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, 2021 , filed with theSecurities and Exchange Commission onMarch 14, 2022 (the "Annual Report"). The majority of the numbers presented below are rounded numbers and should be considered as approximate. 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 2022 means the year endedDecember 31, 2022 , and fiscal 2021 means the year endedDecember 31, 2021 .
Please see the " Glossary " beginning on page 4 of the Annual Report, 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:
"BBL" (also "bbl" or "Bbl") is the abbreviated form for one barrel, 42 U.S. gallons of liquid volume.
"BPD" (also "bpd") is the abbreviated form for barrels per day. This can refer to designed or actual capacity/throughput.
"BCD" (also "bcd", "b/cd") is the abbreviated form of barrels per calendar day; meaning the total number of barrels of actual throughput processed within 24 hours under typical operating conditions. "Base oil" is a lubricant grade oil initially produced from refining crude oil or through chemical synthesis used in manufacturing lubricant products such as lubricating greases, motor oil, and metal processing fluids. "Black Oil" is a term used to describe used lubricating oils, which may be visually characterized as dark in color due to carbon and other residual elements and compounds which accumulate through use. This term can also refer to the business segment within the Company, which manages used motor oil related operations and processes such as purchase, sales, aggregation, processing, and re-refining.
"Catalytic Reforming" is a process that uses heat, pressure, and a catalyst to convert low-octane naphthas into high-octane gasoline blending components.
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--------------------------------------------------------------------------------"Cracking" refers to the process of breaking down larger, heavier, and more complex hydrocarbon molecules into simpler and lighter molecules through the use of heat, pressure, and sometimes a catalyst.
"Crude oil distillation" means the process of distilling vapor from liquid crudes, usually by heating and condensing the vapor slightly above atmospheric pressure turning it back to liquid in order to purify, fractionate or form the desired products.
"Cutterstock" also known as "cutter stock", refers to any stream that is blended to adjust various properties of the resulting blend.
"Generator" means any person, by site, whose act or process produces used oil or whose act first causes used oil to become subject to regulation. Generators can be service stations, governments or other businesses that produce or receive used oil.
"IMO 2020" refers to the
"LLS" means Louisiana Light Sweet Crude and is a grade of crude oil classified by its low sulfur content.
"LPG" means liquefied petroleum gases.
"Lubricant" or "lube" means a solvent-neutral paraffinic product used in commercial heavy-duty engine oils, passenger car oils, and specialty products for industrial applications such as heat transfer, metalworking, rubber, and other general process oil.
"MBL" means one thousand barrels.
"Re-Refining" refers to the process or industry which uses refining processes and technology with used oil as a feedstock to produce high-quality base stocks and intermediate feedstocks for lubricants, fuels, and other petroleum products.
"Refining adjusted EBITDA" represents net income (loss) from operations minus depreciation and amortization, unrealized gains and losses on hedging activities, gain and loss on intermediation agreement, and unusual or non-recurring charges included in selling, general, and administrative expenses.
"Refining gross margin" is defined as revenues less the cost of fuel intakes and other fuel costs. It excludes operating expenses and depreciation attributable to cost of revenues and other non-operating items included in costs of revenues.
"Refining gross margin per barrel of throughput" is calculated as refining gross margin divided by total throughput barrels for the period presented.
"Reformate" is a gasoline blending stock produced by catalytic reforming.
"Renewable Diesel" means a diesel fuel derived from vegetable oils or animal fats that is produced through various processes, most commonly through hydrotreating, reacting the feedstock with hydrogen under temperatures and pressure in the presence of a catalyst.
"RINs" means renewable identification numbers and refers to serial numbers assigned to credits generated from renewable fuel production under theEnvironmental Protection Agency's Renewable Fuel Standard ("RFS") regulations, which require blending renewable fuels into the nation's fuel supply. In lieu of blending, refiners may purchase these transferable credits to comply with the regulations.
"Sour Crude Oil" refers to crude oil containing quantities of sulfur greater than 0.4 percent by weight.
"Sweet Crude Oil" refers to crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.
"UMO" is the abbreviation for used motor oil.
"Vacuum Distillation" is the process of distilling vapor from liquid crudes, usually by heating and condensing the vapor below atmospheric pressure turning it back to a liquid in order to purify, fractionate or form the desired products.
"Vacuum Gas Oil" or "VGO" is a product produced from a vacuum distillation column which is predominately used as an intermediate feedstock to produce transportation fuels and other by-products such as gasoline, diesel and marine fuels.
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--------------------------------------------------------------------------------"VTB" refers to vacuum tower bottoms, the leftover bottom product of distillation, which can be processed in cokers and used for upgrading into gasoline, diesel, and gas oil.
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. 3 --------------------------------------------------------------------------------
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:
•Strategy and Plan of Operations. Discussion of our current strategy and plan of operations.
•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.
•Results of Operations. An analysis of our financial results comparing the six
and three 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.
Strategy and Plan of Operations
The principal elements of our strategy include:
•Completion ofRenewable Diesel Conversion Project . We are in the process of completing a renewable diesel conversion project designed to modify theMobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis. To date, we have technology, engineering and construction partners and construction of foundations and fabrication of piping has commenced. Initial renewable production volumes are expected to come on-stream by the first quarter 2023. The Company expects the total project cost to be in the range of$90 to$100 million , funded entirely through existing cash on-hand and cash flow from operations. •Expand Feedstock Supply Volume. We intend to expand our feedstock supply volume by growing our collection and aggregation operations. We plan to increase the volume of feedstock we collect directly by developing new relationships with generators and working to displace incumbent collectors; increasing the number of collection personnel, vehicles, equipment, and geographical areas we serve; and acquiring collectors in new or existing territories. We intend to increase the volume of feedstock we aggregate from third-party collectors by expanding our existing relationships and developing new vendor relationships. We believe that our ability to acquire large feedstock volumes will help to cultivate new vendor relationships because collectors often prefer to work with a single, reliable customer rather than manage multiple relationships and the uncertainty of excess inventory. •Broaden Existing Customer Relationships and Secure New Large Accounts. We intend to broaden our existing customer relationships by increasing sales of used motor oil and re-refined products to these accounts. In some cases, we may also seek to serve as our customers' primary or exclusive supplier. We also believe that as we increase our supply of feedstock and re-refined products that we will secure larger customer accounts that require a partner who can consistently deliver high volumes. •Re-Refine Higher Value End Products. We intend to develop, lease, or acquire technologies to re-refine our feedstock supply into higher-value end products. We believe that the expansion of our facilities and our technology, and investments in additional technologies, will enable us to upgrade feedstock into end products, such as lubricating base oil, that command higher market prices than the current re-refined products we produce. •Pursue Selective Strategic Relationships or Acquisitions. We plan to grow market share by consolidating feedstock supply through partnering with or acquiring collection and aggregation assets. Such acquisitions and/or partnerships could increase our revenue and provide better control over the quality and quantity of feedstock available for resale and/or upgrading as well as providing additional locations. In addition, we intend to pursue further vertical integration opportunities by acquiring complementary processing technologies where we can realize synergies by leveraging our customer and vendor relationships, infrastructure, and personnel, and by eliminating duplicative overhead costs. 4 --------------------------------------------------------------------------------
Description of Business Activities
Below is a discussion of our business activities during the quarters endedJune 30, 2022 , and 2021. EffectiveApril 1, 2022 , we completed the acquisition of theMobile Refinery (as discussed and defined below). As a result, sinceApril 1, 2022 , our operations include the operation of theMobile Refinery .The Mobile Refinery and related logistics assets ("Logistics Assets") are a group of downstream assets that operate ten miles north ofMobile , inSaraland, Alabama , which include theMobile Refinery andBlakeley Island Terminal , a deep-water draft, bulk loading terminal facility, for crude oil and associated refined petroleum products located inMobile, Alabama , with 600,000 Bbls of storage for loading/unloading of vessels along with a pipeline tie-in, as well as the related logistics infrastructure of a high capacity truck with 3-4 loading heads per truck, each rated at 600 gallons per minute (the "Mobile Truck Rack").The Mobile Refinery currently processes heavy and sour crude to produce heavy olefin feed, regular gasoline, premium gasoline, jet fuel, and diesel fuel. This activity falls in the financial results of our Refining and Marketing segment during the three months endedJune 30, 2022 .The Mobile Refinery has substantially changed our overall revenue, cost of revenue, net income, and earnings before interest, taxes, depreciation, and amortization and during the three months endedJune 30, 2022 , represented 93% of our total revenue.
The below description is of our business activities during the periods reported
(the six months ended
Vertex is an energy transition company specializing in refining and marketing high-value conventional and lower-carbon alternative transportation fuels. We are engaged in operations across the petroleum value chain, including collection, aggregation, transportation, storage, refinement, and sales of aggregated feedstock and 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 theGulf Coast , Midwest, and Mid-Atlantic regions ofthe United States . For the rolling twelve-month period endingJune 30, 2022 , we aggregated approximately 87.4 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 80.4 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-refine 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 pre-treat used oil feedstock; prior to shipping to our facility inMarrero, Louisiana . We also operate a facility located inMarrero, Louisiana , which re-refines used motor oil and produces VGO, and a re-refining complex located inBelle Chasse, Louisiana , which we refer to as ourMyrtle Grove facility.
