VERTEX ENERGY, INC. Introduction
This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and " Part II " , " Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations " contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission onMarch 9, 2021 (the "Annual Report"). Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited consolidated financial statements included above under " Part I - Financial Information" - "Item 1. Financial Statements ". Our logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service marks that are the property of others. Solely for convenience, trademarks, tradenames and service marks referred to in this Report may appear without the ®, ™ and SM symbols. References to our trademarks, tradenames and service marks are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies' trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the refining, re-refining, used oil and oil and gas industries in general from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it. Our fiscal year ends onDecember 31st . Interim results are presented on a quarterly basis for the quarters endedMarch 31 ,June 30 , andSeptember 30th , the first quarter, second quarter and third quarter, respectively, with the quarter endingDecember 31st being referenced herein as our fourth quarter. Fiscal 2021 means the year endedDecember 31, 2021 , fiscal 2020 means the year endedDecember 31, 2020 , and fiscal 2019 means the year endedDecember 31, 2019 .
Please see the " Glossary of Selected Terms " incorporated by reference hereto as Exhibit 99.1, for a list of abbreviations and definitions used throughout this Report.
Unless the context requires otherwise, references to the "Company," "we," "us," "our," "Vertex", "Vertex Energy " and "Vertex Energy, Inc. " refer specifically toVertex Energy, Inc. and its consolidated subsidiaries.
In addition, unless the context otherwise requires and for the purposes of this report only:
"Base Oil" means the lubrication grade oils initially produced from refining crude oil (mineral base oil) or through chemical synthesis (synthetic base oil). In general, only 1% to 2% of a barrel of crude oil is suitable for refining into base oil. The majority of the barrel is used to produce gasoline and other hydrocarbons;
"Cutterstock" means fuel oil used as a blending agent added to other fuels. For example, to lower viscosity;
"Crack" means breaking apart crude oil into its component products, including gases like propane, heating fuel, gasoline, light distillates like jet fuel, intermediate distillates like diesel fuel and heavy distillates like grease;
"Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
"Feedstock" means a product or a combination of products derived from crude oil and destined for further processing in the refining or re-refining industries. It is transformed into one or more components and/or finished products;
"Gasoline Blendstock" means naphthas and various distillate products used for blending or compounding into finished motor gasoline. These components can include reformulated gasoline blendstock for oxygenate blending (RBOB) but exclude oxygenates (alcohols and ethers), butane, and pentanes (an organic compound with properties similar to a butane);
1
--------------------------------------------------------------------------------"Hydrotreating" means the process of reacting oil fractions with hydrogen in the presence of a catalyst to produce high-value clean products;
"IMO 2020" effective
"MDO" means marine diesel oil, which is a type of fuel oil and is a blend of gasoil and heavy fuel oil, with less gasoil than intermediate fuel oil used in the maritime field;
"Naphthas" means any of various volatile, highly flammable liquid hydrocarbon mixtures used chiefly as solvents and diluents and as raw materials for conversion to gasoline;
"Pygas" means pyrolysis gasoline, an aromatics-rich gasoline stream produced in sizeable quantities by an ethylene plant. These plants are designed to crack a number of feedstocks, including ethane, propane, naphtha, and gasoil. Pygas can serve as a high-octane blendstock for motor gasoline or as a feedstock for an aromatics extraction unit;
"SEC" or the "Commission" refers to the
"Securities Act" refers to the Securities Act of 1933, as amended; and
"VGO" refers to Vacuum Gas Oil (also known as cat feed) -a feedstock for a fluid catalytic cracker typically found in a crude oil refinery and used to make gasoline No. 2 oil and other byproducts.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with theSecurities and Exchange Commission ("SEC"). OurSEC filings (reports, proxy and information statements, and other information) are available to the public over the Internet at theSEC's website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to theSEC , on the "Investor Relations," "SEC Filings" page of our website at www.vertexenergy.com. Information on our website is not part of this Report, and we do not desire to incorporate by reference such information herein. Copies of documents filed by us with theSEC are also available from us without charge, upon oral or written request to our Secretary,who can be contacted at the address and telephone number set forth on the cover page of this Report.
Summary of The Information Contained in Management's Discussion and Analysis of Financial Condition and Results of Operations
Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying unaudited consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows: •Description of Business Activities. Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A, and including an update on the effect of the COVID-19 pandemic on us and a summary of certain recent events.
•Results of Operations. An analysis of our financial results comparing the three
and nine months ended
•Liquidity and Capital Resources. An analysis of changes in our consolidated balance sheets and cash flows and discussion of our financial condition.
•Critical Accounting Policies and Use of Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
2
--------------------------------------------------------------------------------
Description of Business Activities
We are an environmental services company that recycles industrial waste streams
and off-specification commercial chemical products. Our primary focus is
recycling used motor oil and other petroleum by-products. We are engaged in
operations across the entire petroleum recycling value chain including
collection, aggregation, transportation, storage, re-refinement, and sales of
aggregated feedstock and re-refined products to end users. We operate in three
segments:
(1) Black Oil,
(2) Refining and Marketing, and
(3) Recovery.
We currently provide our services in 15 states, primarily in the Gulf Coast ,
Midwest and Mid-Atlantic regions of the United States . For the rolling
twelve-month period ending September 30, 2021 , we aggregated approximately 83.2
million gallons of used motor oil and other petroleum by-product feedstocks and
managed the re-refining of approximately 74.2 million gallons of used motor oil
with our proprietary vacuum gas oil ("VGO") and Base Oil processes.
Our Black Oil segment collects and purchases used motor oil directly from
third-party generators, aggregates used motor oil from an established network of
local and regional collectors, and sells used motor oil to our customers for use
as a feedstock or replacement fuel for industrial burners. We operate a refining
facility that uses our proprietary Thermal Chemical Extraction Process ("TCEP")
and we also utilize third-party processing facilities. TCEP's original purpose
was to re-fine used oil into marine cutterstock; however, between the third
quarter of 2015 and the third quarter of 2019, and since the first quarter of
2020, the original purpose of TCEP has not been economically viable and we have
instead been using TCEP to re-fine used oil into marine cutterstock; prior to
shipping to our facility in Marrero, Louisiana .
We also acquired our Marrero, Louisiana facility, which facility re-refines used
motor oil and also produces VGO and the Myrtle Grove re-refining complex in
Belle Chasse, Louisiana (which is now owned by a special purpose entity which we
own an approximate 85% interest of) in May 2014 .
Our Refining and Marketing segment aggregates and manages the re-refinement of
used motor oil and other petroleum by-products and sells the re-refined products
to end customers.
Our Recovery segment includes a generator solutions company for the proper
recovery and management of hydrocarbon streams as well as metals which includes
transportation and marine salvage services throughout the Gulf Coast .
Black Oil Segment
Discontinued operations of Vertex include the Black Oil Segment, also referred
to as the UMO Business, Refer to Note 15, "Discontinued Operations" in the Notes
to Financial Statements for additional information.
Our Black Oil segment is engaged in operations across the entire used motor oil
recycling value chain including collection, aggregation, transportation,
storage, refinement, and sales of aggregated feedstock and re-refined products
to end users. We collect and purchase used oil directly from generators such as
oil change service stations, automotive repair shops, manufacturing facilities,
petroleum refineries, and petrochemical manufacturing operations. We own a fleet
of 41 collection vehicles, which routinely visit generators to collect and
purchase used motor oil. We also aggregate used oil from a diverse network of
approximately 50 suppliers who operate similar collection businesses to ours.
We manage the logistics of transport, storage and delivery of used oil to our
customers. We own a fleet of 30 transportation trucks and more than 80
aboveground storage tanks with over 8.6 million gallons of storage capacity.
These assets are used by both the Black Oil segment and the Refining and
Marketing segment. In addition, we also utilize third parties for the
transportation and storage of used oil feedstocks. Typically, we sell used oil
to our customers in bulk to ensure efficient delivery by truck, rail, or barge.
In many cases, we have contractual purchase and sale agreements with our
suppliers and customers, respectively. We believe these contracts are beneficial
to all parties involved because it ensures that a minimum volume is purchased
from collectors and generators, a minimum volume is sold to our customers, and
we are able to minimize our inventory risk by a spread between the costs to
acquire used oil and the revenues received from the sale and delivery of used
oil. Also, as discussed above under "Description of Business Activities", from
time to time, when market conditions warrant (i.e., when oil prices are
sufficiently high), we have used our proprietary TCEP technology to re-refine
used oil into marine fuel cutterstock, provided that we are currently using such
technology solely to pre-treat our used motor oil feedstock
3
--------------------------------------------------------------------------------
prior to shipping to our facility in Marrero, Louisiana . In addition, at our
Marrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product that is
sold to refineries as well as to the marine fuels market. At our Columbus, Ohio
facility (Heartland Petroleum), we produce a base oil product that is sold to
lubricant packagers and distributors.
Refining and Marketing Segment
Our Refining and Marketing segment is engaged in the aggregation of feedstock,
re-refining it into higher value-end products, and selling these products to our
customers, as well as related transportation and storage activities. We
aggregate a diverse mix of feedstocks including used motor oil, petroleum
distillates, transmix and other off-specification chemical products. These
feedstock streams are purchased from pipeline operators, refineries, chemical
processing facilities and third-party providers, and are also transferred from
our Black Oil segment. We have a toll-based processing agreement in place with
KMTEX to re-refine feedstock streams, under our direction, into various end
products that we specify. KMTEX uses industry standard processing technologies
to re-refine our feedstocks into pygas, gasoline blendstock and marine fuel
cutterstock. We sell all of our re-refined products directly to end-customers or
to processing facilities for further refinement. In addition, we are
distributing refined motor fuels such as gasoline, blended gasoline products and
diesel used as engine fuels, to third party customers who typically resell these
products to retailers and end consumers.
Recovery Segment
The Company's Recovery Segment includes a generator solutions company for the
proper recovery and management of hydrocarbon streams, the sales and marketing
of Group III base oils and other petroleum-based products, together with the
recovery and processing of metals.
Thermal Chemical Extraction Process
We own the intellectual property for our patented TCEP. TCEP is a technology which utilizes thermal and chemical dynamics to extract impurities from used oil which increases the value of the feedstock. We intend to continue to develop our TCEP technology and design with the goal of producing additional re-refined products, including lubricating base oil. TCEP differs from conventional re-refining technologies, such as vacuum distillation and hydrotreatment, by relying more heavily on chemical processes to remove impurities rather than temperature and pressure. Therefore, the capital requirements to build a TCEP plant are typically much less than a traditional re-refinery because large feed heaters, vacuum distillation columns, and a hydrotreating unit are not required. The end product currently produced by TCEP is used as fuel oil cutterstock. Conventional re-refineries produce lubricating base oils or product grades slightly lower than base oil that can be used as industrial fuels or transportation fuel blendstocks. We currently estimate the cost to construct a new, fully-functional, commercial facility using our TCEP technology, with annual processing capacity of between 25 and 50 million gallons at another location would be approximately$10 -$15 million , which could fluctuate based on throughput capacity. The facility infrastructure would require additional capitalized expenditures which would depend on the location and site specifics of the facility. Our TCEP technology converts feedstock into a low sulfur marine fuel that can be sold into the new 0.5% low sulfur marine fuel specification mandated underInternational Maritime Organization (IMO) rules which went into effect onJanuary 1, 2020 . As described above, due to the decline in oil prices and challenges in obtaining feedstock in the early part of 2020, we have been using TCEP for the purposes of pre-treating our used motor oil feedstock prior to shipping to our facility inMarrero, Louisiana since the first quarter of 2020. We have no current plans to construct any other TCEP facilities at this time. Products and Services
We generate substantially all of our revenue from the providing of oil collection services and sale of seven product categories. All of these products are commodities that are subject to various degrees of product quality and performance specifications.
Base Oil
Base oil is an oil to which other oils or substances are added to produce a lubricant. Typically, the main substance in lubricants, base oils, are refined from crude oil.
