Recycling, operations at our NJ facility, and the associated costs of building out our infrastructure to support future growth of the Company.

Other Income and Expenses

For the nine months ended September 30, 2013, Other Income and Expenses increased to $154,189 from $134,553 for the nine month period ended September 30, 2012, representing an increase of $19,636, or 14.6%. Other Income and Expenses consist of Interest Income and Interest Expense.


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Interest Income consists of the interest earned on the Company's corporate bank account. Interest Income for the nine month period ended September 30, 2013 increased to $1,320 from $522 for the nine month period ended September 30, 2012, representing an increase of $798, or 152.9%. The increase was due to larger cash holdings in a money market account.

Interest Expense consists of paid and accrued interest on the Company's outstanding indebtedness. For the nine month period ended September 30, 2013, Interest Expense increased to $153,845 from $135,075 for the nine month period ended September 30, 2012, representing an increase of $18,770 or approximately 13.9%. The increase was mainly due to the interest expense related to the Company's capital lease obligation for equipment used by Acquisition Sub #4.

Net Loss

For the nine months ended September 30, 2013, we incurred a loss of $(1,848,940) or $(0.05) basic loss per share compared to a loss of $(1,265,174) or $(0.05) basic loss per share for the nine months ended September 30, 2012. The increase in the loss is described above in the detailed operating expenses.

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

Net Sales

For the nine months ended September 30, 2013, we incurred a loss of $(2,148,118) or $(0.05) basic loss per share compared to a loss of $(1,265,174) or $(0.05) basic loss per share for the nine months ended September 30, 2012. The increase in the loss is described above in the detailed operating expenses.

Cost of Goods Sold

For the three months ended September 30, 2013, our Cost of Goods Sold was $1,203,240, compared to $233,180 for the three months ended September 30, 2012, representing an increase of $970,060 or 416.0%. 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 consists of all costs of sale, including costs to purchase, transport, store and process the raw materials, and overhead related to product manufacture and sale.

Gross Profit (Loss)

For the three months ended September 30, 2013, we realized a gross loss of $(39,633), compared to $70,276 for the three months ended September 30, 2012, a decrease of $109,909, or (156.4)%. The decrease in gross profit was primarily due to costs related to recent acquisitions, as well as integration costs incurred as the Company streamlined its processes and procedures across its facilities. Our gross profit margin for the three month period ended September 30, 2013 was approximately (3.4)%, compared to approximately 23.2% for the three month period ended September 30, 2012. The decrease in gross profit margin is primarily attributable to additional, one-time costs for the integration of our facilities, which were expensed as Cost of Goods Sold in compliance with GAAP absorption costing. The additional costs caused the production costs per unit to exceed the revenues per unit produced.

Operating Expenses

For the three month period ended September 30, 2013, operating expenses increased to $1,380,775 from $470,579 for the three month period ended September 30, 2012, representing an increase of $910,196, or 193.4%. Operating expenses consist of Consulting Fees, Share-Based Compensation, 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 integrate operations.

Consulting Fees consist of marketing, administrative and management fees paid under consulting agreements. Consulting Fees decreased to $161,339 for the three month period ended September 30, 2013 from $165,100 for the three month period ended September 30, 2012, representing a decrease of $3,761, or (2.3)%. The decrease is primarily due to the Company's addition of employees in roles previously occupied by consultants.


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Share-Based Compensation is the expense for options and warrants issued to consultants or employees for work performed or as incentive for future performance. Share-Based Compensation increased to $839,210 for the three month period ended September 30, 2013 from $0 for the three month period ended September 30, 2012, representing an increase of $839,210, or 100.0%. The increase is due to an increase in the fair market value of the Company's common stock and the issuance of 1,640,500 compensatory options and 283,500 compensatory warrants.

Salaries and Wages consist of wages, and taxes paid on behalf of employees. Salaries and Wages increased to $196,560 for the three month period ended September 30, 2013 from $168,974 for the three month period ended September 30, 2012, representing an increase of $27,586, or 16.3%. The increase is due to the addition of employees.

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 September 30, 2013, Legal and Professional Fees increased to $63,460 from $60,428 for the three month period ended September 30, 2012, representing an increase of $3,032, or 5.0%. The increase is due to additional legal costs associated with the acquisitions.

General and Administrative (G&A) Expenses consist of general operational costs of our business. For the three month period ended September 30, 2013, G&A Expenses increased to $120,206 from $76,077 for the three month period ended September 30, 2012, representing an increase of $44,129, or 58.0%. This increase is primarily due to the acquisition of our subsidiaries, Renew Resources, ARI, Evergreen and GSS Automotive Recycling, operations at our NJ facility, 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 September 30, 2013, Other Income and Expenses increased to $49,347 from $46,053 for the three month period ended September 30, 2012, representing an increase of $3,294, or 7.2%. 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 September 30, 2013 increased to $363 from $136 for the three month period ended September 30, 2012, representing an increase of $227, or 166.9%. The increase was due to larger cash holdings in a money market account.

Interest Expense consists of paid and accrued interest on the Company's outstanding indebtedness. For the three month period ended September 30, 2013, Interest Expense increased to $48,046 from $46,189 for the three month period ended September 30, 2012, representing an increase of $1,857 or approximately 4.0%. The increase was mainly due to the interest expense related to the Company's capital lease obligation for equipment used by Acquisition Sub #4.

Net Loss

For the three months ended September 30, 2013, we incurred a loss of $(1,469,755) or $(0.03) basic loss per share compared to a loss of $(446,356) or $(0.02) basic loss per share for the three months ended September 30, 2012. The increase in the loss is described above in the detailed operating expenses.

Liquidity & Capital Resources; Going Concern

As of September 30, 2013, we had $6,999,500 in current assets, consisting of $6,270,706 in cash, $187,760 in accounts receivable, $2,225 due from related parties, $82,175 in prepaid expenses, and $456,634 in inventories. We had total current liabilities of $1,146,929 consisting of accounts payable and accrued expenses of $607,028, due related parties of $223,654, note payable of $6,408, and a capital lease obligation of $279,039. We had total non-current liabilities of $1,274,871 consisting of note payable of $11,540, and a capital lease obligation of $1,263,331.

During the nine months ended September 30, 2013, we raised $8,777,826 through equity financing for a total of $8,421,688, net of financing costs of $366,637.


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

                                                    For the Nine Months ended
                                                          September 30,
                                                      2013              2012
      Net cash used in operating activities       $  (1,313,820 )   $ (1,235,722 )
      Net cash used in investing activities       $  (1,882,248 )   $     (6,170 )
      Net cash provided by financing activities   $   8,421,688     $  1,615,000
      Net increase in cash and cash equivalents   $   5,116,765     $    373,108
      Cash - beginning of period                  $   1,153,941     $    577,127
      Cash - end of period                        $   6,270,706     $    950,235

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 prior 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 were exercised on August 28, 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 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 shares of Global Recycling Common Stock at $.00025 per share with an expiration of December 31, 2011. Mr. Frenkel exercised all 400,000 warrants on August 11, 2010.

The First Forbearance Agreement expired on November 30, 2010 because Global Recycling 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 agreement provided that the warrant shares shall not be reduced for a reverse stock split. The Second Forbearance Agreement expired on December 31, 2011 because Global Recycling did not pay the accrued and payable interest of $431,692. As a result of failing to pay the interest due, Global Recycling defaulted on the Frenkel Convertible Note.

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