Our Refining and Marketing segment manages the refining of crude oil and other petroleum by-products and sells those refined products to end customers.
Our Recovery segment includes a generator solutions company for properly
recovering and managing hydrocarbon streams and metals, including transportation
and marine salvage services throughout the
Black Oil Segment
Discontinued operations of Vertex includes the Black Oil Segment, also referred
to as the UMO Business, Refer to Note 16, "Discontinued Operations" in the
Notes to Financial Statements for additional information.
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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 43 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. Prior to the completion of the Mobile Refinery Acquisition, and
during the period covered by this Report, we owned a fleet of 43 transportation
trucks and more than 80 above-ground storage tanks with over 8.6 million gallons
of storage capacity. These assets are used by both the Black Oil and Refining
and Marketing segments. In addition, we also utilize third parties for the
transportation and storage of used oil feedstocks. 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 prior to shipping to our facility in
Marrero, Louisiana . In addition, at our Marrero, Louisiana facility, we produce
a Vacuum Gas Oil (VGO) product for the marine fuels market. At our Columbus,
Ohio facility (Heartland Petroleum), we produce a base oil product which in turn
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 transferred from our Black Oil segment. We have a toll-based processing agreement in place withMonument Chemical Port Arthur, LLC ("Monument Chemical") to re-refine feedstock streams, under our direction, into various end products that we specify.Monument Chemical uses industry-standard processing technologies to re-refine our feedstocks into pygas, gasoline blendstock, and fuel oil cutterstock. We sell our re-refined products directly to end customers or 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. In addition, the newly acquiredMobile, Alabama facility is included in this segment.The Mobile Refinery and Logistics Assets are a group of downstream assets and related logistics infrastructure of the Mobile Truck Rack.The Mobile Refinery currently processes heavy and sour crude to produce vacuum gas oil (VGO), heavy olefin feed, regular gasoline, jet fuel and diesel fuel, vacuum tower bottoms (VTBs), and other incremental products such as LPGs, sulfur, and reformate. We are also currently in the process of completing a renewable diesel conversion project designed to modify theMobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis, as discussed above.
Recovery Segment
The Company's Recovery Segment includes a generator solutions company for the proper recovery and management of hydrocarbon streams and other petroleum-based products, together with the recovery and processing of metals.
Products and Services
We generate the majority of our revenue from refining petroleum products, oil collection services, and sales of the below product categories, and gasolines, jet fuels and diesel. 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, additives, or other compounds are added
to manufacture a finished lubricant. The primary substance in lubricants, base
oil, can be refined from crude oil or re-refined from used motor oils.
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--------------------------------------------------------------------------------Pygas
Pygas, or pyrolysis gasoline, is a product that can be blended with gasoline as an octane booster or distilled and separated into its components, including benzene and other hydrocarbons.
Industrial Fuel
Industrial fuel is a distillate fuel oil, 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 kerosene and diesel fuels.
Oil Collection Services
Oil collection services include the collection, handling, treatment, and transacting of used motor oil and related products which contain used motor oil (such as oil filters and absorbents) acquired from 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 refinery products
Other 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.
Olefins
Olefins are hydrotreated VGO.
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)
Gasolines X
Jet Fuels X
Diesel X
Base oil X X
Pygas X
Industrial fuel X X
Oil collection services X
Metals X
Other refinery products X 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
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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.
(2) As discussed in greater detail above under "Refining and Marketing Segment",
the Refining and Marketing segment consists primarily of the sale of refined
finished products which include jet fuel, gasolines, diesels, LPGs, residual
fuels which are produced at our Mobile Refinery along with pygas and industrial
fuels, which are produced at a third-party facility ("Monument Chemical").
(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.
Recent Events
Heartland and Myrtle Grove Purchase Agreements
OnFebruary 25, 2022 ,Vertex Splitter Corporation ("Vertex Splitter"), a wholly-owned subsidiary of the Company entered into (1) a Purchase and Sale Agreement withTensile-Vertex Holdings LLC ("Tensile-Vertex"), an affiliate of Tensile and Tensile-Heartland (the "Heartland Purchase Agreement"); and (2) a Purchase and Sale Agreement with Tensile-Vertex and Tensile-MG (the "Myrtle Grove Purchase Agreement", and together with the Heartland Purchase Agreement, the "Purchase Agreements").
As the time of the entry into the agreement, Tensile-Heartland held 65% of Heartland SPV and Tensile-MG owned 15% of MG SPV, with Tensile-Vertex holding 100% of both Tensile-Heartland and Tensile-MG.
Pursuant to the Heartland Purchase Agreement, the Company, through Vertex Splitter, agreed to acquire 100% of the outstanding securities of Tensile-Heartland and pursuant to the Myrtle Grove Purchase Agreement, the Company, through Vertex Splitter, agreed to acquire 100% of the outstanding securities of Tensile-MG, from Tensile-Vertex, the result of which will be that Vertex Splitter will own 100% of each of Heartland SPV and MG SPV.
OnApril 1, 2022 , the Company, through Vertex Splitter acquired 100% of Tensile-MG from Tensile-Vertex for$7.2 million , which was based on the value of the ClassB Unit preference of MG SPV held by Tensile-MG, plus capital invested by Tensile-MG in MG SPV (which had not been returned as of the date of payment), plus cash and cash equivalents held by Tensile-MG as of the closing date. As a result, the Company indirectly acquired 100% of MG SPV, which in turn owns the Company'sBelle Chasse, Louisiana , re-refining complex, and consequently the Company, as ofApril 1, 2022 , owns 100% of theBelle Chasse, Louisiana , re-refining complex. The Myrtle Grove Purchase Agreement included customary representations of the parties for a transaction of that size and type, requires Vertex Splitter to maintain officer and director insurance for Tensile-MG for at least six years following the closing; requires that each party bear their own fees and expenses; includes customary indemnification obligations; and includes mutual releases of the parties, which were effective upon closing. OnMay 26, 2022 , the Company, through Vertex Splitter acquired 100% of Tensile-Heartland from Tensile-Vertex for$43.5 million , which was equal to$35 million (the "Base Amount"), plus an amount accrued and accruing from and afterMay 31, 2021 , on the Base Amount on a daily basis at the rate of 22.5% per annum compounded on the last day of each calendar quarter plus an amount equal to any and all cash and cash equivalents of Tensile-Heartland, as of the closing date. As a result of the closing, the Company acquired 100% of Heartland SPV, which in turn owns the Company'sColumbus, Ohio , Heartland facility. The Heartland Purchase Agreement included customary representations of the parties, requires Vertex Splitter to maintain officer and director insurance for Tensile-Heartland for at least six years following the closing; requires that the parties bear their own fees and expenses; includes customary indemnification obligations; and includes mutual releases of the parties, which were effective upon closing.
The Company used funds from the Additional Term Loan to pay amounts due under the Heartland Purchase Agreement.
Heartland Note Amendment
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Also on February 25, 2022 , Vertex Operating, the Company and Heartland SPV,
entered into a Second Amendment to Promissory Note (the "Second Note
Amendment"), which amended the Heartland Note, to extend the due date of the
Heartland Note until the earlier of (i) June 30, 2022 ; and (ii) five (5)
calendar days following the closing of a sale of substantially all the assets of
Vertex Refining OH, LLC ("Vertex Ohio"), and/or the sale of membership interests
in Vertex Ohio possessing voting control (with the consent of the Company),
provided that the Heartland Note may be prepaid in whole or in part at any time
without premium or penalty and without the consent of Heartland SPV. The
Heartland Note accrues interest at the applicable federal rate of interest from
time to time, increasing to 12% upon an event of default. On May 26, 2022 , the
Heartland Note was forgiven after the completion of the Tensile-Heartland
transaction as noted above as an inter-company transaction.
Loan and Security Agreement
OnApril 1, 2022 (the "Closing Date"), Vertex Refining; the Company, as a guarantor; substantially all of the Company's direct and indirect subsidiaries, as guarantors (together with the Company, the "Guarantors"); certain funds and accounts under management byBlackRock Financial Management, Inc. or its affiliates, as lenders ("BlackRock"), certain funds managed or advised byWhitebox Advisors, LLC , as lenders ("Whitebox"), certain funds managed byHighbridge Capital Management, LLC , as lenders ("Highbridge"),Chambers Energy Capital IV, LP , as a lender ("Chambers"),CrowdOut Capital LLC , as a lender ("CrowdOut Capital "),CrowdOut Credit Opportunities Fund LLC , as a lender (collectively with BlackRock, Whitebox, Highbridge,Chambers and CrowdOut Capital , the "Lenders"); andCantor Fitzgerald Securities , in its capacity as administrative agent and collateral agent for the Lenders (the "Agent"), entered into a Loan and Security Agreement (the "Loan and Security Agreement"). Pursuant to the Loan and Security Agreement, the Lenders agreed to provide a$125 million term loan to Vertex Refining (the "Initial Term Loan"), the proceeds of which, less agreed upon fees and discounts, were held in escrow prior to the Closing Date, pursuant to the Escrow Agreement, discussed above. On the Closing Date, net proceeds from the term loans, less the agreed upon fees and discounts, as well as certain transaction expenses, were released from escrow to Vertex Refining in an aggregate amount of$94.3 million . The Company used a portion of the proceeds from the Term Loan borrowing to pay a portion of the purchase price associated with the acquisition of theMobile, Alabama refinery (the "Mobile Refinery ") acquired by Vertex Refining onApril 1, 2022 , as discussed in greater detail below, and to pay certain fees and expenses associated with the closing of the Loan and Security Agreement and is required to use the remainder of the funds for (i) the planned renewable diesel conversion of theMobile Refinery , and (ii) working capital and liquidity needs. The amounts borrowed pursuant to the terms of the Loan and Security Agreement are secured by substantially all of the present and after-acquired assets of the Company and its subsidiaries. Additionally, Vertex Refining's obligations under the Loan and Security Agreement are jointly and severally guaranteed by substantially all of the Company's subsidiaries and the Company (collectively, Vertex Refining, the Company and the Company's subsidiaries which have guaranteed Vertex Refining's obligations under the Loan and Security Agreement, each a "Loan Party " and collectively, the "Loan Parties"). In connection with the Loan and Security Agreement, and as additional consideration for the Lenders agreeing to loan funds to the Company thereunder, the Company granted warrants to purchase 2.75 million shares of common stock of the Company to the Lenders (and/or their affiliates) on the Closing Date, as discussed in greater detail below.