Pygas
4
--------------------------------------------------------------------------------
Pygas, or pyrolysis gasoline, is a product that can be blended with gasoline as
an octane booster or that can be distilled and separated into its components,
including benzene and other hydrocarbons.
Industrial Fuel
Industrial fuel is a distillate fuel oil which is typically a blend of lower quality fuel oils. It can include diesel fuels and fuel oils such as No. 1, No. 2 and No. 4 diesel fuels that are historically used for space heating and power generation. Industrial fuel is typically a fuel with low viscosity, as well as low sulfur, ash, and heavy metal content, making it an ideal blending agent.
Distillates
Distillates are finished fuel products such as gasoline and diesel fuels.
Oil Collection Services
Oil collection services include the collection, handling, treatment and sales of used motor oil and products which include used motor oil (such as oil filters) which are collected from our customers.
Metals
Metals consist of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes, barges, boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut-up and sent back to a steel mill for re-purposing.
Other re-refinery products
Other re-refinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.
VGO/Marine fuel sales
VGO/Marine fuel sales relate to the sale of low sulfur fuel meeting the criteria for IMO 2020 compliant marine fuels.
The way that the product categories above fit into our three operating segments
(1) Black Oil; (2) Refining and Marketing; and (3) Recovery, are indicated
below:
Black Oil(1) Refining and Marketing(2) Recovery(3)
Base oil X X
Pygas X
Industrial fuel X X
Distillates X
Oil collection services X
Metals X
Other re-refinery products X X
VGO/Marine fuel sales X
(1) As discussed in greater detail above under "Black Oil Segment", the Black
Oil segment consists primarily of the sale of (a) petroleum products which
include base oil and industrial fuels-which consist of used motor oils,
cutterstock and fuel oil generated by our facilities; (b) oil collection
services-which consist of used oil sales, burner fuel sales, antifreeze sales
and service charges; (c) the sale of other re-refinery products including
asphalt, condensate, recovered products, and used motor oil; (d) transportation
revenues; and (e) the sale of VGO (vacuum gas oil)/marine fuel.
5
--------------------------------------------------------------------------------(2) As discussed in greater detail above under "Refining and Marketing Segment", the Refining and Marketing segment consists primarily of the sale of pygas; industrial fuels, which are produced at a third-party facility (KMTEX); and distillates.
(3) As discussed in greater detail above under "Recovery Segment", the Recovery segment consists primarily of revenues generated from the sale of ferrous and non-ferrous recyclable Metal(s) products that are recovered from manufacturing and consumption. It also includes revenues generated from trading/marketing of Group III Base Oils. Novel Coronavirus (COVID-19) InDecember 2019 , a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported inWuhan, China . TheWorld Health Organization declared COVID-19 a "Public Health Emergency of International Concern" onJanuary 30, 2020 and a global pandemic onMarch 11, 2020 . In March and April, manyU.S. states and local jurisdictions began issuing 'stay-at-home' orders, which have mainly been terminated of the date of this report. Notwithstanding such 'stay-at-home' orders, to date, our operations have for the most part been deemed an essential business under applicable governmental orders based on the critical nature of the products we offer. We sell products and services primarily in theU.S. domestic oil and gas commodity markets. Throughout the first quarter of 2020, the industry experienced multiple factors which lowered both the demand for, and prices of, oil and gas. First, the COVID-19 pandemic lowered global demand for hydrocarbons, as social distancing and travel restrictions were implemented across the world. Second, the lifting ofOrganization of the Petroleum Exporting Countries (OPEC)+ supply curtailments, and the associated increase in production of oil, drove the global supply of hydrocarbons higher through the first quarter of 2020. As a result of both dynamics, prices for hydrocarbons declined 67% from peak prices within the first quarter of 2020. While global gross domestic product (GDP) growth was impacted by COVID-19 during 2020 and into the first, second and third quarters of 2021, we expect GDP to continue to be impacted globally for the remainder of 2021, as a result of the COVID-19 pandemic. As a result, we expect oil and gas related markets will continue to experience significant volatility in the fourth quarter of 2021. Our goal through this downturn has been to remain disciplined in allocating capital and to focus on liquidity and cash preservation. We are taking the necessary actions to right-size the business for expected activity levels. As a result of the impact of the COVID-19 outbreak, some of our feedstock suppliers have permanently or temporarily closed their businesses, limited our access to their businesses, and/or have experienced a decreased demand for services. As a result of the above, and due to 'stay-at-home' and other social distancing orders, as well as the decline inU.S. travel caused by COVID-19, we saw a significant decline in the volume of feedstocks (specifically used oil) that we were able to collect during 2020, and therefore process through our facilities. A prolonged economic slowdown, renewed periods of social quarantine (imposed by the government or otherwise), or another prolonged period of decreased travel due to COVID-19 or the responses thereto, similar to those experienced during 2020, will likely have a material negative adverse impact on our ability to produce products, and consequently our revenues and results of operations. The full extent of the impact of COVID-19 on our business and operations currently cannot be estimated and will depend on a number of factors including the scope and duration of the global pandemic, the efficacy of, and the willingness of the general public to obtain, vaccines, as well as the rate of transmission of new COVID-19 variants. Currently we believe that we have sufficient cash on hand and will generate sufficient cash through operations to support our operations for the foreseeable future; however, we will continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of any new developments regarding the pandemic.
The full extent of the impact of COVID-19 on our business and operations currently cannot be estimated and will depend on a number of factors including the scope and duration of the global pandemic, the efficacy of, and the willingness of the general public to obtain, vaccines and boosters, further mutations of the virus, as well as the rate of transmission of new COVID-19 variants.
Recent EventsMay 2021 Purchase Agreement OnMay 26, 2021 , Vertex Operating, entered into a definitive Sale and Purchase Agreement (the "Refinery Purchase Agreement") withEquilon Enterprises LLC d/b/aShell Oil Products US and/orShell Chemical LP and/orShell Oil Company ("Seller"), to purchase the Seller'sMobile, Alabama refinery , certain real property associated therewith, and related assets, 6 -------------------------------------------------------------------------------- including all inventory at the refinery as of closing and certain equipment, rolling stock, and other personal property associated with theMobile refinery (collectively, the "Mobile Refinery " and the "Mobile Acquisition").The Mobile Refinery is located on an 800+ acre site in the city and county ofMobile, Alabama . The 91,000 barrel-per-day nameplate capacityMobile Refinery is capable of sourcing a flexible mix of cost-advantaged light-sweet domestic and international feedstocks. Approximately 70% of the refinery's current annual production is distillate, gasoline and jet fuel, with the remainder being vacuum gas oil, liquefied petroleum gas (LPG) and other products. The facility distributes its finished product across the southeasternUnited States through a high-capacity truck rack, together with deep and shallow water distribution points capable of supplying waterborne vessels. In addition to refining assets, the transaction will include the acquisition by the Company of approximately 3.2 million barrels of inventory and product storage, logistics and distribution assets, together with more than 800+ acres of developed and undeveloped land. The initial base purchase price for the assets is$75 million . In addition, we will also pay for the hydrocarbon inventory located at theMobile Refinery , as valued at closing, and the purchase price is subject to other customary purchase price adjustments and reimbursement for certain capital expenditures, resulting in an expected total purchase price of approximately$86.7 million .
In connection with Vertex Operating's execution of the Refinery Purchase
Agreement, and as a required term and condition thereof, Vertex Operating
provided the Seller a promissory note in the amount of
In the event of the closing of the transactions contemplated by the Refinery Purchase Agreement, the funded portion of the Deposit Note (the "Deposit") is credited against the purchase price due to the Seller. In the event the Refinery Purchase Agreement is terminated, the Deposit is non-refundable except as more particularly described in the Refinery Purchase Agreement, which provides that in some circumstances the Company may receive a complete refund of the Deposit or must pay a portion of (or in some cases all) the costs for the Swapkit (defined below) and/or the audit of the Seller's operations, to the extent requested by the Company. The Refinery Purchase Agreement is subject to termination prior to closing under certain circumstances, and may be terminated: at any time prior to the closing date by the mutual consent of the parties; by Vertex Operating or Seller in the event the closing has not occurred byMay 26, 2022 (the "Refinery Purchase Outside Date", subject to extensions as discussed in the Purchase and Sale Agreement), in the event such failure to close is not a result of Vertex Operating's or Seller's breach of the agreement, respectively, or the failure to obtain any government consent; by Vertex Operating or Seller, if the other party has breached any representation, warranty or covenant set forth in the agreement, subject to certain cases to the right to cure such breach, or required regulatory approvals have not been received as of the Refinery Purchase Outside Date; or by Seller if Vertex Operating fails to remit payment of the Deposit by the Deposit Note Due Date, at which time Seller also has the right to pursue collection under the terms of the Deposit Note, plus interest, if any, and to retain any amounts thereby collected. The Refinery Purchase Agreement provides that if all conditions to closing are satisfied other than government approvals and required permits and registrations, then the Refinery Purchase Outside Date is extended to such date as the parties mutually agree; provided, however, in the event the parties do not mutually agree, then the Refinery Purchase Outside Date is automatically extended toMay 26, 2023 .
The Refinery Purchase Agreement contemplates the Company and the Seller entering into various supply and offtake agreements at closing.
The Mobile Acquisition is expected to close in the first quarter of 2022, subject to satisfaction of customary closing conditions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the absence of legal impediments prohibiting the Mobile Acquisition, receipt of regulatory approvals and required consents, absence of a material adverse effect and the Company raising sufficient cash to pay such aggregate purchase price. The Company anticipates financing the transaction through the recent sale inNovember 2021 of Convertible Notes (defined below) and the entry into a future debt facility. The Company has not entered into any definitive lending agreements regarding such debt fundings to date, and such debt funding may not be available on favorable terms, if at all. The Company may also generate cash through asset divestitures. The Company may also generate cash through asset divestitures. The conditions to the closing of the Mobile Acquisition may not be met, and such closing may not ultimately occur on the terms set forth in the Refinery Purchase Agreement, if at all. We plan to launch an$85 million capital project designed to modify theMobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis (the "Conversion"). Certain engineering services and the initial payments 7 -------------------------------------------------------------------------------- of purchase orders for long lead-time equipment associated with the Conversion are expected to be paid in advance of the closing of the Mobile Acquisition in the approximate amount of$13.0 million , and provided that our fundraising initiatives are successful, we plan to follow through with completion of the Conversion at an additional cost of approximately$72.0 million . In connection with the entry into the Refinery Purchase Agreement, Vertex Operating and the Seller entered into a Swapkit Purchase Agreement (the "Swapkit Agreement"). Pursuant to the agreement, Vertex Operating agreed to fund a technology solution comprising the ecosystem required for the Company to run theMobile Refinery after closing (the "Swapkit"), at a cost of$8.7 million , which is payable at closing (subject to certain adjustments), or in certain circumstances, upon termination of the Refinery Purchase Agreement.
Series B and B1 Preferred Stock Automatic Conversion
Pursuant to the terms of the Series B Preferred Stock and Series B1 Preferred Stock of the Company, in the event that the closing sales price of the Company's common stock was at least$6.20 (as to the Series B Preferred Stock) and$3.90 (as to the Series B1 Preferred Stock) per share for at least 20 consecutive trading days, such shares of Series B Preferred Stock and Series B1 Preferred Stock were to convert automatically into common stock of the Company on a one-for-one basis (the "Automatic Conversion Provisions"). Effective onJune 24, 2021 (as to the Series B1 Preferred Stock) andJune 25, 2021 (as to the Series B Preferred Stock), the Automatic Conversion Provisions of the Series B Preferred Stock and Series B1 Preferred Stock were triggered, and the outstanding shares of the Company's Series B Preferred Stock and Series B1 Preferred Stock automatically converted into common stock of the Company. Specifically, the 1,783,292 then outstanding shares of Series B Preferred Stock automatically converted into 1,783,292 shares of common stock and the 3,134,889 then outstanding shares of Series B1 Preferred Stock automatically converted into 3,134,889 shares of common stock (or 4,918,181 shares of common stock in total).