The amounts owed under the Loan and Security Agreement are also secured by
various deeds of trusts and mortgages for the real property(s) described
therein, over the
Intellectual Property Security Agreement
In connection with the entry into the Loan and Security Agreement,Vertex Energy Operating, LLC ("Vertex Operating"), the Company's wholly-owned subsidiary, entered into an Intellectual Property Security Agreement in favor of the Agent, pursuant to which it granted a security interest in substantially all of its intellectual property (including patents and trademarks) in favor of the Lenders to secure the obligations of the Loan Parties under the Loan and Security Agreement.
Collateral Pledge Agreement
In connection with the entry into the Loan and Security Agreement, the Company,
Vertex Refining and each of the Guarantors, entered into a Collateral Pledge
Agreement in favor of the Agent, pursuant to which they granted the Agent a
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--------------------------------------------------------------------------------security interest in all now owned or hereafter acquired promissory notes and instruments evidencing indebtedness to any Guarantor and all now owned or hereafter acquired equity interests owned by such Guarantor.
Intercreditor Agreement
In connection with the entry into the Loan and Security Agreement and the Supply and Offtake Agreement (as defined below), the Agent, Macquarie (as defined below), Vertex Refining and each of the Guarantors (collectively, the "Grantors") entered into an intercreditor agreement (the "Intercreditor Agreement") pursuant to which the Agent and Macquarie acknowledged each other's liens on the assets of Vertex Refining. The intercreditor arrangements may limit our ability to amend the Loan and Security Agreement and the Supply and Offtake Agreement and related agreements, provides for certain restrictions on the exercise of remedies (through "standstill" and access periods) and governs certain creditor rights in bankruptcy proceedings relating to Grantors.
Completion of Mobile Refinery Acquisition
OnApril 1, 2022 , Vertex Operating assigned its rights to theMay 26, 2021 Sale and Purchase Agreement (the "Refinery Purchase Agreement") to Vertex Refining and on the same date, Vertex Refining completed the Mobile Acquisition. On the Effective Date, a total of$75.0 million (less$10 million previously paid) was paid by Vertex Refining in consideration for the acquisition of theMobile Refinery , which amount is subject to customary purchase price adjustments and reimbursement for certain capital expenditures in the amount of approximately$440 thousand ,$15.9 million was paid to Shell for previously agreed upon capital expenditures and miscellaneous prepaid and reimbursable items, and$164.2 million was paid to Shell by Vertex Refining in connection with the purchase of certain crude oil inventory and finished products owned by Shell and located at theMobile Refinery on the Closing Date (approximately$154 million of which was funded by Macquarie as a result of the simultaneous sale of such inventory to Macquarie pursuant to an Inventory Sales Agreement between Vertex Refining and Macquarie). The Company also paid$8.7 million at closing pursuant to the terms of a Swapkit Purchase Agreement entered into with Shell onMay 26, 2021 (the "Swapkit Agreement"), pursuant to which the Company agreed to fund a technology solution comprising the ecosystem required for the Company to run theMobile Refinery after closing (the "Swapkit"). As discussed above, we have started a renewable diesel conversion project designed to modify theMobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis, which has an estimated cost of$90 to$100 and is expected to be online during the first quarter of 2023. Funds for the purchase of theMobile Refinery , Swapkit Agreement, provision of cash collateral required pursuant to terms of the Supply and Offtake Agreement (discussed below), capital expenditures and transaction expenses, came from funds previously held in escrow in connection with ourNovember 2021 sale of$155 million principal at maturity of 6.25% senior unsecured notes due 2027 ($100.4 million ), the Term Loan and cash on hand. Following the transactions described above, including the Term Loan, and our acquisition of Tensile-MG (as defined and discussed below), our unrestricted cash increased by approximately$75 million , which funds are anticipated to be used for (i) the planned renewable diesel conversion of theMobile Refinery , and (ii) working capital and liquidity needs.
Inventory and Finished Products Purchase and Sale
As a required condition to the closing of the Mobile Acquisition, on the Closing Date, Vertex Refining paid approximately$164.2 million for the acquisition from Shell, of all Mobile Refinery Inventory (defined and discussed below). Also onApril 1, 2022 , pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all theMobile Refinery Inventory from Vertex Refining for$154 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement, discussed in detail below.
Supply and Offtake Agreement
OnApril 1, 2022 (the "Commencement Date"), Vertex Refining entered into a Supply and Offtake Agreement (the "Supply and Offtake Agreement") withMacquarie Energy North America Trading Inc. , aDelaware corporation ("Macquarie"), pertaining to crude oil supply and offtake of finished products located at theMobile Refinery acquired onApril 1, 2022 . On the Commencement Date, pursuant to an Inventory Sales Agreement and in connection with the Supply and Offtake Agreement, Macquarie purchased from Vertex Refining all crude oil and finished products within the categories covered by the Supply and Offtake Agreement and the Inventory Sales Agreement, which were held at theMobile Refinery and a certain specified third 10 -------------------------------------------------------------------------------- party storage terminal, which were previously purchased by Vertex Refining as part of the acquisition of theMobile Refinery as discussed in greater detail above. Pursuant to the Supply and Offtake Agreement, beginning on the Commencement Date and subject to certain exceptions, substantially all of the crude oil located at theMobile Refinery and at a specified third party storage terminal from time to time will be owned by Macquarie prior to its sale to Vertex Refining for consumption within theMobile Refinery processing units. Also pursuant to the Supply and Offtake Agreement, and subject to the terms and conditions and certain exceptions set forth therein, Macquarie will purchase from Vertex Refining substantially all of theMobile Refinery's output of certain refined products and will own such refined products while they are located within certain specified locations at theMobile Refinery . Macquarie will have title to and risk of loss of crude oil and refined products purchased from Vertex Refining while within certain specified locations at theMobile Refinery and a specified third party storage terminal.
Pursuant to the Supply and Offtake Agreement and subject to the terms and conditions therein, Macquarie may during the term of the Supply and Offtake Agreement procure crude oil and refined products from certain third parties which may be sold to Vertex Refining or third parties pursuant to the Supply and Offtake Agreement and may sell Refined Products to Vertex Refining or third parties (including customers of Vertex Refining).
The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are guaranteed by the Company. The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are also secured by a Pledge and Security Agreement in favor of Macquarie, discussed below, executed by Vertex Refining. In addition, the Supply and Offtake Agreement also requires that Vertex Refining post and maintain cash collateral (in the form of an independent amount) as security for Vertex Refining's obligations under the Supply and Offtake Agreement and the related transaction documents. The amount of cash collateral is subject to adjustments during the term. Pursuant to the Supply and Offtake Agreement, Vertex Refining and Macquarie agreed to cooperate to develop and document, by no later than 180 days after the Commencement Date, procedures relating to the unwinding and termination of the agreement and related agreements, in the event of the expiration or early termination of the Supply and Offtake Agreement. The parties also agreed to use commercially reasonable efforts to negotiate mutually agreeable terms for Macquarie's intermediating of renewable feedstocks and renewable diesel that will be utilized and/or produced by Vertex Refining in connection with and following a planned renewable diesel conversion project at theMobile Refinery (including providing Macquarie a right of first refusal in connection therewith), for 90 days after the Commencement Date (the "RD Period"), which discussions are ongoing. If, by the end of the RD Period, Macquarie and Vertex Refining, each acting in good faith and in a commercially reasonable manner, have not been able to reach commercial agreement regarding the entry into a renewable diesel intermediation, Vertex Refining may elect to terminate the Supply and Offtake Agreement by providing notice of any such election to Macquarie; provided that no such election may be effective earlier than the date falling 90 calendar days following the date on which such notice is delivered. The agreement is also subject to termination upon the occurrence of certain events, including the termination of certain agreements relating to the delivery of crude oil to and the offtake of products from theMobile Refinery . Upon an early termination of the Supply and Offtake Agreement, Vertex Refining is required to pay certain amounts relating to such termination to Macquarie including, among other things, outstanding unpaid amounts, amounts owing with respect to terminating transactions under the Supply and Offtake Agreement and related transaction documents, unpaid ancillary costs, and breakage costs, losses and out-of-pocket costs with respect to the termination, liquidation, maintenance or reestablishment, or redeployment of certain hedges put in place by Macquarie in connection with the transactions contemplated by the agreement, and Vertex Refining is required to pay other termination fees and amounts to Macquarie in the event of any termination of the agreement. Additionally, upon the termination of the Supply and Offtake Agreement, the outstanding obligations of Vertex Refining and Macquarie to each other will be calculated and reduced to an estimated net settlement payment which will be subject to true-up when the final settlement payment has been calculated following termination. The Supply and Offtake Agreement has a 24 month term following the Commencement Date, subject to the performance of customary covenants, and certain events of default and termination events provided therein (certain of which are discussed in greater detail below), for a facility of this size and type. Additionally, either party may terminate the agreement at any time, for any reason, with no less than 180 days prior notice to the other. The price for crude oil purchased by the Company from Macquarie and for products sold by the Company to Macquarie within each agreed product group, in each case, is equal to a pre-determined benchmark, plus a pre-agreed upon differential, subject to adjustments and monthly true-ups. 11 -------------------------------------------------------------------------------- In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into various ancillary agreements which relate to supply, storage, marketing and sales of crude oil and refined products including, but not limited to the following: Inventory Sales Agreement, Master Crude Oil and Products Agreement, Storage and Services Agreement, and a Pledge and Security Agreement (collectively with the Supply and Offtake Agreement, the "Supply Transaction Documents"). The Company agreed to guarantee the obligations of Vertex Refining and any of its subsidiaries arising under the Supply Transaction Documents pursuant to the entry into a Guaranty in favor of Macquarie.
Tripartite Agreements
Also on the Commencement Date, Vertex Refining, Macquarie and certain parties subject to crude oil supply and products offtake agreements with Vertex Refining, relating to theMobile Refinery , entered into various tripartite agreements (the "Tripartite Agreements"), whereby Vertex Refining granted Macquarie the right, on a rolling daily or monthly basis, as applicable, to elect to assume Vertex Refining's rights and obligations under such crude oil supply and products offtake agreements in connection with the performance of the Supply and Offtake Agreement, and the counterparties thereto are deemed to have consented to Macquarie assuming such obligations. Such Tripartite Agreements also provided for certain interpretations of the provisions of such supply and offtake agreements between Vertex Refining and such third parties in connection with Macquarie's right to elect to assume Vertex Refining's rights and obligations under such agreements. The Tripartite Agreements remain in place until the termination of the agreements to which they relate, or the earlier termination thereof as set forth in the Tripartite Agreements, including in the event of certain events of default by the parties thereto under the modified crude oil supply and products offtake agreements or the Supply and Offtake Agreement and related transaction documents and also in the event of the termination of the Supply and Offtake Agreement. Macquarie, Vertex Refining and a third party offtaker also entered into a tripartite agreement pursuant to which certain storage capacity within theMobile Refinery which Macquarie had leased pursuant to the Storage and Services Agreement was effectively made available to such third party consistent with the terms agreed by such party and Vertex Refining in its underlying products offtake agreement. Macquarie, Vertex Refining and a third party storage terminal operator also entered into a tripartite agreement relating to the storage of Macquarie-owned crude oil in such terminal in connection with the Supply and Offtake Agreement.
Guaranty
Vertex Refining's obligations under the Supply and Offtake Agreement and related transaction documents (other than the hedges which are secured and guaranteed on a pari passu basis under the Loan and Security Agreement) were unconditionally guaranteed by the Company pursuant to the terms of a Guaranty entered into onApril 1, 2022 , by the Company in favor of Macquarie (the "Guaranty").
Pledge and Security Agreement
In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into a Pledge and Security Agreement in favor of Macquarie, pursuant to which it provided Macquarie a first priority security interest in all inventory, including all crude oil, product, and all proceeds with respect of the forgoing, subject to certain exceptions. The Pledge and Security Agreement includes customary representations, warranties and covenants of Vertex Refining for a facility of this size and type.
Inventory Sales Agreement
OnApril 1, 2022 , pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all crude oil and finished products (including, jet fuel, diesel and gasoline) located at theMobile Refinery and held in inventory on such date, which purchase was based on agreed upon market values (the "Mobile Refinery Inventory") from Vertex Refining for$154 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell, as discussed in detail above), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement.
Initial Warrant Agreement and Registration Rights Agreement
In connection with the entry into the Loan and Security Agreement, and as a
required term and condition thereof, on
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The Initial Warrants have a five-year term and a $4.50 per share exercise price,
and include weighted average anti-dilutive rights in the event any shares of
common stock or other equity or equity equivalent securities payable in common
stock are granted, issued or sold (or the Company enters into any agreement to
grant, issue or sell), or in accordance with the terms of the Warrant Agreement,
are deemed to have granted, issued or sold, in each case, at a price less than
the exercise price, which automatically decreases the exercise price of the
Initial Warrants upon the occurrence of such event, as described in greater
detail in the Warrant Agreement, and increases the number of shares of common
stock issuable upon exercise of the Initial Warrants, such that the aggregate
exercise price of all Initial Warrants remains the same before and after any
such dilutive event. The Initial Warrants are described in greater detail below
under "Amendment Number One to Loan and Security Agreement".
In connection with the grant of the Initial Warrants, the Company and the
holders of such Warrants entered into a Registration Rights Agreement dated
April 1, 2022 (the "Initial Registration Rights Agreement"), which was amended
and replaced by the Amended and Restated Registration Rights Agreement discussed
in greater detail below.
Crude Supply Agreement
On the Commencement Date, Vertex Refining and Shell Trading (US) Company
("STUSCO") entered into a Crude Oil & Hydrocarbon Feedstock Supply Agreement
(the "Crude Supply Agreement") pursuant to which STUSCO agreed to sell to Vertex
Refining, and Vertex Refining agreed to buy from STUSCO, all of the crude oil
and hydrocarbon feedstock requirements of the Mobile Refinery , subject to
certain exceptions set forth therein. The agreement provides that STUSCO is the
exclusive supplier for the Mobile Refinery's requirement for crude oil and
hydrocarbon feedstock.
The initial term of the Crude Supply Agreement will continue for five (5) years
beginning on the Commencement Date, unless earlier terminated, and will
automatically renew for one (1) year renewal terms thereafter subject to timely
notice of either party that it elects not to so renew.
Pursuant to the Crude Supply Agreement, STUSCO will procure crude oil based upon
a monthly mandate from Vertex Refining as to the Mobile Refinery's requirements
for each delivery month, based on a pre-agreed price, based on internal market
prices, subject in certain cases to markup.
Vertex Refining will prepay STUSCO for crude oil deliveries on a provisional
basis during a predetermined delivery period during each delivery month, subject
to final true up.
The Crude Supply Agreement also contains customary and typical general terms and conditions for transactions of this nature.
Pursuant to a tripartite agreement, Macquarie may intermediate Vertex Refining's purchases of crude oil from STUSCO under the Crude Supply Agreement, from time to time, by assuming Vertex Refining's rights and obligations under the Crude Supply Agreement in respect of purchases of crude oil and feedstock in a given delivery month. If Macquarie assumes Vertex Refining's rights and obligations, Macquarie will be responsible for paying the purchase price for such crude oil and feedstocks to STUSCO in accordance with the terms of the tripartite agreement. In the event that Macquarie intermediates a purchase and sale, the terms and conditions for Vertex Refining's payments to Macquarie for such crude oil and feedstocks will be determined pursuant to the Supply and Offtake Agreement.
Storage & Services Agreement
On the Commencement Date, Vertex Refining and Macquarie entered into a Storage & Services Agreement (the "Storage & Services Agreement"), whereby Vertex Refining granted Macquarie certain access, storage, usage and information rights in respect of theMobile Refinery and certain storage facilities and agreed to provide Macquarie certain services in connection with, among other things, such rights under certain other agreements, including the Supply and Offtake Agreement and various tripartite agreements.
Pursuant to the Storage & Services Agreement, Macquarie will pay Vertex Refining a monthly storage fee for provision of the storage and related services.
Pursuant to the Storage & Services Agreement, Macquarie will have the exclusive
and uninterrupted license and right to use certain storage facilities specified
in the Supply and Offtake Agreement (the "Included Locations"), including the
right to inject, store and withdraw crude oil and products (as applicable) in
and from the Included Locations. Vertex Refining will be responsible for the
care, custody and control of, and will hold as bailee, the property of Macquarie
and certain other eligible
13
--------------------------------------------------------------------------------hydrocarbons which are held within the Included Locations, and will be solely responsible for pumping, unloading, receipt, movements, blending, transportation, storage, measuring, gauging, sampling, analysis, treatment, refining, loading, and delivery of and use of such property, subject to the terms of the Supply and Offtake Agreement and other applicable transaction documents.