As a result, there are no outstanding shares of Series B or B1 Preferred Stock
as of
Safety-Kleen Sale Agreement
OnJune 29, 2021 , we entered into an Asset Purchase Agreement (the "Sale Agreement" and the transactions contemplated therein, the "Sale Transaction" or the "Sale") with Vertex Operating,Vertex Refining LA, LLC ("Vertex LA"),Vertex Refining OH, LLC ("Vertex OH"),Cedar Marine Terminals, L.P. ("CMT"), andH & H Oil, L.P. ("H&H"), as sellers, andSafety-Kleen Systems, Inc. , as purchaser ("Safety-Kleen"), dated as ofJune 28, 2021 . Pursuant to the Sale Agreement, Safety-Kleen agreed to acquire the Company'sMarrero used oil refinery inLouisiana (currently owned by Vertex LA); our Heartland used oil refinery inOhio (currently owned by Vertex OH); our H&H and Heartland used motor oil ("UMO") collections business; our oil filters and absorbent materials recycling facility inEast Texas ; and the rights CMT holds to a lease on the Cedar Marine terminal inBaytown, Texas (the "UMO Business").
The initial base purchase price for the assets is
The Sale Agreement also requires us to place$7 million of shares of our common stock into escrow for a period of 18 months following the closing (the "Escrow Period"), in order to satisfy any indemnification claims made by Safety-Kleen pursuant to the terms of the Sale Agreement. Such shares are to be valued at the volume weighted average price of the Company's common stock for the ten consecutive trading days ending on and including the closing date (the "10-Day VWAP"). On the last day of each fiscal quarter during the Escrow Period, the value of the shares of common stock held in escrow is calculated (based on the 10-Day VWAP, using the last day of each quarter as the ending trading day in lieu of the closing date), and if such value is less than$7 million (less any value of shares released from escrow to satisfy indemnification claims under the Sale Agreement, based on the 10-Day VWAP ending on the trading day immediately prior to the date any such shares are released from escrow), we are required to deposit additional shares into escrow such that the value of shares held in the escrow account is at least$7 million at all times. Notwithstanding the above, in no event will the number of shares issued into the escrow account, or otherwise pursuant to the terms of the Sale Agreement, exceed 19.9% of the Company's outstanding common stock on the date the Sale Agreement was entered into. Upon termination of the Escrow Period, any shares remaining in escrow (subject to pending claims) are to be returned to the Company for cancellation. 8 -------------------------------------------------------------------------------- The Sale Agreement is subject to termination prior to closing under certain circumstances, and may be terminated: at any time prior to the closing date by the mutual consent of the parties; by Safety-Kleen in the event the closing has not occurred byDecember 31, 2021 (the "Sale Agreement Outside Date", subject to certain extensions as discussed in the Sale Agreement), in the event such failure to close is not a result of Safety-Kleen's breach of the agreement, provided that if the failure to close is the result of the failure to obtain certain government consents or the failure of the Company to obtain the required shareholder approval for the transaction, either party may extend the Sale Agreement Outside Date for up to an additional 90 days; by the Company or Safety-Kleen, if the other party has breached the agreement, subject to certain cases to the right to cure such breach; by the Company if it becomes apparent that the closing of the Sale Agreement will not occur due to certain reasons, including if any of Safety-Kleen's required conditions to closing conditions will not be fulfilled by the Sale Agreement Outside Date, unless such failure is the result of the Company. In the event that the Sale Agreement is terminated as a result of the failure of the Company's shareholders to approve the transaction, we are required to reimburse all of Safety-Kleen's out-of-pocket expenses (including all fees and expenses of counsel, accountants, investment bankers, financing sources, experts and consultants) incurred in connection with the authorization, preparation, negotiation, execution and performance of the Sale Agreement and the transactions contemplated therein (the "Reimbursement"). If Safety-Kleen terminates the Sale Agreement for certain reasons, including in certain cases due to a breach of the agreement by the Company in the event the Company solicits other competing transactions or takes other similar actions; because the Company considers a competing transaction and the shareholders of the Company fail to approve the Sale Agreement; or the Company's board of directors refuses to complete the transaction due to a competing transaction, then we are required to pay Safety-Kleen a break-fee of$3,000,000 , less amounts paid as Reimbursement (the "Break-Fee"), which will be the sole remedy of Safety-Kleen in such situation. The Sale Agreement is expected to close in the first half of 2022, subject to satisfaction of customary closing conditions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the absence of legal impediments prohibiting the transaction, and receipt of regulatory approvals and required consents. We are currently responding to inquiries received from theFederal Trade Commission (the "FTC"), which is not required to rule on the matter until the expiration of 30 days following submission of our responses which is not expected to occur beforeNovember 30, 2021 , if then. The Sale Agreement also required us to hold a shareholders meeting to seek shareholder approval for the Sale Agreement, which shareholder approval was received inSeptember 2021 . The conditions to the closing of the Sale Agreement may not be met, and such closing may not ultimately occur on the terms set forth in the Sale Agreement, if at all. Houlihan Lokey andH.C. Wainwright acted as financial advisors to the Company on the transaction.Vallum Advisors acted as financial communications counsel to the Company. Tensile Transactions OnJuly 1, 2021 , the Operating Agreement of MG SPV was amended to provide that from the date of such agreement untilDecember 31, 2021 , the Company (through Vertex Operating), is required to fund the working capital requirements of MG SPV, which advances are initially characterized as debt, but that Tensile MG may convert such debt into additional Class A Units of MG SPV (afterDecember 31, 2021 ), at$1,000 per unit (the "MG SPV Amendment"). OnJuly 1, 2021 , Heartland SPV loaned Vertex Operating$7,000,000 , which was evidenced by a Promissory Note (the "Heartland Note"). The Heartland Note accrues interest at the applicable federal rate of interest from time to time, increasing to 12% upon an event of default. Amounts borrowed under the Heartland Note are due ninety days after the date of the note or within five (5) days of the closing of the Sale Agreement (whichever is earlier), and may be prepaid at any time without penalty. In the event the Heartland Note is not paid on or before the applicable due date, we agreed to use our best efforts to raise the funds necessary to repay the note as soon as possible. The Heartland Note includes customary events of defaults. The Company used the funds borrowed under the Heartland Note, to paydown a portion of the Deposit Note, with the remaining funds coming from a loan from EBC as discussed below. OnJuly 25, 2019 , Tensile purchased 1,500,000 shares of common stock and warrants to purchase 1,500,000 shares of common stock with an exercise price of$2.25 per share, and we entered into a Registration Rights and Lock-Up Agreement with Tensile which required us to register the shares of common stock issued to Tensile, and the shares of common stock issuable upon exercise of the warrants issued to Tensile, and Tensile agreed to certain restrictions on the sale of the shares held by Tensile. OnJuly 1, 2021 , we entered into a First Amendment to Registration Rights and Lock-Up Agreement with Tensile (the "RRA Amendment") to adjust the restriction on Tensile's ability to sell shares of common stock under the lock-up to provide for Tensile to not sell more than 500,000 shares of common stock in any seven day period untilJuly 25, 2024 , without the prior written consent of the Company. 9 --------------------------------------------------------------------------------
Encina Credit Agreement Term Loan
On
Indenture and Convertible Notes
OnNovember 1, 2021 , we issued$155.0 million aggregate principal amount at maturity of our 6.25% Convertible Senior Notes due 2027 (the "Convertible Notes") pursuant to an Indenture (the "Indenture"), datedNovember 1, 2021 , between the Company andU.S. Bank National Association , as trustee (the "Trustee"), in a private offering (the "Note Offering") to persons reasonably believed to be "qualified institutional buyers" and/or to "accredited investors" in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act, pursuant to Securities Purchase Agreements. The net proceeds from the offering, after deducting placement agent fees and estimated offering costs and expenses payable by the Company, were approximately$133.9 million . The Company intends to use approximately (1)$33.7 million of the net proceeds from the offering to fund a portion of the funds payable in connection with the Refinery Purchase Agreement, (2)$13.0 million of the net proceeds from the offering for engineering services and for the initial payments of purchase orders for long lead-time equipment associated with the Conversion, (3)$10.9 million of the net proceeds from the offering to repay amounts owed by the Company under its credit facilities withEncina Business Credit, LLC and certain of its affiliates, and (4)$0.4 million of the net proceeds to repay certain secured equipment leases with certain affiliates ofWells Fargo Bank, National Association . The Company intends to use the remainder of the net proceeds for working capital and other general corporate purposes, which may include debt retirement and organic and inorganic growth initiative, provided that the Company has no current specific plans for such uses.
Key terms of the Convertible Notes are as follows:
•Issue price - 90% of the face amount of each Note.
•Interest rate of 6.25% - The Convertible Notes will bear interest at a rate of 6.25% per year, payable semiannually in arrears onApril 1 andOctober 1 of each year, beginning onApril 1, 2022 . •Conversion price of approximately$5.89 - The Convertible Notes will be convertible at an initial conversion rate of 169.9235 shares of the Company's common stock, per$1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately$5.89 per share, which represents a conversion premium of approximately 37.5% to the last reported sale price of$4.28 per share of the Company's common stock on The Nasdaq Capital Market onOctober 26, 2021 ).
•Maturity date -The Convertible Notes will mature on
•Conversion - Prior toJuly 1, 2027 , the Convertible Notes will be convertible at the option of the holders of the Convertible Notes only upon the satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. •Cash settlement of principal amount in connection with conversions - Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election, provided that until such time as the Company's stockholders have approved the issuance of more than 19.99% of our common stock issuable upon conversion of the Convertible Notes in accordance with the rules of The Nasdaq Capital Market, the Company is required to elect "cash settlement" for all conversions of the Convertible Notes. •Limited investor put rights - Holders of the Convertible Notes will have the right to require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the accreted principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding the repurchase date, upon the occurrence of certain change of control transactions or liquidation, dissolution or common stock delisting events (collectively, a "fundamental change"), subject to certain conditions. 10 -------------------------------------------------------------------------------- •Optional Redemption - Prior toOctober 6, 2024 , the Convertible Notes will not be redeemable at the Company's option. On a redemption date occurring on or afterOctober 6, 2024 and on or before the 30 scheduled trading day before the maturity date, the Company may redeem for cash all or part of the Convertible Notes (subject to certain restrictions), at its option, if the last reported sale price of our Company's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the redemption notice date at a redemption price equal to 100% of the accreted principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No "sinking fund" is provided for the Convertible Notes, which means that we are not required to redeem or retire the Convertible Notes periodically. •Escrow of proceeds; special mandatory redemption. A total of seventy-five percent (75%) of the net proceeds from the offering (approximately$100 million ) were placed into an escrow account to be released to the Company, upon the satisfaction of certain conditions, including the satisfaction or waiver of all of the conditions precedent to the Company's obligation to consummate theMobile Acquisition (collectively, the "Escrow Release Conditions"). If theMobile Acquisition is not consummated on or prior toApril 1, 2022 , if the Company has not certified to the escrow agent that all conditions precedent to the Company's obligations to consummate the Mobile Acquisition have been satisfied, or if the Company notifies the trustee and the escrow agent in writing that the agreement relating to the purchase of theMobile Refinery has been terminated, the Convertible Notes will be subject to a special mandatory redemption equal to 100% of the accreted principal amount of the Convertible Notes, plus accrued and unpaid interest to, but excluding, the special mandatory redemption date, plus interest that would have accrued on the Convertible Notes from the special mandatory redemption date to, and including, the date that is nine (9) months after the special mandatory redemption date. If the Escrow Release Conditions have been satisfied or waived, the Company can request that the escrowed funds be released to the Company. •Conversion rate increase in certain customary circumstances - The Company will also be required to increase the conversion rate for holderswho convert their Convertible Notes in connection with a fundamental change and certain other corporate events or convert their Convertible Notes called for optional redemption (or deemed called for redemption) following delivery by the Company of a notice of optional redemption, in either case, in certain circumstances.