Pursuant to the Storage & Services Agreement and in addition to customary services provided by a storage provider, Macquarie has appointed Vertex Refining to perform certain obligations assumed by Macquarie in connection with supply, offtake and exchange arrangements related to the Supply and Offtake Agreement and related transaction documents, including, without limitation, giving, receiving, accepting and rejecting nominations for delivering, loading, unloading, receiving and transporting crude oil and products; the provision of facilities for the delivery, loading, unloading and transportation of crude oil and products; arranging, coordinating quantity and quality sampling, measurements, analysis and inspections for crude oil and products; preparing and handling shipping documentation; providing information with respect to, and submitting claims in relation to, quality, quantity and demurrage; and notifying Macquarie of the occurrence of certain specified events. Vertex Refining periodically will be required to provide various reports to Macquarie regarding the inventory held in the Included Locations.
The Storage & Services Agreement includes certain accelerated export rights pursuant to which, upon the occurrence of certain events, including during the continuation of an event of default under the Supply and Offtake Agreement, Macquarie can instruct Vertex Refining to withdraw all or any amount of Macquarie's property from the Included Locations.
Macquarie has certain rights to inspect and access the Included Locations and conduct audits on accounting records and other documents maintained by Vertex Refining relating to the Storage & Services Agreement, in each case subject to the terms and conditions of the Storage & Services Agreement. Vertex Refining will be required to maintain and operate the Included Locations in accordance with various customary covenants contained within the Storage & Services Agreement, including, without limitation, in respect of the maintenance of the Included Locations and related facilities, the standard of care pursuant to which Vertex Refining will perform services under the Storage & Services Agreement, insurance requirements, and compliance with laws. Vertex Refining made various representations and warranties to Macquarie which are required to continue to be met during the term of the agreement, which are customary and typical for storage agreements relating to an intermediation facility, including maintaining insurance. The Supply & Storage Agreement also includes certain customary limitations on liability and damages. In addition to certain obligations to indemnify Macquarie for loss, damage or degradation of Macquarie's property held at the Included Locations, Vertex Refining agreed to indemnify Macquarie against various liabilities which may arise relating to its performance under the Storage & Services Agreement, as well as, among other liabilities, any liabilities directly or indirectly arising from or in connection with environmental conditions at the facility, environmental law, required permits, and law applicable to the operation of Vertex Refining's refinery and storage facilities. The term of the Storage & Services Agreement will continue until the earlier to occur of (i) the date upon which all of Macquarie's property in the Included Locations has been sold to Vertex Refining or another person or (ii) the date upon which Macquarie has certified that all of its property has been removed from the Included Locations.
ULSD/Gasoline Offtake Agreement
On theCommencement Date, Vertex Refining and Equilon Enterprises LLC , dbaShell Oil Products US ("Shell") entered into a refined products offtake agreement for the sale of ultra low sulfur diesel ("ULSD") and gasoline (the "ULSD/Gasoline Offtake Agreement") pursuant to which Shell agreed to purchase from Vertex Refining, and Vertex Refining agreed to sell to Shell, ULSD and gasoline produced by theMobile Refinery according to an agreed nomination and confirmation process, subject to certain exceptions set forth therein. The initial term of the ULSD/Gasoline Offtake Agreement will continue for five years beginning on the Commencement Date, unless earlier terminated as provided in the ULSD/Gasoline Offtake Agreement, and will automatically renew for one year renewal terms thereafter, unless terminated by either party by written notice as set forth therein. With respect to purchases and sales of ULSD, during the first three years of the term, Shell is required to purchase and Vertex Refining is required to sell certain pre-determined amounts of barrels (subject to minimums and maximums) per month. Thereafter, Vertex Refining may elect to sell Shell the same amounts or certain other pre-determined amounts, at Shell's option. Volumes in excess of the foregoing limits for ULSD may be sold subject to mutual agreement. 14 -------------------------------------------------------------------------------- With respect to purchases and sales of gasoline, during the first three years of the term, Shell will purchase all gasoline produced at the refinery up to certain maximum number of barrels per day, and all premium gasoline up to a pre-determined maximum number of barrels per day. Thereafter, Vertex Refining may elect to sell Shell the same amounts or certain pre-determined amounts of barrels (subject to minimums and maximums) per month, at Shell's option. Volumes in excess of the foregoing limits for gasoline may be sold subject to mutual agreement. In the event that Shell does not purchase and take delivery of certain required quantities of product nominated for purchase in a given month, Vertex Refining is entitled to sell the resulting shortfall volumes and obtain cover damages from Shell (excluding shortfall volumes resulting from force majeure events). In the event that Vertex Refining does not supply certain required quantities of product nominated for sale in a given month, Shell is entitled to procure replacement product to cover the shortfall volumes and obtain damages from Vertex Refining (excluding shortfall volumes resulting from force majeure events) in connection therewith.
Products will be provisionally priced and invoiced over certain pre-determined periods, subject to final true up. Prices will be calculated based upon published indices and an agreed fixed per gallon differentials.
The ULSD/Gasoline Offtake Agreement also contains customary and typical general terms and conditions for transactions of this nature.
Amendment Number One to Loan and Security Agreement
OnMay 26, 2022 , each of the Initial Guarantors (including the Company),Vertex Refining OH, LLC , anOhio limited liability company ("Vertex Ohio"), HPRM, and Tensile-Heartland, and together with Vertex Ohio and HPRM, the "Additional Guarantors", and the Additional Guarantors, together with the Initial Guarantors, the "Guarantors", and the Guarantors, together with Vertex Refining, the "Loan Parties"), entered into an Amendment Number One to Loan and Security Agreement ("Amendment No. One to Loan Agreement"), with certain of theLenders and CrowdOut Warehouse LLC , as a lender (the "Additional Lenders" and together with the Initial Lenders, the "Lenders") and the Agent, pursuant to which, the amount of the Term Loan (as defined below) was increased from$125 million to$165 million , with the Additional Lenders providing an additional term loan in the amount of$40 million (the "Additional Term Loan", and together with the Initial Term Loan, the "Term Loan"). As part of the transaction, each of the Additional Guarantors entered into joinders to the prior intercreditor agreement, intercompany subordination agreement, and collateral and pledge agreements relating to the Term Loan, and certain of the prior mortgages securing the Term Loan were amended to provide the Additional Lenders secured rights over the amount of the Additional Term Loan. The Amendment No. One to Loan Agreement amended the Loan and Security Agreement to provide for the Additional Term Loan; to provide for the grant of the Additional Warrants (defined and described below) to the Lenders; and to include certain other mutually negotiated changes to the Loan and Security Agreement, including permitting certain share buybacks. The proceeds of the Additional Term Loan can be used by the Company to fund (i) the acquisition of Heartland SPV pursuant to the Heartland Purchase Agreement and (ii) certain fees and expenses associated with the closing of the transactions contemplated by the Heartland Purchase Agreement and the Additional Term Loan. The Term Loan will bear interest at a rate per annum equal to the sum of (i) the greater of (x) the per annum rate publicly quoted from time to time by The Wall Street Journal as the "Prime Rate" inthe United States minus 1.50% as in effect on such day and (y) the Federal Funds rate for such day plus 0.50%, subject in the case of this clause (i), to a floor of 1.0%, plus (ii) 9.25%. The funds borrowed in connection with the Term Loan were issued with an original issue discount of 1.5%. The Company also paid certain fees and transaction expenses in connection with the Term Loan. Amounts owed under the Loan and Security Agreement (as amended), if not earlier repaid, are due onApril 1, 2025 (or the next business day thereafter). Interest on the Term Loans is payable in cash (i) quarterly, in arrears, on the last business day of each calendar quarter, commencing on the last business day of the calendar quarter endingJune 30, 2022 , (ii) in connection with any payment, prepayment or repayment of the Term Loans (including as discussed in greater detail below), and (iii) at maturity (whether upon demand, by acceleration or otherwise). Pursuant to the Loan and Security Agreement (as amended), on the last day of March, June, September and December of each year (or if such day is not a business day, the next succeeding business day), beginning onMarch 31, 2023 and ending onDecember 31, 2024 , Vertex Refining is required to repay$2,062,500 of the principal amount owed under the Loan and 15 --------------------------------------------------------------------------------
Security Agreement (as amended) (i.e., 1.25% of the principal amount per quarter), subject to reductions in the event of any prepayment of the Loan and Security Agreement (as amended).
In connection with the Additional Term Loan, and as additional consideration to the Additional Lenders for loaning funds to the Company in connection therewith, the Company granted warrants to purchase 250,000 shares of common stock of the Company to the Lenders (and/or their affiliates), as discussed in greater detail below.
Additional Warrant Agreement and Amended and Restated Registration Rights Agreement
In connection with the entry into the Amendment No. One to Loan Agreement, and as a required term and condition thereof, onMay 26, 2022 , the Company granted warrants (the "Additional Warrants" and together with the Initial Warrants, the "Warrants") to purchase 250,000 shares of the Company's common stock to the Lenders and their affiliates. The terms of the Additional Warrants are set forth in a Warrant Agreement (the "Additional Warrant Agreement" and together with the Initial Warrant Agreement, the "Warrant Agreements") entered into onMay 26, 2022 , between the Company andContinental Stock Transfer & Trust Company as warrant agent. In connection with the grant of the Additional Warrants, the Company and the holders of the Warrants entered into an Amended and Restated Registration Rights Agreement datedMay 26, 2022 , entered into between the Company and the holders of the Warrants (as amended and restated, the "Amended and Restated Registration Rights Agreement" or the "Registration Rights Agreement"). Under the Registration Rights Agreement, the Company agreed to file a registration statement (the "Initial Registration Statement") with theSEC as soon as reasonably practicable and in no event later than 75 days followingApril 1, 2022 (i.e., on or beforeJune 15, 2022 ), for purposes of registering the resale of the shares of common stock issuable upon exercise of the Warrants. The Company also agreed to use commercially reasonable efforts to cause theSEC to declare the Registration Statement effective as soon as practicable and no later than 45 days following the filing of the Initial Registration Statement; provided, that such date is extended until 120 days after the filing date if the Initial Registration Statement is reviewed by the staff of the Commission. The Registration Rights Agreement also provides the holders of the Warrants certain piggyback and demand registration rights (including pursuant to an underwritten offering, in the event the gross proceeds from such underwritten offering are expected to exceed$35 million ). The Company filed and obtained effectiveness of the required Registration Statement onJuly 8, 2022 . The Additional Warrants have a five and one-half-year term and a$9.25 per share exercise price, and include weighted average anti-dilutive rights in the event any shares of common stock or other equity or equity equivalent securities payable in common stock are granted, issued or sold (or the Company enters into any agreement to grant, issue or sell), or in accordance with the terms of the Additional Warrant Agreement, are deemed to have granted, issued or sold, subject to certain exceptions, in each case, at a price less than the exercise price, which automatically decreases the exercise price of the Additional Warrants upon the occurrence of such event, as described in greater detail in the Additional Warrant Agreement, and increases the number of shares of common stock issuable upon exercise of the Additional Warrants, such that the aggregate exercise price of all Additional Warrants remains the same before and after any such dilutive event. Until or unless the Company receives shareholder approval under applicable Nasdaq listing rules for the issuance of more than 19.9% of the Company's outstanding shares of common stock onApril 1, 2022 , pursuant to the exercise of Warrants (i.e., 12,828,681 shares of common stock, based on 64,465,734 shares of outstanding common stock on such date) (the "Share Cap"), the Company may not issue more shares of common stock upon exercise of the Warrants than the Share Cap, and is required to pay the Lenders cash, based on the fair market value of any shares required to be issued upon exercise of the Prior Warrants and Additional Warrants (as calculated in the Warrant Agreement), in excess of the Share Cap. Upon the occurrence of a fundamental transaction (as described in the Warrant Agreements), the Warrant Agreements (a) provide each holder a put right and (b) provides the Company with a call right in respect of the Warrants. Upon the exercise of a put right by the holder or a call right by the Company, the Company is obligated to repurchase the Warrants for the Black Scholes Value of the Warrants repurchased, as calculated in the Warrant Agreements. The Warrants also include cashless exercise rights and a provision preventing a holder of the Warrants from exercising any portion of their Warrants if such holder (together with its affiliates) would beneficially own in excess of 4.99% or 9.99% (as applicable pursuant to the Warrant Agreements) of the number of shares of Company common stock outstanding immediately after giving effect to the exercise, subject to certain rights of the holders to increase or decrease such percentage.
Amendment No. 1 to the First Amended and Restated Registration Rights Agreement
On
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pursuant to the terms of the Registration Rights Agreement, to register the
resale of the shares of common stock underlying the Warrants, from no later than
June 15, 2022 , to on July 1, 2022 , or, if the Company was then ineligible to
file a registration statement on such date, to require the Company to use
commercially reasonable efforts to cause such registration statement to be
declared effective under the Securities Act, as promptly as reasonably
practicable after the initial filing thereof (including, if then a "well-known
seasoned issuer" (as defined in Rule 405 of the Securities Act, a "WKSI") by
filing such registration statement as an automatically effective shelf
registration statement). The Amendment also included various representations
from the Company regarding its satisfaction of the requirements for being a
WKSI.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Description of Material Financial Line Items:
Revenues
During the periods covered by this Report, we generated 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 16, "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 Mobile Refinery and Logistics Assets are included in our Refining and Marketing segment and are a group of downstream assets and related logistics infrastructure of the Mobile Truck Rack.The Mobile Refinery currently processes heavy and sour crude to produce heavy olefin feed, regular gasoline, premium gasoline, jet fuel and diesel fuel. This segment also 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 customers who 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 includes
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 16, "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.
18
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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.
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,Crystal Energy, LLC andMobile Refinery acquisitions. 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 systems, applications, and products (SAP) and internet technology (IT) related items and intangibles.
Factors Impacting Comparability of Our Financial Results
Our results of operations for the three and six months endedJune 30, 2022 , were significantly impacted by the acquisition of theMobile Refinery onApril 1, 2022 . There are no comparable amounts presented for the same periods in 2021. See summary of theMobile Refinery operating results under Results of Operations -Mobile Refinery , below. Non-GAAP Financial Measures In addition to our results calculated under generally accepted accounting principles inthe United States ("GAAP"), in this Report we also present Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA, each as discussed in greater detail below. Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA are "non-GAAP financial measures" presented as supplemental measures of the Company's performance. They are not presented in accordance with GAAP. We use Refining Gross Margin, EBITDA and Adjusted EBITDA as supplements to GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to allocate resources and to compare our performance relative to our peers. Additionally, these measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework which management uses, in addition to historical operating results, as the basis for financial, operational and planning decisions and present measurements that third parties have indicated are useful in assessing the Company and its results of operations. Refining Gross Margin, EBITDA and Adjusted EBITDA are presented because we believe they provide additional useful information to investors due to the various noncash items during the period. Refining Gross Margin, EBITDA, and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA are unaudited, and have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations are: Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect cash expenditures, or future requirements for capital expenditures, or contractual commitments; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt or cash income tax payments; although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect any cash requirements for such replacements; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA, represent only a portion of our total operating results; and other companies in this industry may calculate Refining Gross Margin, Refining 19 --------------------------------------------------------------------------------
Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA differently than we do, limiting their usefulness as a comparative measure.
You should not consider Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA in isolation, or as substitutes for analysis of the Company's results as reported under GAAP. The Company's presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items. We compensate for these limitations by providing a reconciliation of each of these non-GAAP measures to the most comparable GAAP measure below. We encourage investors and others to review our business, results of operations, and financial information in their entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measure.
Refining gross margin.
Refining gross margin is defined as revenues less the cost of fuel intakes and other fuel costs. It excludes operating expenses and depreciation attributable to cost of revenues and other non-operating items included in costs of revenues.
Refining gross margin per barrel of throughput.
Refining gross margin per throughput barrel is calculated as refining gross margin divided by total throughput barrels for the period presented.
Refining Adjusted EBITDA.
Refining Adjusted EBITDA represents net income (loss) from operations minus depreciation and amortization, , unrealized gains and losses on hedging activities, gain and loss on intermediation agreement, and unusual or non-recurring charges included in selling, general, and administrative expenses.
Crack Spread USGC 2-1-1
The crack spread is a measure of the difference between market prices for refined products and crude oil, commonly used by the refining industry. We use crack spreads as a performance benchmark for our refining gross margin and as a comparison with other industry participants. Crack spreads can fluctuate significantly, particularly when prices of refined products do not move in the same direction as the cost of crude oil. To calculate the crack spread we believe more closely relates to the crude intakes and products at theMobile Refinery , we use two barrels of LouisianaLight Sweet crude oiil, producing one barrel of USGC CBOB gasoline and one barrel of USGC ULSD.
The following table reconciles gross profit to refining gross margin and net loss to refining Adjusted EBITDA for the periods presented (in thousands):
Three Months Ended June 30, 2022
Total Refining and Mobile Refinery
Marketing
Gross profit $ 3,614 $ 1,967
Operating expenses included in cost of revenues 17,575 17,575
Depreciation and amortization attributable to 3,009 2,986
cost
of revenues
Unrealized loss on hedging activities 46,901 46,901
Loss on inventory intermediation agreement 23,180 23,180
Refining gross margin $ 94,279 $ 92,609
Net loss from operations $ (20,719) $ (20,729)
Depreciation and amortization 3,745 3,722
Unrealized loss on hedging activities 46,901 46,901
Loss on intermediation agreement 23,180 23,180
Acquisition costs 9,078 9,078
20--------------------------------------------------------------------------------
Environmental reserve 1,428 1,428
Refining Adjusted EBITDA $ 63,613 $ 63,580
Mobile Refinery
Set forth are our results of operations and certain key performance indicators
disaggregated to show only the
Three Months Ended June 30,
2022
Statement of operations data:
Revenues $ 922,196
Cost of revenues 917,243
Depreciation and amortization attributable to cost 2,986
of revenues
Gross profit 1,967
Operating expenses:
Operating expenses 21,960
Depreciation and amortization 736
Total operating expenses 22,696
Operating income (loss) (20,729)
Other income (expense)
Interest expense (3,250)
Other income, net 18
Net loss $ (23,961)
Adjusted EBITDA $ 63,580
Key performance indicators:
Sales volume (MBLs) 6,468
Refining gross margin $ 92,608
Refining gross margin per bbl of throughput 14.11
USGC 2-1-1 Crack Spread Per Barrel 45.06
Operating expenses per bbl of throughput $ 3.35
Three Months Ended June 30, 2022
Refinery Feedstocks (bpd)
Crude oil 72,133
Total feedstocks 72,133
Refinery Yields (bpd)
21--------------------------------------------------------------------------------
Gasolines 17,997
Distillates 30,112
Other (1) 23,646
Total average barrel yields per day 71,755
(1) Other includes intermediates and LPGs.