The Convertible Notes are
The Indenture contains additional customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Convertible Notes then outstanding may declare the entire principal amount of all the Convertible Notes plus accrued and unpaid interest, if any, to be immediately due and payable, provided that in the case of an event of default with respect to the Convertible Notes arising from specified events of bankruptcy or insolvency, 100% of the principal of and accrued and unpaid special interest, if any, on the Convertible Notes will automatically become due and payable. The following events are considered an "event of default," which may result in acceleration of the maturity of the Convertible Notes: (1) default in any payment of interest on any Convertible Note when due and payable and the default continues for a period of 30 consecutive days; (2) default in the payment of the accreted principal amount of any Convertible Note when due and payable at its stated maturity, upon optional redemption, upon any required repurchase, upon declaration of acceleration or otherwise; (3) our failure to comply with our obligation to convert the Convertible Notes in accordance with the Indenture upon exercise of a holder's conversion right and such failure continues for three business days; (4) our failure to give certain required notices under the Indenture, in each case when due and such failure continues for five business days; (5) our failure to comply with certain of our obligations under the Indenture; (6) our failure for 60 days after written notice from the Trustee or the holders of at least 25% in principal amount of the Convertible Notes then outstanding to comply with any of our other agreements contained in the Convertible Notes or Indenture; (7) default by us or any of our significant subsidiaries with respect to any mortgage, agreement or other instrument under which there may be outstanding, or by which there may be secured or evidenced, any indebtedness for borrowed money in excess of$15,000,000 (or its foreign currency equivalent) in an aggregate of us and/or any such significant subsidiary, whether such indebtedness now exists or shall hereafter be created (i) resulting in such indebtedness becoming or being declared due and payable prior to its stated maturity date or (ii) constituting a failure to pay the principal of any such indebtedness when due and payable (after the expiration of all applicable grace periods) at its stated maturity, upon required repurchase, upon declaration of acceleration or otherwise and in the cases of clauses (i) and (ii), such acceleration shall not have been rescinded or annulled or such failure to pay or default shall not have been cured or waived, or such indebtedness is not paid or discharged, as the case may be, within 30 days after written notice to us by the Trustee or to us and the Trustee by holders of at least 25% in aggregate principal amount of the Convertible Notes then 11 -------------------------------------------------------------------------------- outstanding in accordance with the Indenture; (8) certain events of bankruptcy, insolvency, or reorganization of us or any of our significant subsidiaries; or (9) a final judgment or judgments for the payment of$15,000,000 (or its foreign currency equivalent) (excluding any amounts covered by insurance) or more (excluding any amounts covered by insurance) in the aggregate rendered against us or any of our Significant Subsidiaries, which judgment is not discharged, bonded, paid, waived or stayed within 60 days after (i) the date on which the right to appeal thereof has expired if no such appeal has commenced, or (ii) the date on which all rights to appeal have been extinguished. The Company may elect that the sole remedy for an event of default relating to a failure by it to comply with certain reporting obligations set forth in the Indenture, will after the occurrence of such an event of default consist exclusively of the right to receive additional interest on the Convertible Notes at a rate equal to (i) 1.00% per annum of the principal amount of the Convertible Notes outstanding for each day during the period beginning on, and including, the date on which such event of default first occurred and ending on the earlier of (x) the date on which such event of default is cured or validly waived and (y) the 365th day immediately following, and including, the date on which such event of default first occurred. On the 366th day after such event of default (if the event of default relating to the reporting obligations is not cured or waived prior to such 366th day), the Trustee by notice to us, or the holders of at least 25% in principal amount of the outstanding Convertible Notes by notice to us and the Trustee, may declare 100% of the principal of and accrued and unpaid interest, if any, on all the Convertible Notes to be due and payable. If on or after the date that is six months after the last original issue date of the Convertible Notes, the Company has not satisfied the reporting conditions (including, for the avoidance of doubt, the requirement for current Form 10 information) set forth in Rule 144(c) and (i)(2) under the Securities Act, or the Convertible Notes are not otherwise able to be traded pursuant to Rule 144 by holders other than the Company's affiliates or holders that were affiliates of the Company at any time during the three months immediately preceding (as a result of restrictions pursuant toU.S. securities laws or the terms of the Indenture or the Convertible Notes), the Company will pay additional interest on the Convertible Notes at a rate equal to 1.00% per annum of the principal amount of the Convertible Notes outstanding, in each case for each day for which the Company's failure to file has occurred and is continuing or the Convertible Notes are not otherwise able to be traded pursuant to Rule 144 as described above. Initially, a maximum of 36,214,960 shares of common stock may be issued upon conversion of the Convertible Notes, based on the initial maximum conversion rate of 233.6449 shares of the Company's common stock per$1,000 principal amount of Convertible Notes, which is subject to customary and other adjustments described in the Indenture. 12 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Description of Material Financial Line Items: Revenues We generate revenues from three existing operating segments as follows: BLACK OIL -Revenues from our Black Oil segment are comprised primarily of product sales from our re-refineries and feedstock sales (used motor oil) which are purchased from generators of used motor oil such as oil change shops and garages, as well as a network of local and regional suppliers. Volumes are consolidated for efficient delivery and then sold to third-party re-refiners and fuel oil blenders for the export market. In addition, through used oil re-refining, we re-refine used oil into different commodity products. Through the operations at ourMarrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product from used oil re-refining which is then sold via barge to crude refineries to be utilized as an intermediate feedstock in the refining process. Through the operations at ourColumbus, Ohio facility, we produce a base oil finished product which is then sold via truck or rail car to end users for blending, packaging and marketing of lubricants. Discontinued operations of Vertex include the Black Oil Segment, also referred to as the UMO Business, Refer to Note 15, "Discontinued Operations" in the Notes to Financial Statements for additional information. REFINING AND MARKETING -The Refining and Marketing segment generates revenues relating to the sales of finished products. The Refining and Marketing segment gathers hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have become off-specification during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and then processed at a third-party facility under our direction. The end products are typically three distillate petroleum streams (gasoline blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large petroleum trading and blending companies. The end products are delivered by barge and truck to customers. In addition, we are distributing refined motor fuels such as gasoline, blended gasoline products and diesel used as engine fuels, to third party customerswho typically resell these products to retailers and end consumers. RECOVERY -The Recovery segment is a generator solutions company for the proper recovery and management of hydrocarbon streams. We own and operate a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials. Our revenues are affected by changes in various commodity prices including crude oil, natural gas, #6 oil and metals. Cost of Revenues BLACK OIL -Cost of revenues for our Black Oil segment are comprised primarily of feedstock purchases from a network of providers. Other cost of revenues include processing costs, transportation costs, purchasing and receiving costs, analytical assessments, brokerage fees and commissions, and surveying and storage costs. Discontinued operations of Vertex include the Black Oil Segment, also referred to as the UMO Business, Refer to Note 15, "Discontinued Operations" in the Notes to Financial Statements for additional information. REFINING AND MARKETING -The Refining and Marketing segment incurs cost of revenues relating to the purchase of feedstock, purchasing and receiving costs, and inspection and processing of the feedstock into gasoline blendstock, pygas and fuel oil cutter by a third party. Cost of revenues also includes broker's fees, inspection and transportation costs. RECOVERY -The Recovery segment incurs cost of revenues relating to the purchase of hydrocarbon products, purchasing and receiving costs, inspection, and transporting of metals and other salvage and materials. Cost of revenues also includes broker's fees, inspection and transportation costs. Our cost of revenues is affected by changes in various commodity indices, including crude oil, natural gas, #6 oil and metals. For example, if the price for crude oil increases, the cost of solvent additives used in the production of blended oil products, and fuel cost for transportation cost from third party providers will generally increase. Similarly, if the price of crude oil falls, these costs may also decline. 13 -------------------------------------------------------------------------------- General and Administrative Expenses Our general and administrative expenses consist primarily of salaries and other employee-related benefits for executive, administrative, legal, financial, and information technology personnel, as well as outsourced and professional services, rent, utilities, and related expenses at our headquarters, as well as certain taxes. Depreciation and Amortization Expenses Our depreciation and amortization expenses are primarily related to the property, plant and equipment and intangible assets acquired in connection with ourVertex Holdings, L.P. (formerlyVertex Energy, L.P. ), aTexas limited partnership ("Holdings"),Omega Refining, LLC ("Omega Refining"),Warren Ohio Holdings Co., LLC , f/k/aHeartland Group Holdings, LLC ("Heartland"),Acadiana Recovery, LLC ,Nickco Recycling, Inc. ,Ygriega Environmental Services, LLC ,Specialty Environmental Services and Crystal Energy, LLC acquisitions, described in greater detail in our 2020 Annual Report on Form 10-K for the year endedDecember 31, 2020 . Depreciation and amortization expense attributable to cost of revenues reflects the depreciation and amortization of the fixed assets at our refineries along with rolling stock at our collection branches.
Depreciation and amortization expense attributable to operating expenses reflects depreciation and amortization related to our corporate and administrative offices along with internet technology (IT) related items and intangibles.
14--------------------------------------------------------------------------------
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Set forth below are our results of operations for the three months ended
Three Months Ended September 30, $ Change -
Favorable % Change - Favorable
2021 2020 (Unfavorable) (Unfavorable)
Revenues $ 28,974,471 $ 16,249,312 $ 12,725,159 78 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 28,061,498 15,324,914 (12,736,584) (83) %
Depreciation and amortization attributable to
costs of revenues 126,795 115,562 (11,233) (10) %
Gross profit 786,178 808,836 (22,658) (3) %
Operating expenses:
Selling, general and administrative expenses 4,944,719 1,832,067 (3,112,652) (170) %
Depreciation and amortization attributable to
operating expenses 26,916 28,002 1,086 4 %
Total operating expenses 4,971,635 1,860,069 (3,111,566) (167) %
Loss from operations (4,185,457) (1,051,233) (3,134,224) (298) %
Other income (expense):
Loss on asset sales (3,351) (136,434) 133,083 98 %
Gain on change in value of derivative liability 11,907,413
256,587 11,650,826 4,541 %
Interest expense (352,587) (97,157) (255,430) (263) %
Total other expense 11,551,475 22,996 11,528,479 50,133 %
Income (loss) before income tax 7,366,018 (1,028,237) 8,394,255 816 %
Income tax benefit (expense) - - - - %
Net income (loss) from continuing operations 7,366,018 (1,028,237) 8,394,255 816 %
Income (loss) from discontinued operations, net
of tax (see Note 15) 3,278,498 (926,933) 4,205,431 454 %
Net income attributable to non-controlling
interest and redeemable non-controlling
interest from continuing operations (115,131) 136,334 (251,465) (184) %
Net income attributable to non-controlling
interest and redeemable non-controlling from
discontinued operations 2,400,141 343,881 2,056,260 598 %
Net income (loss) attributable to Vertex
Energy, Inc. $ 8,359,506 $ (2,435,385) $ 10,794,891 443 %
Our revenues and cost of revenues are significantly impacted by fluctuations in
commodity prices; increases in commodity prices typically result in increases in
revenue and cost of revenues (i.e., feedstock acquisition costs). Our gross
profit is to a large extent a function of the market discount we are able to
obtain in purchasing feedstock, as well as how efficiently management conducts
operations. During the three months ended September 30, 2021 , compared to the
same period in 2020, we saw a 15% increase in the volume of products we managed
through our facilities. In addition, we saw an increase in operating costs
(inclusive of depreciation and amortization) on a per barrel basis for the third
quarter of 2021 as compared to the same period in 2020.