22
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Set forth below are our results of operations for the three months ended
Three Months Ended June 30, $ Change -
Favorable % Change - Favorable
2022 2021 (Unfavorable) (Unfavorable)
Revenues $ 991,839 $ 30,228 $ 961,611 3,181 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 984,442 28,041 (956,401) (3,411) %
Depreciation and amortization attributable to
costs of revenues 3,122 116 (3,006) (2,591) %
Gross profit 4,275 2,071 2,204 106 %
Operating expenses:
Selling, general and administrative expenses 36,641 4,177 (32,464) (777) %
Depreciation and amortization attributable to
operating expenses 763 27 (736) (2,726) %
Total operating expenses 37,404 4,204 (33,200) (790) %
Loss from operations (33,129) (2,133) (30,996) (1,453) %
Other income (expense):
Interest income 18 - 18 100 %
Other income 152 4,222 (4,070) (96) %
Gain on asset sales - - - - %
Loss on change in value of derivative warrant
liability (945) (21,508) 20,563 96 %
Interest expense (47,722) (139) (47,583) (34,232) %
Total other expense (48,497) (17,425) (31,072) (178) %
Loss from continuing operation before income
tax (81,626) (19,558) (62,068) (317) %
Income tax benefit (expense) - - - - %
Loss from continuing operations (81,626) (19,558) (62,068) (317) %
Income from discontinued operations, net of tax 17,844 3,601 14,243 396 %
Net loss (63,782) (15,957) (47,825) 79 %
Net income attributable to non-controlling
interest and redeemable non-controlling
interest from continuing operations 165 243 (78) (32) %
Net income attributable to non-controlling
interest and redeemable non-controlling from
discontinued operations 3,023 3,175 (152) (5) %
Net loss attributable to
116 %
Our operating results are significantly affected by the Mobile Refinery
acquisition, which closed on April 1, 2022 . During the three months ended June
30, 2022 , the Mobile Refinery generated approximately $922 million of revenue,
cost of revenues associated with the Mobile Refinery were $917 million , there
was $4 million of depreciation and amortization to both cost of revenue and
operating expenses, and $22 million of selling, general and administrative
expenses.
Our revenues and cost of revenues are also 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 June 30, 2022 ,
compared to the same period in 2021, we saw a 16% decrease in the volume of
products we manage through our facilities (mainly as a result of the Mobile
Refinery acquisition and
23
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increased volumes processed through such facility) In addition, we saw an
increase in operating costs (inclusive of depreciation and amortization) on a
per barrel basis for the second quarter of 2022 as compared to the same period
in 2021.
Total revenues increased approximately $961.6 million , of which $922.2 million
was from the Mobile Refinery and $39.4 million of the increase from other
business for the three months ended June 30, 2022 , compared to the same period
in 2021. The $39.4 million increase was due primarily to higher commodity prices
and increased volumes at our facilities. Volumes improved as a result of
additional feedstock availability in the overall marketplace.
During the three months ended June 30, 2022 , total cost of revenues (exclusive
of depreciation and amortization) increased approximately $956 million , of which
$917 million was from the Mobile Refinery and $39 million was from other
business compared to same period ended June 30, 2021 . The main reason for the
$39 million increase was the result of the increase in commodity prices which
impacted our feedstock pricing and certain operational expenses. 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 approximately $36.6
million for the three months ended June 30, 2022 , compared to $4.2 million from
the prior year's period, an increase of approximately $32.5 million or 777% from
the prior year's period. This increase is primarily due to $22 million of
selling, general and administrative expenses relating to the Mobile Refinery and
$8 million of Mobile Refinery acquisition costs.
For the three months ended June 30, 2022 , total depreciation and amortization
expense attributable to cost of revenues was $3.1 million , compared to $0.1
million for the three months ended June 30, 2021 , an increase of $3.0 million ,
mainly due to Mobile Refinery assets acquired and additional investments in
rolling stock and facility assets during the fourth quarter of 2021, which
increased depreciation and amortization in 2022.
We had gross profit as a percentage of revenue of 0.4% for the three months
ended June 30, 2022 , compared to gross profit as a percentage of revenues of
6.9% for the three months ended June 30, 2021 . The main reason for the decrease
was the recognition of a $94 million loss from hedging activities for Mobile
Refinery inventory during the period.
Additionally, our per barrel margin decreased 21% for the three months ended
June 30, 2022 , relative to the three months ended June 30, 2021 . Our per barrel
margin is calculated by dividing the total volume of product sold (in bbls) by
total gross profit for the applicable period ($4.3 million for the 2022 period
versus $2.1 million for the 2021 period). This decrease was a result of the
decrease in our product spreads related to increases in feedstock prices and
increases in operating maintenance costs at our facilities, during the three
months ended June 30, 2022 , compared to the same period during 2021.
Overall, commodity prices were up for the three months ended June 30, 2022 ,
compared to the same period in 2021. For example, the average posting (U.S.
Gulfcoast Residual Fuel No. 6 3%) for the three months ended June 30, 2022 ,
increased 61% per barrel from a three-month average of $58.59 for the three
months ended June 30, 2021 to $94.11 per barrel for the three months ended June
30, 2022 . The average posting (U.S. Gulfcoast Unleaded 87 Waterborne) for the
three months ended June 30, 2022 increased $67.79 per barrel from a three-month
average of $86.55 for the three months ended June 30, 2021 to $154.35 per barrel
for the three months ended June 30, 2022 .
We had loss from operations of approximately $33.1 million for the three months
ended June 30, 2022 , compared to loss from operations of $2.1 million for the
three months ended June 30, 2021 , an increase of $30.2 million from the prior
year's three-month period. The increase in loss from operations was mostly due
to a $21 million loss from the Mobile Refinery and $8 million of acquisition
costs related to the transactions contemplated by the Refinery Purchase
Agreement and related transactions.
We had interest expense of $47.7 million for the three months ended June 30,
2022 , compared to interest expense of $139 thousand for the three months ended
June 30, 2021 , an increase in interest expense of $47.6 million or 34,232% from
the prior period, due to the unamortized deferred loan costs related to the
conversion of Convertible Senior Notes to common stock during the period and the
interest associated with the Convertible Senior Notes, which were issued on
November 1, 2021 , and the Term Loan, which was issued on April 1, 2022 ($125
million ) and May 26, 2022 ($40 million ).
We had an approximately $0.9 million loss on change in value of derivative
liability for the three months ended June 30, 2022 , in connection with the
warrants granted in connection with the Term Loan issued on April 1, 2022
(warrants to purchase 2.75 million shares) and May 26, 2022 (warrants to
purchase 0.25 million shares), compared to a loss on change in the value of our
derivative liability of $21.5 million in the prior year's period, which was in
connection with certain warrants granted in May 2016 . 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.
24
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We had net loss from continuing operations of approximately $80.9 million for
the three months ended June 30, 2022 , compared to net loss from continuing
operations of $19.6 million for the three months ended June 30, 2021 , an
increase in net loss from continuing operations of $61.3 million or 317%. The
main reason for the increase in net loss for the three months ended June 30,
2022 , compared to the three months ended June 30, 2021 , was attributable to the
loss on inventory hedging activities, acquisition costs and the increase in
interest expenses for the three months ended June 30, 2022 , each as described in
greater detail above.
Each of our segments' income (loss) from operations during the three months
ended
Three Months Ended $ Change -
June 30, Favorable % Change - Favorable
Black Oil Segment 2022 2021 (Unfavorable) (Unfavorable)
Revenues $ 20,254 $ 155 $ 20,099 12,967 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 20,147 363 (19,784) (5,450) %
Depreciation and amortization attributable
to costs of revenues 31 19 (12) (63) %
Gross profit (loss) 76 (227) 39,895 35 %
Selling general and administrative expense 12,027 3,281 (8,746) (267) %
Depreciation and amortization attributable
to operating expenses 27 27 - - %
Loss from operations $ (11,978) $ (3,535) $ 48,641 (239) %
Refining and Marketing Segment
Revenues $ 966,390 $ 23,836 $ 942,554 3,954 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 959,767 22,248 (937,519) (4,214) %
Depreciation and amortization attributable
to costs of revenues 3,009 31 (2,978) (9,606) %
Gross profit 3,614 1,557 2,057 132 %
Selling general and administrative expense 23,597 687 (22,910) (3,335) %
Depreciation and amortization attributable
to operating expenses 736 - (736) (100) %
Income (loss) from operations $ (20,719) $ 870 $ 25,703 (2,481) %
Recovery Segment
Revenues $ 5,195 $ 6,237 $ (1,042) (17) %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 4,528 5,430 902 17 %
Depreciation and amortization attributable
to costs of revenues 82 66 (16) (24) %
Gross profit 585 741 (156) (21) %
Selling general and administrative expense 1,017 209 (808) (387) %
Depreciation and amortization attributable
to operating expenses - - - - %
Income (loss) from operations $ (432) $ 532 $ (964) (181) %
Our Black Oil segment generated revenues of approximately $20.3 million for the
three months ended June 30, 2022 , with cost of revenues (exclusive of
depreciation and amortization) of $20.1 million , and depreciation and
amortization attributable to cost of revenues of $31 thousand . During the three
months ended June 30, 2021 , these revenues were $0.2 million with cost of
revenues (exclusive of depreciation and amortization) of $0.4 million and
depreciation and amortization attributable to cost of revenues of $19 thousand .