Total revenues increased by 78% for the three months ended September 30, 2021 ,
compared to the same period in 2020, due primarily to higher commodity prices
(commodity prices reached near historic lows during 2020, as a result of the
COVID-19 pandemic) and increased volumes at our facilities; including $20
million of revenue generated from our wholesale distribution of gasoline,
blended gasoline, and diesel for use as engine fuel to operate automobiles,
trucks, locomotives, and construction equipment, which operations were acquired
in June 2020 , in connection with our acquisition of Crystal Energy, LLC
("Crystal"), for the three months ended September 30, 2021 , compared to the same
period in 2020. Total volume increased 15% during the three months ended
September 30, 2021 , compared to the same period in 2020. Volumes were impacted
as a result of feedstock
15
--------------------------------------------------------------------------------
availability in the overall marketplace. This volume impact was largely due to
lingering impacts of the shelter in place orders in the locations in which we
operate as a result of the COVID-19 pandemic, which directly impacted the
generation of metals and petroleum products during the period ended 2020.
During the three months ended September 30, 2021 , total cost of revenues
(exclusive of depreciation and amortization) was $28,061,498 compared to
$15,324,914 for the three months ended September 30, 2020 , an increase of
$12,736,584 or 83% from the prior period. The main reason for the increase was
the result of the increase in commodity prices, which impacted our feedstock
pricing and the additional cost of sales related to our Crystal operations. Our
cost of revenues is a function of the ultimate price we are required to pay to
acquire feedstocks. and other maintenance costs at our facilities.
We had selling, general and administrative expenses of $4,944,719 for the three
months ended September 30, 2021 , compared to $1,832,067 from the prior year's
period, an increase of $3,112,652 or 170% from the prior year's period. This
increase is primarily due to the additional selling, general and administrative
expenses incurred during the period as a result of increased personnel costs,
legal expenses, and insurance expenses related to our expansion of trucks and
facilities through acquisitions and organic growth. In addition, we had
significant business development and related expenses related to the
transactions contemplated by the Sale Agreement and the Refinery Purchase
Agreement and related transactions.
For the three months ended September 30, 2021 , total depreciation and
amortization expense attributable to cost of revenues was $126,795 , compared to
$115,562 for the three months ended September 30, 2020 , an increase of $11,233
mainly due to additional investments in rolling stock and facility assets during
the fourth quarter of 2020, which increased depreciation and amortization in
2021.
We had gross profit as a percentage of revenue of 2.7% for the three months
ended September 30, 2021 , compared to gross profit as a percentage of revenues
of 5.0% for the three months ended September 30, 2020 . The main reason for the
decrease was the increase in commodity prices during the period.
Additionally, our per barrel margin was decreased 16% for the three months
ended September 30, 2021 , relative to the three months ended September 30, 2020 .
Our per barrel margin is calculated by dividing the total volume of product sold
(in bbls) by total gross profit for the applicable period ($786,178 for the 2021
period versus $808,836 ) for the 2020 period). This decrease was a result of the
decrease in our product spreads related to increases in feedstock prices and
increases in operating costs at our facilities, during the three months ended
September 30, 2021 , compared to the same period during 2020.
Overall, commodity prices were up for the three months ended September 30, 2021 ,
compared to the same period in 2020. For example, the average posting (U.S.
Gulfcoast Residual Fuel No. 6 3%) for the three months ended September 30, 2021,
increased $24.54 per barrel from a three-month average of $37.95 for the three
months ended September 30, 2020 to $62.49 per barrel for the three months ended
September 30, 2021 . The average posting (U.S. Gulfcoast Unleaded 87 Waterborne)
for the three months ended September 30, 2021 increased $33.81 per barrel from a
three-month average of $44.82 for the three months ended September 30, 2020 to
$78.63 per barrel for the three months ended September 30, 2021 .
We had loss from operations of $4,185,457 for the three months ended September
30, 2021 , compared to loss from operations of $1,051,233 for the three months
ended September 30, 2020 , an increase of $3,134,224 or 298% from the prior
year's three-month period. The increase in loss from operations was mostly due
to the increases seen in commodity prices and overall margin impact from our
bunker fuels business along with overall increase in operating expenses at our
facilities.
We had interest expense of $352,587 for the three months ended September 30,
2021 , compared to interest expense of $97,157 for the three months ended
September 30, 2020 , an increase in interest expense of $255,430 or 263% from the
prior period, due to having a higher amount of term debt outstanding during the
three months ended September 30, 2021 , compared to the prior year's period.
We had a $11,907,413 gain on change in value of derivative liability for the
three months ended September 30, 2021 , in connection with certain warrants
granted in May 2016 , as described in greater detail in " Note 9. Preferred
Stock and Detachable Warrants " to the unaudited consolidated financial
statements included herein under "Part I"-"Item 1 Financial Statements",
compared to a gain on change in the value of our derivative liability of
$256,587 in the prior year's period (which also included warrants granted in
June 2015 , which had expired as of December 31, 2020 ). This change was mainly
due to the fluctuation in the market price of our common stock (and more
specifically the increase in the market price of our common stock during the
current period, compared to the prior period), warrant exercises, and non-cash
accounting adjustments in connection therewith. This resulted in a significant
change in non-cash expense for the period, compared to the prior year's period.
16
--------------------------------------------------------------------------------
We had net income from continuing operations of $7,366,018 for the three
months ended September 30, 2021 , compared to net loss from continuing operations
of $1,028,237 for the three months ended September 30, 2020 , an increase in net
income of $8,394,255 or 816% from the prior period. The main reason for the
increase in net income for the three months ended September 30, 2021 , compared
to the three months ended September 30, 2020 , was attributable to the increase
in gain on change in value of derivative liability as discussed above, which is
a non-cash adjustment, offset by the decrease in gross profit for the three
months ended September 30, 2021 , each as described in greater detail above.
Each of our segments' income (loss) from operations during the three months
ended
Three Months Ended $ Change -
September 30, Favorable % Change - Favorable
Black Oil Segment 2021 2020 (Unfavorable) (Unfavorable)
Revenues $ 446,676 $ 288,000 $ 158,676 55 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 402,989 189,947 (213,042) (112) %
Depreciation and amortization attributable
to costs of revenues 18,420 3,985 (14,435) (362) %
Gross profit (loss) 25,267 94,068 (68,801) (73) %
Selling general and administrative expense 3,675,190 987,424 (2,687,766) (272) %
Depreciation and amortization attributable
to operating expenses 26,916 26,916 - - %
Income (loss) from operations $ (3,676,839) $ (920,272) $ (2,756,567) (300) %
Refining and Marketing Segment
Revenues $ 24,572,390 $ 13,501,751 $ 11,070,639 82 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 23,897,263 13,217,757 (10,679,506) (81) %
Depreciation and amortization attributable
to costs of revenues 29,844 31,829 1,985 6 %
Gross profit 645,283 252,165 393,118 156 %
Selling general and administrative expense 1,034,024 696,611 (337,413) (48) %
Depreciation and amortization attributable
to operating expenses - 1,086 1,086 100 %
Income (loss) from operations $ (388,741) $ (445,532) $ 56,791 13 %
Recovery Segment
Revenues $ 3,955,405 $ 2,459,561 $ 1,495,844 61 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 3,761,246 1,917,210 (1,844,036) (96) %
Depreciation and amortization attributable
to costs of revenues 78,531 79,748 1,217 2 %
Gross profit (loss) 115,628 462,603 (346,975) (75) %
Selling general and administrative expense 235,505 148,032 (87,473) (59) %
Depreciation and amortization attributable
to operating expenses - - - - %
Loss from operations $ (119,877) $ 314,571 $ (434,448) (138) %
Our Black Oil segment generated revenues of $446,676 for the three months ended
September 30, 2021 , with cost of revenues (exclusive of depreciation and
amortization) of $402,989 , and depreciation and amortization attributable to
cost of revenues of $18,420 . During the three months ended September 30, 2020 ,
these revenues were $288,000 with cost of revenues (exclusive of depreciation
and amortization) of $189,947 and depreciation and amortization attributable to
cost of revenues of $3,985 . Income from operations decreased for the three
months ended September 30, 2021 , compared to 2020, as a result of increases in
commodity prices which resulted in higher costs, as well as negative spreads in
the bunker fuel market which directly impacted our margins as well as higher
operating expenses through our various facilities and increased SG&A expense.
17
--------------------------------------------------------------------------------
During the three months ended September 30, 2021 , our Refining and Marketing
cost of revenues (exclusive of depreciation and amortization) were $23,897,263 ,
of which the processing costs for our Refining and Marketing business located at
KMTEX were $448,647 , and depreciation and amortization attributable to cost of
revenues was $29,844 . Revenues for the same period were $24,572,390 . During the
three months ended September 30, 2020 , our Refining and Marketing cost of
revenues (exclusive of depreciation and amortization) were $13,217,757 , which
included the processing costs at KMTEX of $328,225 , and depreciation and
amortization attributable to cost of revenues was $31,829 . Revenues for the same
period were $13,501,751 .
Our Refining segment includes the business operations of our Refining and
Marketing operations, as well as Crystal which we acquired in June 2020 . With
the acquisition of Crystal, we began operating as a wholesale distributer of
motor fuels which include gasoline, blended gasoline and diesel. Revenues in the
Refining segment were up 82% during the three months ended September 30, 2021 ,
as compared to the same period in 2020 mostly as a result of the added business
line and increased commodity prices during the three months ended September 30,
2021 . Overall volume for the Refining and Marketing segment was flat during the
three months ended September 30, 2021 , as compared to the same period in 2020.
Our pygas volumes increased 33% for the three months ended September 30, 2021 ,
as compared to the same period in 2020. Our fuel oil cutter volumes increased
13% for the three months ended September 30, 2021 , as compared to the same
period in 2020, due to improvements in the volume of feedstock available from
third party facilities in the Gulf coast region. Our Crystal volumes were down
5% for the three months ended September 30, 2021 as compared to the three months
ended September 30, 2020 . We have also had to assess the volume of fuel oil
cutterstocks that we manage due to enhanced quality of products being demanded
in the marketplace.
Our Recovery segment generated revenues of $3,955,405 for the three months
ended September 30, 2021 , with cost of revenues (exclusive of depreciation and
amortization) of $3,761,246 , and depreciation and amortization attributable to
cost of revenues of $78,531 . During the three months ended September 30, 2020 ,
these revenues were $2,459,561 with cost of revenues (exclusive of depreciation
and amortization) of $1,917,210 , and depreciation and amortization attributable
to cost of revenues of $79,748 . Loss from operations increased for the three
months ended September 30, 2021 , compared to 2020, as a result of higher
operating costs related to increases in volumes attributable to our Recovery
segment and somewhat lower margins related thereto, through our various
facilities.
Our Recovery segment includes the business operations of Vertex Recovery
Management as well as our Group III base oil business. Vertex previously acted
as Penthol C.V . of the Netherlands aka Penthol LLC's (a Penthol subsidiary in
the United States ) ("Penthol's") exclusive agent to provide marketing, sales,
and logistical duties of Group III base oil from the United Arab Emirates to the
United States from June 2016 to January 2021 . Vertex and Penthol are currently
involved in ongoing litigation described in greater detail above under " Part
I" - "Item 1. Financial Statements" in the Notes to Consolidated Financial
Statements in "Note 3. Concentrations, Significant Customers, Commitments and
Contingencies ", under the heading "Litigation". Revenues for this segment
increased 61% as a result of an increase in volumes during the three months
ended September 30, 2021 , compared to the same period in 2020. Volumes were down
in our metals segment during the three months ended September 30, 2021 , compared
to the same period during 2020, due to certain one-time projects. This segment
periodically participates in project work that is not ongoing thus we expect to
see fluctuations in revenue and gross profit from this segment from period to
period.
18--------------------------------------------------------------------------------
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
Set forth below are our results of operations for the nine months ended
Nine Months Ended September 30, $ Change -
Favorable % Change - Favorable
2021 2020 (Unfavorable) (Unfavorable)
Revenues $ 84,823,476 $ 30,460,606 $ 54,362,870 178 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 79,319,678 28,598,874 (50,720,804) (177) %
Depreciation and amortization attributable to
costs of revenues 358,905 327,672 (31,233) (10) %
Gross Profit 5,144,893 1,534,060 3,610,833 235 %
Operating expenses:
Selling, general and administrative expenses 12,111,951 6,044,050 (6,067,901) (100) %
Depreciation and amortization attributable to
operating expenses 80,748 48,118 (32,630) (68) %
Total operating expenses 12,192,699 6,092,168 (6,100,531) (100) %
Income (loss) from operations (7,047,806) (4,558,108) (2,489,698) (55) %
Other income (expense):
Other Income 4,222,000 - 4,222,000 100 %
Loss on sale of assets (1,927) (124,090) 122,163 98 %
Gain (loss) on change in value of derivative
liability (11,380,122) 1,844,369 (13,224,491) (717) %
Interest expense (603,398) (291,933) (311,465) (107) %
Total other income (expense) (7,763,447) 1,428,346 (9,191,793) (644) %
Loss before income taxes (14,811,253) (3,129,762) (11,681,491) (373) %
Income tax (expense) benefit - - - - %
Net loss from continuing operations (14,811,253) (3,129,762) (11,681,491) (373) %
Income (loss) from discontinued operations (see
Note 15) 12,464,445 (5,323,630) 25,221,927 303 %
Net income (loss) attributable to
non-controlling interest and redeemable
non-controlling interest from continued
operations 510,618 155,322 355,296 229 %
Net income (loss) attributable to
non-controlling interest and redeemable
non-controlling interest from discontinued
operations 7,183,268 35,449 7,147,819 20,164 %
Net loss attributable to Vertex Energy , Inc. $ (10,040,694) $ (8,644,163) $ 23,825,396 276 %
Our revenues and cost of revenues are significantly impacted by fluctuations in
commodity prices; increases in commodity prices typically result in increases in
revenue and cost of revenues (i.e., feedstock acquisition costs). Additionally,
we use hedging instruments to manage our exposure to underlying commodity
prices. Our gross profit is to a large extent a function of the market discount
we are able to obtain in purchasing feedstock, as well as how efficiently
management conducts operations. As demand for feedstock increases, the prices we
are required to pay for such feedstock typically increases as well.
Our cost of revenues is a function of the ultimate price we are required to pay
to acquire feedstocks, how efficient we are in acquiring such feedstocks as well
as how efficiently we operate our facilities, and other maintenance at our
facilities.
19
--------------------------------------------------------------------------------
Total revenues increased by 178% for the nine months ended September 30, 2021
compared to the same period in 2020, due primarily to higher commodity prices
and increased volumes across our facilities, during the nine months ended
September 30, 2021 , compared to the prior year's period. Total volume was up 3%
during the nine months ended September 30, 2021 , compared to the same period in
2020.
During the nine months ended September 30, 2021 , total cost of revenues
(exclusive of depreciation and amortization) was $79,319,678 , compared to
$28,598,874 for the nine months ended September 30, 2020 , an increase of
$50,720,804 or 177% from the prior period. The main reason for the increase was
the addition of the Crystal business which we only had for the second half of
2020 and have now had the operations of for the full nine months of 2021, in
addition to higher commodity prices, which impacted our feedstock pricing, and
increases in volumes throughout the business.
Additionally, our per barrel margin increased 226% for the nine months ended
September 30, 2021 , relative to the nine months ended September 30, 2020 , due to
increased volumes, along with increases in commodity prices for the finished
products we sell during the nine months ended September 30, 2021 , compared to
the same period during 2020. Our per barrel margin is calculated by dividing the
total volume of product sold (in bbls) by total gross profit for the applicable
period ($5,144,893 for the 2021 period versus $1,534,060 for the 2020 period).
The 177% increase in cost of revenues (exclusive of depreciation and
amortization) for the nine months ended September 30, 2021 , compared to the nine
months ended September 30, 2020 , is mainly a result of the increase in commodity
prices, and increased volumes at our facilities during the period, offset by
increases in revenues.
For the nine months ended September 30, 2021 , total depreciation and
amortization expense attributable to cost of revenues was $358,905 , compared to
$327,672 for the nine months ended September 30, 2020 , an increase of $31,233 ,
mainly due to additional investments in rolling stock and facility assets during
the fourth quarter of 2020, which increased depreciation and amortization in
2021.
We had gross profit as a percentage of revenue of 6.1% for the nine months ended
September 30, 2021 , compared to gross profit as a percentage of revenues of 5.0%
for the nine months ended September 30, 2020 . The main reason for the
improvement was the increase in volumes at our refineries, along with increases
in commodity prices during the period.
In addition, commodity prices increased approximately 68% for the nine months
ended September 30, 2021 , compared to the same period in 2020. For example, the
average posting (U.S. Gulfcoast No. 2 Waterbone) for the nine months ended
September 30, 2021 , increased $26.53 per barrel from a nine-month average of
$45.96 for the nine months ended September 30, 2020 , to $72.49 per barrel for
the nine months ended September 30, 2021 .
We had selling, general, and administrative expenses of $12,111,951 for the nine
months ended September 30, 2021 , compared to $6,044,050 of selling, general, and
administrative expenses for the prior year's period, an increase of $6,067,901
or 100%. This increase is primarily due to the additional selling, general and
administrative expenses incurred during the period as a result of increased
personnel costs, legal expenses, and insurance expenses related to expansion
through organic growth.
We had loss from operations of $7,047,806 for the nine months ended September
30, 2021 , compared to a loss from operations of $4,558,108 for the nine months
ended September 30, 2020 , an increase of $2,489,698 or 55% from the prior year's
nine-month period. The increase in loss from operations was mostly due to the
increases seen in commodity prices and overall margin impact from our bunker
fuels business along with overall increase in operating expenses at our
facilities. As market conditions change, the pay or charge for our oil
collection services will fluctuate.
We had interest expense of $603,398 for the nine months ended September 30,
2021 , compared to interest expense of $291,933 for the nine months ended
September 30, 2020 , an increase in interest expense of $311,465 or 107%, due to
a higher amount of term debt outstanding during the nine months ended
September 30, 2021 , compared to the prior period. This was due to having a
higher amount of term debt outstanding during the nine months ended
September 30, 2021 , compared to the prior year's period.
We had other income of $4,222,000 for the nine months ended September 30, 2021 ,
compared to $0 for the nine months ended September 30, 2020 . This is due to the
debt forgiveness of the PPP loan during the second quarter of 2021 (see " Note
6. Line of Credit and Long-Term Debt" - "Loan Agreements " for more
information).
We had a loss on the sale of assets of
We had a$11,380,122 loss on change in value of derivative liability for the nine months endedSeptember 30, 2021 , in connection with certain warrants granted inJune 2015 andMay 2016 , as described in greater detail in " Note 9. Preferred Stock and Detachable Warrants " to the unaudited consolidated financial statements included herein under "Part I"-"Item 1 Financial 20 -------------------------------------------------------------------------------- Statements", compared to a gain on change in the value of our derivative liability of$1,844,369 in the prior year's period. This change was mainly due to the fluctuation in the market price of our common stock (and more specifically the significant increase in the market price of our common stock during the current period), warrant exercises, and non-cash accounting adjustments in connection therewith. This resulted in a significant change in non-cash expense for the period, compared to the prior year's period. We had a net loss from continuing operations of$14,811,253 for the nine months endedSeptember 30, 2021 , compared to a net loss from continuing operations of$3,129,762 for the nine months endedSeptember 30, 2020 , an increase in net loss of$11,681,491 or 373% from the prior period due to the reasons described above. The majority of our net loss for the nine months endedSeptember 30, 2021 , was attributable to the loss on change in value of derivative liability due to change in market conditions, which is a non-cash expense.
Each of our segments' income (loss) from operations during the nine months ended
Nine Months Ended September 30, $ Change -
Favorable % Change - Favorable
Black Oil Segment 2021 2020 (Unfavorable) (Unfavorable)
Revenues $ 1,300,220 $ 864,000 $ 436,220 50 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 1,045,608 567,898 (477,710) (84) %
Depreciation and amortization attributable to
costs of revenues 56,983 3,985 (52,998) (1,330) %
Gross profit (loss) 197,629 292,117 (94,488) (32) %
Selling, general and administrative expense 9,030,142 3,780,366 (5,249,776) (139) %
Depreciation and amortization attributable to
operating expenses 80,748 44,860 (35,888) (80) %
Loss from operations $ (8,913,261) $ (3,533,109) $ (5,380,152) (152) %
Refining Segment
Revenues $ 67,683,035 $ 22,309,671 $ 45,373,364 203 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 64,503,727 21,750,687 (42,753,040) (197) %
Depreciation and amortization attributable to
costs of revenues 97,658 101,152 3,494 3 %
Gross profit 3,081,650 457,832 2,623,818 573 %
Selling, general and administrative expense 2,481,542 1,867,027 (614,515) (33)%
Depreciation and amortization attributable to
operating expenses - 3,258 3,258 100%
Income (loss) from operations $ 600,108 $ (1,412,453) $ 2,012,561 142%
Recovery Segment
Revenues $ 15,840,222 $ 7,286,935 $ 8,553,287 117%
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 13,770,343 6,280,290 (7,490,053) (119)%
Depreciation and amortization attributable to
costs of revenues 204,264 222,535 18,271 8%
Gross profit 1,865,615 784,110 1,081,505 138%
Selling, general and administrative expense 600,268 396,656 (203,612) (51)%
Depreciation and amortization attributable to
operating expenses - - - -%
Income from operations $ 1,265,347 $ 387,454 $ 877,893 227%
Our Black Oil segment generated revenues of $1,300,220 for the nine months
ended September 30, 2021 , with cost of revenues (exclusive of depreciation and
amortization) of $1,045,608 , and depreciation and amortization attributable to
cost of revenues of $56,983 . During the nine months ended September 30, 2020 ,
these revenues were $864,000 with cost of revenues (exclusive of depreciation
and amortization) of $567,898 , and depreciation and amortization attributable to
cost of revenues of
21
--------------------------------------------------------------------------------
$3,985 . Loss from operations increased for the nine months ended September 30,
2021 , compared to 2020, as a result of higher commodity prices, increased
operating expenses, as well as the fact that, as discussed above, during the
nine months ended September 30, 2021 .
Our Refining segment includes the business operations of our Refining and
Marketing operations, as well as Crystal. Since the acquisition of Crystal in
June 2020 , we have operated as a wholesale distributer of motor fuels which
include gasoline, blended gasoline and diesel. During the nine months ended
September 30, 2021 , our Refining and Marketing cost of revenues (exclusive of
depreciation and amortization) were $64,503,727 , of which the processing costs
for our Refining and Marketing business located at KMTEX were $1,304,672 , and
depreciation and amortization attributable to cost of revenues of $97,658 .
Revenues for the same period were $67,683,035 . During the nine months ended
September 30, 2020 , our Refining and Marketing cost of revenues (exclusive of
depreciation and amortization) were $21,750,687 , which included the processing
costs at KMTEX of $1,202,050 , and depreciation and amortization attributable to
cost of revenues of $101,152 . Revenues for the same period were $22,309,671 .
Overall volume for the Refining and Marketing division increased 123% during
the nine months ended September 30, 2021 , as compared to the same period in
2020. Our fuel oil cutter volumes increased 46% for the nine months ended
September 30, 2021 , compared to the same period in 2020. Our pygas volumes were
up 9% for the nine months ended September 30, 2021 , as compared to the same
period in 2020. The improved margins were a result of increases in available
feedstock volumes as compared to the same period during 2020. We experienced a
large increase in volumes being received from third party facilities as a result
of changes in COVID-19 restrictions in 2021 compared to the prior 2020 period.
Our Recovery segment generated revenues of $15,840,222 for the nine months
ended September 30, 2021 , with cost of revenues (exclusive of depreciation and
amortization) of $13,770,343 , and depreciation and amortization attributable to
cost of revenues of $204,264 . During the nine months ended September 30, 2020 ,
these revenues were $7,286,935 with cost of revenues (exclusive of depreciation
and amortization) of $6,280,290 , and depreciation and amortization attributable
to cost of revenues of $222,535 . Income from operations increased for the nine
months ended September 30, 2021 , compared to 2020, as a result of increased
volumes attributable to our Recovery segment and margins related thereto,
through our various facilities. This segment benefits from certain one-time
projects that drive increases in volumes as well as revenues and margins from
time to time and the increase for the current period was due to certain one-time
projects which were completed.
Our Recovery segment includes the business operations of Vertex Recovery
Management as well as our Group III base oil business. Vertex previously acted
as Penthol's exclusive agent to provide marketing, sales, and logistical duties
of Group III base oil from the United Arab Emirates to the United States from
June 2016 to January 2021 . Vertex and Penthol are currently involved in ongoing
litigation described in greater detail above under " Part I" - "Item 1.
Financial Statements" in the Notes to Consolidated Financial Statements in "Note
3. Concentrations, Significant Customers, Commitments and Contingencies", under
the heading "Litigation ". Revenues for this segment increased 117% as a result
of increased commodity prices when compared to the same period in 2020. Volumes
of products acquired in our Recovery business were down 12% during the nine
months ended September 30, 2021 , compared to the same period during 2020. This
segment periodically participates in project work that is not ongoing, thus we
expect to see fluctuations in revenue and income before income taxes from period
to period. These projects are typically bid related and can take time to line
out and get started; however, we believe these are very good projects for the
Company and we anticipate more in the upcoming periods.
The following table sets forth the high and low spot prices during the nine
months ended
High Date Low Date
U.S. Gulfcoast No. 2 Waterborne
(dollars per gallon) $ 2.15 September 30 $ 1.32 January 4
U.S. Gulfcoast Unleaded 87 Waterborne
(dollars per gallon) $ 2.30 July 30 $ 1.36 January 4
U.S. Gulfcoast Residual Fuel No. 6 3%
(dollars per barrel) $ 69.64 September 30 $ 45.08 January 4
NYMEX Crude oil (dollars per barrel) $ 75.29 September 28 $ 47.62 January 4
Reported in Platt's US Marketscan (
22
--------------------------------------------------------------------------------
The following table sets forth the high and low spot prices during the nine
months ended September 30, 2020 , for our key benchmarks.
2020
Benchmark High Date Low Date
U.S. Gulfcoast No. 2 Waterborne
(dollars per gallon) $ 1.95 January 3 $ 0.42 April 27
U.S. Gulfcoast Unleaded 87 Waterborne
(dollars per gallon) $ 1.75 January 3 $ 0.40 March 23
U.S. Gulfcoast Residual Fuel No. 6 3%
(dollars per barrel) $ 47.34 January 29 $ 12.00 April 21
NYMEX Crude oil (dollars per barrel) $ 63.27 January 6 $ (37.63) April 20
Reported in Platt's US Marketscan (
We saw an increase in the second half of 2021, in each of the benchmark commodities we track compared to the same period in 2020. The increase in market prices was a result of the gradual opening up of states and marketplaces which were shut-down a year ago as a result of COVID-19, which led to worldwide shutdowns and halting of commercial and interpersonal activity, as governments around the world imposed regulations in response to efforts to control the spread of COVID-19, such as 'shelter-in-place' orders, quarantines, executive orders and similar restrictions. As a result, the global economy has been marked by significant slowdown and uncertainty, which has led to a precipitous decline in oil prices in response to demand concerns, further exacerbated by the price war among members of theOrganization of Petroleum Exporting Countries ("OPEC") and other non-OPEC producer nations (collectively withOPEC members, "OPEC+") during the first quarter of 2020 and global storage considerations. Moving into the fourth quarter of 2021, we anticipate that our results of operations will continue to be significantly impacted by the price of, and demand for oil, COVID-19 and the global response thereto. Our margins are a function of the difference between what we are able to pay for raw materials and the market prices for the range of products produced. The various petroleum products produced are typically a function of crude oil indices and are quoted on multiple exchanges such as theNew York Mercantile Exchange ("NYMEX"). These prices are determined by a global market and can be influenced by many factors, including but not limited to supply/demand, weather, politics, and global/regional inventory levels. As such, we cannot provide any assurances regarding results of operations for any future periods, as numerous factors outside of our control affect the prices paid for raw materials and the prices (for the most part keyed to the NYMEX) that can be charged for such products. Additionally, for the near term, results of operations will be subject to further uncertainty, as the global markets and exchanges, including the NYMEX, continue to experience volatility. As our competitors bring new technologies to the marketplace, which will likely enable them to obtain higher values for the finished products created through their technologies from purchased black oil feedstock, we anticipate that they will have to pay more for feedstock due to the additional value received from their finished product (i.e., as their margins increase, they are able to increase the prices they are willing to pay for feedstock). If we are not able to continue to refine and improve our technologies and gain efficiencies in our technologies, we could be negatively impacted by the ability of our competitors to bring new processes to market which compete with our processes, as well as their ability to outbid us for feedstock supplies. Additionally, if we are forced to pay more for feedstock, our cash flows will be negatively impacted and our margins will decrease.
Liquidity and Capital Resources
The success of our current business operations has become dependent on repairs and maintenance to our facilities and our ability to make routine capital expenditures, as well as our ability to manage our margins which are a function of the difference between what we are able to pay or charge for raw materials and the market prices for the range of products produced. We also must maintain relationships with feedstock suppliers and end-product customers, and operate with efficient management of overhead costs. Through these relationships, we have historically been able to achieve volume discounts in the procurement of our feedstock, thereby increasing the margins of our segments' operations. The resulting operating cash flow is crucial to the viability and growth of our existing business lines. We had total assets of$144,685,626 as ofSeptember 30, 2021 , compared to$122,099,958 atDecember 31, 2020 . The increase was mainly due to exercises of options and warrants that provided cash, along with increases in accounts receivable and inventory levels, due to the increases in commodity prices and volumes, and the payment of the$10 million deposit to the Seller in connection with the Refinery Purchase Agreement, during the nine months endedSeptember 30, 2021 , compared to the prior year's period. 23 -------------------------------------------------------------------------------- We had total current liabilities of$62,398,086 as ofSeptember 30, 2021 , compared to$23,850,412 atDecember 31, 2020 . We had total liabilities of$67,572,248 as ofSeptember 30, 2021 , compared to total liabilities of$60,809,023 as ofDecember 31, 2020 . The increase in current liabilities and total liabilities was mainly due to the increase in commodity prices and volumes, current portion of debt due in less than a year, and derivative warrant liability during the nine months endedSeptember 30, 2021 , compared to the prior year's period. We had working capital of$50,746,282 as ofSeptember 30, 2021 , compared to working capital of$5,934,976 as ofDecember 31, 2020 . The increase in working capital fromDecember 31, 2020 toSeptember 30, 2021 is mainly due to the change in presentation of assets held for sale in current assets, the generation of additional liquidity as a result of option and warrant exercises for cash and the increase in accounts receivable and inventory offset by the increase in accounts payable, as explained above, and the increase in the debt owed toEncina Business Credit, LLC andEncina Business Credit SPV, LLC (as shown below), which is a current liability because it is due in less than a year fromSeptember 30, 2021 , as described below. Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including commodity prices, the cost of recovered oil, and the ability to turn our inventory. Other factors that have affected and are expected to continue to affect earnings and cash flow are transportation, processing, and storage costs. Over the long term, our operating cash flows will also be impacted by our ability to effectively manage our administrative and operating costs. Additionally, we may incur capital expenditures related to new TCEP facilities in the future (provided that none are currently planned). Given the ongoing COVID-19 pandemic, challenging market conditions and recent market events resulting in industry-wide spending cuts, we continue to remain focused on maintaining a strong balance sheet and adequate liquidity. We believe that our cash on hand, internally generated cash flows and availability under the Revolving Credit Agreement and other borrowings will be sufficient to fund our operations and service our debt in the near term, notwithstanding the funding which will be required to complete the acquisition of theMobile Refinery , and a planned capital project following such acquisition, and the funds we plan to receive upon the closing of the Sale (each as discussed in greater detail above). A prolonged period of weak, or a significant decrease in, industry activity and overall markets, due to COVID-19 or otherwise, may make it difficult to comply with our covenants and the other restrictions in the agreements governing our debt and/or may make it more difficult or costly to raise funding to complete theMobile Refinery acquisition and the planned capital project associated therewith. Current global and market conditions have increased the potential for that difficulty.
The Company's outstanding debt facilities as of
24
--------------------------------------------------------------------------------
Balance on
September 30, Balance on
Creditor Loan Type Origination Date Maturity Date Loan Amount 2021 December 31, 2020
Encina Business Credit,
LLC Term Loan February 1, 2017 February 1, 2022 $ 20,000,000 $ 9,758,000 $ 5,433,000
Encina Business Credit SPV, LLC Revolving Note February 1, 2017 February 1, 2022$ 10,000,000 -
133,446
Encina Business Credit, LLC Capex Loan August 7, 2020 February 1, 2022$ 2,000,000 1,102,170
1,378,819
Wells Fargo Equipment Lease-Ohio Finance Lease April-May, 2019 April-May, 2024$ 621,000 346,321 436,411 John Deere Note Note May 27, 2020 June 24, 2024$ 152,643 103,414 131,303 Loan-Leverage Lubricants SBA Loan July 18, 2020 July 18, 2050$ 58,700 58,700 - Well Fargo Equipment Lease-VRM LA Finance Lease March, 2018 March, 2021$ 30,408 -
1,804
Texas Citizens Bank PPP Loan May 5, 2020 April 28, 2022$ 4,222,000 -
4,222,000
Insurance premiums
Various institutions financed Various < 1 year $ 2,902,428 3,562,608 1,183,543
Total $ 14,931,213 $ 12,920,326
Deferred finance costs (62,500) -
Total, net of deferred
finance costs $ 14,868,713 $ 12,920,326 Future contractual maturities of notes payable are summarized as follows:
Creditor Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter
Encina Business Credit, LLC $ 9,758,000 $ - $ - $ - $ - $ -
Encina Business Credit, LLC 1,102,170 - - - - -
John Deere Note 37,991 38,933 26,490 - - -
Well Fargo Equipment Lease-
Ohio 346,321 - - - - -
Loan-Leverage Lubricants - 683 1,290 1,340 1,391 53,996
Various institutions 3,562,608 - - - - -
Totals $ 14,807,090 $ 39,616 $ 27,780 $ 1,340 $ 1,391 $ 53,996
Deferred finance costs, net (62,500) - - - - -
Totals, net of deferred
finance costs $ 14,744,590 $ 39,616 $ 27,780 $ 1,340 $ 1,391 $ 53,996
Need for additional funding
Our re-refining business will require significant capital to design and
construct any new facilities. The facility infrastructure would be an additional
capitalized expenditure to these process costs and would depend on the location
and site specifics of the facility. We also estimate the need for additional
funding to complete the transactions contemplated by the Refinery Purchase
Agreement.
Additionally, as part of our ongoing efforts to maintain a capital structure
that is closely aligned with what we believe to be the potential of our business
and goals for future growth, which is subject to cyclical changes in commodity
prices, we will be exploring additional sources of external liquidity. The
receptiveness of the capital markets to an offering of debt or equities cannot
be assured and may be negatively impacted by, among other things, debt
maturities, current market conditions, and potential
25
--------------------------------------------------------------------------------
stockholder dilution. The sale of additional securities, if undertaken by us and
if accomplished, may result in dilution to our shareholders. However, such
future financing may not be available in amounts or on terms acceptable to us,
or at all.
Our current near term plans include closing the transactions contemplated by the
Purchase Agreement and the Sale Agreement and transitioning the majority of our
assets and operations away from used motor oil and towards several important
objectives, the combination of which we believe will advance our strategy of
becoming a leading pure-play energy transition company of scale in connection
with the planned acquisition of the Mobile Refinery . The refinery, which has a
long track record of safe, reliable operations and consistent financial
performance, is expected to become Vertex's flagship refining asset upon the
close of the transaction, positioning the Company to become a pure-play producer
of renewable and conventional products. The addition of renewable fuels
production associated with the refinery is anticipated to accelerate Vertex's
strategic focus on "clean" refining. By year-end 2022, assuming the completion
of the planned acquisition and our capital project at the facility, the Mobile
Refinery is projected to produce approximately 10,000 barrels per day (bpd) of
renewable diesel fuel and renewable byproducts. By mid-year 2023, based on
current projections, Vertex expects to increase renewable diesel production to
14,000 bpd. Upon completion of the planned renewable diesel project, Vertex
expects to become one of the leading independent producers of renewable fuels in
the southeastern United States .
On November 1, 2021 , the Company issued $155.0 million aggregate principal
amount at maturity of its 6.25% Convertible Senior Notes due 2027 in a private
offering with persons believed to be "Qualified institutional buyers" and/or
"accredited investors" pursuant to a Private Placement Purchase Agreement. The
net proceeds from the offering, after deducting placement agent fees and
estimated offering costs and expenses payable by the Company, were approximately
$133.9 million , more details on this offering can be found in our Recent Events
section above.
The Company plans to use $10.9 million of the net proceeds from the offering to
repay amounts owed by the Company under its credit facilities with Encina
Business Credit, LLC and certain of its affiliates, as well as $0.4 million of
the net proceeds to repay certain secured equipment leases with certain
affiliates of Wells Fargo Bank, National Association .
We anticipate that the market for our common stock will be subject to wide
fluctuations in response to several factors moving forward, including, but not
limited to:
(1)actual or anticipated variations in our results of operations;
(2)the market for, and volatility in, the market for oil and gas;
(3)our ability or inability to generate new revenues;
(4)the status of planned acquisitions and divestitures; and
(5)the number of shares in our public float.
Furthermore, because our common stock is traded on The NASDAQ Capital Market,
our stock price may be impacted by factors that are unrelated or
disproportionate to our operating performance. These market fluctuations, as
well as general economic, political and market conditions, such as recessions,
interest rates or international currency fluctuations may adversely affect the
market price of our common stock. Additionally, at present, we have a limited
number of shares in our public float, and as a result, there could be extreme
fluctuations in the price of our common stock.
We believe that our stock prices (bid, ask and closing prices) may not relate
to the actual value of our company, and may not reflect the actual value of our
common stock. Shareholders and potential investors in our common stock should
exercise caution before making an investment in our common stock, and should not
rely on the publicly quoted or traded stock prices in determining our common
stock value, but should instead determine the value of our common stock based on
the information contained in our public reports and industry information.
26
--------------------------------------------------------------------------------
Cash flows for the nine months ended
Nine
Months Ended
2021 2020
Beginning cash, cash equivalents and restricted cash $ 10,995,169 $ 4,199,825
Net cash provided by (used in):
Operating activities (7,694,777) (2,980,926)
Investing activities (10,982,990) (2,477,640)
Financing activities 12,367,155 16,296,932
Net increase in cash, cash equivalents and restricted cash 1,217,533 11,453,279
Ending cash, cash equivalents and restricted cash $
12,212,702
Our primary sources of liquidity are cash flows from our operations and the
availability to borrow funds under our credit and loan facilities. We also
raised
Net cash used by operating activities was$7,694,777 for the nine months endedSeptember 30, 2021 , as compared to net cash used by operating activities of$2,980,926 during the corresponding period in 2020. Our primary sources of liquidity are cash flows from our operations and the availability to borrow funds under our credit and loan facilities. The primary reason for the increase in cash used by operating activities for the nine month period endedSeptember 30, 2021 , compared to the same period in 2020, was the fluctuation in market and commodity prices, a gain on forgiveness of the PPP loan, and the increase in account receivable and inventory, during the nine months endedSeptember 30, 2021 . Investing activities used cash of$10,982,990 for the nine months endedSeptember 30, 2021 , as compared to having used$2,477,640 of cash during the corresponding period in 2020, due mainly to the purchase of fixed assets and our deposit to Shell related to the potential acquisition. Financing activities provided cash of$12,367,155 for the nine months endedSeptember 30, 2021 , as compared to providing cash of$16,296,932 during the corresponding period in 2020. Financing activities for the nine months endedSeptember 30, 2021 were comprised of proceeds from the exercise of options and warrants of$6,492,759 and proceeds from our line of credit totaling$5,178,117 , offset by$2,826,939 used to pay down our long-term debt. Financing activities for the nine months endedSeptember 30, 2020 were comprised of contributions the Company received from certain transactions undertaken with Tensile duringJanuary 2020 totaling$21,000,000 , of which$1,650,746 was used to pay down our long-term debt, and$6,741,727 of proceeds on our line of credit.
More information regarding our outstanding line of credits, promissory notes and long-term debt can be found under " Note 6. Line of Credit and Long-Term Debt " to the unaudited financial statements included herein.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management regularly evaluates its estimates and judgments, including those related to revenue recognition, goodwill, intangible assets, long-lived assets valuation, variable interest entities, and legal matters. Actual results may differ from these estimates may be material. Note 2, " Summary of Critical Accounting Policies and Estimates " in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the " 2020 Form 10-K "), and "Critical Accounting Policies and Estimates" in Part II, Item 7 of the 2020 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company's financial statements. There have been no material changes to the Company's critical accounting policies and estimates since the 2020 Form 10-K, except as summarized below: 27 -------------------------------------------------------------------------------- Impairment of long-lived assets The Company evaluates the carrying value and recoverability of its long-lived assets when circumstances warrant such evaluation by applying the provisions of the FASB ASC regarding long-lived assets. It requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. The Company determined that no long-lived asset impairment existed as of and for the nine months endedSeptember 30, 2021 . Leases InFebruary 2016 , the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. We adopted ASU No. 2016-02, Leases (Topic 842) effectiveJanuary 1, 2019 and elected certain practical expedients which permit us to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing leases, to not reassess initial direct costs for any existing leases, and to not separate lease and nonlease components for all classes of underlying assets. We also made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet for all classes of underlying assets. Additional information and disclosures required by this new standard are contained in "Part I" -"Item 1. Financial Statements"- " Note 13. Leases ".
Redeemable Noncontrolling Interest
As more fully described in " Note 14. Share Purchase and Subscription Agreements ", the Company is party to put/call option agreements with the holder of MG SPV's and Heartland SPV's non-controlling interests. The put options permit MG SPV's and Heartland SPV's non-controlling interest holders, at any time on or after the earlier of (a) the fifth anniversary of the applicable closing date of such issuances and (ii) the occurrence of certain triggering events (an "MG Redemption" and "Heartland Redemption", as applicable) to require MG SPV and Heartland SPV to redeem the non-controlling interest from the holder of such interest. Per the agreements, the cash purchase price for such redeemed ClassB Units (MG SPV) and Class A Units (Heartland SPV) is the greater of (y) the fair market value of such units (without discount for illiquidity, minority status or otherwise) as determined by a qualified third party agreed to in writing by a majority of the holders seeking an MG SPV Redemption and Heartland SPV Redemption and Vertex Operating (provided that Vertex Operating still owns Class A Units (as to MG SPV) or ClassB Units (as to Heartland SPV) on such date, as applicable) and (z) the original per-unit price for such Class B Units/Class A Units plus any unpaid Class A/Class B preference. The preference is defined as the greater of (A) the aggregate unpaid "Class B/Class A Yield" (equal to an annual return of 22.5% per annum) and (B) an amount equal to fifty percent (50%) of the aggregate capital invested by the Class B/Class A Unit holders. The agreements also permit the Company to acquire the non-controlling interest from the holders thereof upon certain events. Applicable accounting guidance requires an equity instrument that is redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. Based on this guidance, the Company has classified the MG SPV and Heartland SPV non-controlling interests between the liabilities and equity sections of the accompanying consolidated balance sheets. If an equity instrument subject to the guidance is currently redeemable, the instrument is adjusted to its maximum redemption amount at the balance sheet date. If the equity instrument subject to the guidance is not currently redeemable but it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the guidance permits either of the following measurement methods: (a) accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, or (b) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument. Because the MG SPV and Heartland SPV equity instruments will become redeemable solely based on the passage of time, the Company determined that it is probable that the MG SPV and Heartland SPV equity instruments will become redeemable. The Company has elected to apply the second of the two measurement options described above. An adjustment to the carrying amount of a non-controlling interest from the application of the above guidance does not impact net income or loss in the consolidated financial statements. Rather, such adjustments are treated as equity transactions.
Variable Interest Entities
The Company has investments in certain legal entities in which equity
investors do not have (1) sufficient equity at risk for the legal entity to
finance its activities without additional subordinated financial support, (2) as
a group, (the holders of the equity investment at risk), do not have either the
power, through voting or similar rights, to direct the activities of the legal
entity that most
28
--------------------------------------------------------------------------------
significantly impact the entity's economic performance, or (3) the obligation to
absorb the expected losses of the legal entity or the right to receive expected
residual returns of the legal entity. These certain legal entities are referred
to as "variable interest entities" or "VIEs."
The Company consolidates the results of any such entity in which it determines
that it has a controlling financial interest. The Company has a "controlling
financial interest" in such an entity if the Company has both the power to
direct the activities that most significantly affect the VIE's economic
performance and the obligation to absorb the losses of, or right to receive
benefits from, the VIE that could be potentially significant to the VIE. On a
quarterly basis, the Company reassesses whether it has a controlling financial
interest in any investments it has in these certain legal entities.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the period in which
all of the following criteria are met: (1)management, having the authority to
approve the action, commits to a plan to sell the disposal group; (2) the
disposal group is available for immediate sale in its present condition subject
only to terms that are usual and customary for sales of such disposal groups;
(3) an active program to locate a buyer or buyers and other actions required to
complete the plan to sell the disposal group have been initiated; (4) the sale
of the disposal group is probable, and transfer of the disposal group is
expected to qualify for recognition as a completed sale, within one year, except
if events of circumstances beyond the Company's control extend the period of
time required to sell the disposal group beyond one year; (5) the disposal group
is being actively marketed for sale at a price that is reasonable in relation to
its current fair value; and (6) actions required to complete the plan indicate
that it is unlikely that significant changes to the plan will be made or that
the plan will be withdrawn.
A disposal group that is classified as held for sale is initially measured at
the lower of its carrying amount or fair value less any costs to sell. Any loss
resulting from this measurement is recognized in the period in which the held
for sale criteria are met.
Subsequent changes in the fair value of a disposal group less any costs to sell
are reported as an adjustment to the carrying amount of the disposal group, as
long as the new carrying amount does not exceed the carrying amount of the asset
at the time it was initially classified as held for sale. Upon determining that
a disposal group meets the criteria to be classified as held for sale, the
Company reports the assets and liabilities of the disposal group for all periods
presented in the line items assets held for sale and liabilities held for sale,
respectively, in the consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that can be clearly
distinguished, operationally and for financial reporting purposes, that either
has been disposed of or is classified as held for sale is reported in
discontinued operations, if the disposal represents a strategic shift that has,
or will have, a major effect on the Company's operations and financial results.
Market Risk
Our revenues and cost of revenues are affected by fluctuations in the value of
energy related products. We attempt to mitigate much of the risk associated
with the volatility of relevant commodity prices by using our knowledge of the
market to obtain feedstock at attractive costs, by efficiently managing the
logistics associated with our products, by turning our inventory over quickly
and by selling our products into markets where we believe we can achieve the
greatest value.
29--------------------------------------------------------------------------------
© Edgar Online, source