Revenue from operations increased for the three months ended June 30, 2022 ,
compared to 2021, as a result of increases in commodity prices, and a new Marine
Division which provided positive revenue and a profit for the period, which was
created at the end of 2021 for blending bunker fuels into the Gulf Coast Market.
The total loss was $12 million for the three months
25
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ended
Our Refining segment includes the business operations of our Refining and Marketing operations, which includesMobile Refinery . Revenues of$966 million in the Refining segment were up 3,954% during the three months endedJune 30, 2022 , as compared to the same period in 2021 mostly as a result of the operations of theMobile Refinery , which had$922 million of revenue and the increased commodity prices and volume during the three months endedJune 30, 2022 . Overall volume for the Refining and Marketing segment was increased during the three months endedJune 30, 2022 , as compared to the same period in 2021. Our Recovery segment generated revenues of approximately$5 million for the three months endedJune 30, 2022 , with cost of revenues (exclusive of depreciation and amortization) of$5 million , and depreciation and amortization attributable to cost of revenues of$82 thousand . During the three months endedJune 30, 2021 , these revenues were$6 million with cost of revenues (exclusive of depreciation and amortization) of$5 million , and depreciation and amortization attributable to cost of revenues of$66 thousand . Loss from operations of$0.4 million for the three months endedJune 30, 2022 , compared to profit from operation of$0.5 million in 2021, was a result of higher commodity costs, less metal sales in volumes, which caused lower margins related thereto. 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.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
Set forth below are our results of operations for the six months ended
26
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Six Months Ended June 30, $ Change -
Favorable % Change - Favorable
2022 2021 (Unfavorable) (Unfavorable)
Revenues $ 1,032,056 $ 55,273 $ 976,783 1,767 %
Cost of revenues (exclusive of depreciation
and amortization shown separately below) 1,023,008 50,850 (972,158) (1,912) %
Depreciation and amortization attributable to
costs of revenues 3,236 228 (3,008) (1,319) %
Gross Profit 5,812 4,195 1,617 39 %
Operating expenses:
Selling, general and administrative expenses 45,423 7,035 (38,388) (546) %
Depreciation and amortization attributable to
operating expenses 790 54 (736) (1,363) %
Total operating expenses 46,213 7,089 (39,124) (552) %
Loss from operations (40,401) (2,894) (37,507) (1,296) %
Other income (expense):
Interest income 18 - 18 100 %
Other Income 625 4,223 (3,598) (85) %
Bargain purchase gain related to Omega
acquisition - - - - %
Loss on sale of assets - - - - %
Loss on change in value of derivative
liability (4,524) (23,288) 18,764 81 %
Gain (loss) on futures contracts - - - - %
Interest expense (51,952) (251) (51,701) (20,598) %
Total other expense (55,833) (19,316) (36,517) -
Loss before income taxes (96,234) (22,210) (74,024) (333) %
Income tax (expense) benefit - - - - %
Net loss from continuing operations (96,234) (22,210) (74,024) (333) %
Income (loss) from discontinued operations
(see Note 15) 31,643 9,219 25,222 303 %
Net income attributable to non-controlling
interest and redeemable non-controlling
interest from continued operations 97 626 (529) (85) %
Net income attributable to non-controlling
interest and redeemable non-controlling
interest from discontinued operations 6,829 4,783 2,046 43 %
Net loss attributable to
$ (18,400) $ (27,895) (152) % Our revenues and cost of revenues are significantly impacted by the recently acquiredMobile Refinery and 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. 27 --------------------------------------------------------------------------------
Total revenues increased by 1,767% for the six months ended
During the six months endedJune 30, 2022 , total cost of revenues (exclusive of depreciation and amortization) was$1 billion , compared to$50.9 million for the six months endedJune 30, 2021 , an increase of$972.2 million or 1,912% from the prior period. The main reason for the increase was the addition of theMobile Refinery business which started onApril 1, 2022 , in addition to higher commodity prices, which impacted our feedstock pricing, and increases in volumes throughout the business. For the six months endedJune 30, 2022 , total depreciation and amortization expense attributable to cost of revenues was approximately$3.2 million , compared to$0.2 million for the six months endedJune 30, 2021 , an increase of$3.0 million , mainly due to assets acquired with theMobile Refinery purchase. We had gross profit as a percentage of revenue of 0.6% for the six months endedJune 30, 2022 , compared to gross profit as a percentage of revenues of 7.6% for the six months endedJune 30, 2021 . The decrease mainly due to the recognition of$94 million loss of inventory hedging activities, which was reported as cost of revenue, during the period. We had selling, general, and administrative expenses of approximately$45.4 million for the six months endedJune 30, 2022 , compared to$7.0 million for the prior year's period, an increase of$38.4 million or 546%. This increase is primarily due to$22 million of selling, general and administrative expenses relating to theMobile Refinery and$13.6 million ofMobile Refinery acquisition costs and business development expenses related to the transactions contemplated by the Sale Agreement (which was terminated as ofJanuary 25, 2022 ) and the Refinery Purchase Agreement and related transactions. We had loss from operations of approximately$40.4 million for the six months endedJune 30, 2022 , compared to a loss from operations of$2.9 million for the six months endedJune 30, 2021 , an increase of$37.5 million in loss from the prior year's six-month period. The increase in loss from operations was mostly due to the cost of theMobile Refinery acquisition and hedging loss. We had interest expense of approximately$52.0 million for the six months endedJune 30, 2022 , compared to interest expense of$0.3 million for the six months endedJune 30, 2021 , an increase in interest expense of$51.7 million due to a higher amount of term debt outstanding during the six months endedJune 30, 2022 , compared to the prior period, the unamortized deferred loan costs related to the conversion of Convertible Senior Notes to common stock during the period and the interest associated with the Convertible Senior Notes, which were issued onNovember 1, 2021 , and the Term Loan, which was issued onApril 1, 2022 ($125 million ) andMay 26, 2022 ($40 million ). We had an approximately$4.5 million loss on change in value of derivative liability for the six months endedJune 30, 2022 , in connection with certain warrants granted in April andMay 2022 , compared to a loss on change in the value of our derivative liability of$23.3 million in the prior year's period, which related to warrants granted inJune 2015 andMay 2016 and expired during 2021. 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 approximately$96.2 million for the six months endedJune 30, 2022 , compared to a net loss from continuing operations of$22.2 million for the six months endedJune 30, 2021 , an increase in net loss of$74.0 million or 333% from the prior period due to the reasons described above. The majority of our net loss for the six months endedJune 30, 2022 , was attributable to the loss on hedging activities and amortized deferred loan cost and discount, which was reported as interest expenses, related to the conversion of Convertible Senior Notes, which is a non-cash expense. 28 --------------------------------------------------------------------------------
Each of our segments' income (loss) from operations during the six months ended
Six Months Ended June 30, $ Change -
Favorable % Change - Favorable
Black Oil Segment 2022 2021 (Unfavorable) (Unfavorable)
Revenues $ 21,804 $ 278 $ 21,526 7,743 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 21,797 643 (21,154) (3,290) %
Depreciation and amortization attributable to
costs of revenues 47 39 (8) (21) %
Gross loss (40) (404) 364 90 %
Selling, general and administrative expense 19,438 5,223 (14,215) (272) %
Depreciation and amortization attributable to
operating expenses 54 54 - - %
Loss from operations $ (19,532) $ (5,681) $ (13,851) (244) %
Refining Segment
Revenues $ 1,001,109 $ 43,110 $ 957,999 2,222 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 992,852 40,198 (952,654) (2,370) %
Depreciation and amortization attributable to
costs of revenues 3,033 63 (2,970) (4,714) %
Gross profit 5,224 2,849 2,375 83 %
Selling, general and administrative expense 24,721 1,447 (23,274) (1,608)%
Depreciation and amortization attributable to operating expenses 736 - (736)
(100)%
Income (loss) from operations $ (20,233)$ 1,402 $ (21,635) (1,543)% Recovery Segment Revenues $ 9,143$ 11,885 $ (2,742) (23)% Cost of revenues (exclusive of depreciation and amortization shown separately below) 8,357 10,009 1,652
17%
Depreciation and amortization attributable to costs of revenues 156 126 (30) (24)% Gross loss 630 1,750 (1,120) (64)% Selling, general and administrative expense 1,264 365 (899)
(246)%
Depreciation and amortization attributable to operating expenses - - - -% Loss from operations $ (634)$ 1,385 $ (2,019) (146)% Our Black Oil segment generated revenues of approximately$21.8 million for the six months endedJune 30, 2022 , with cost of revenues (exclusive of depreciation and amortization) of$21.8 million , and depreciation and amortization attributable to cost of revenues of$47 thousand . During the six months endedJune 30, 2021 , these revenues were$0.3 million with cost of revenues (exclusive of depreciation and amortization) of$0.6 million , and depreciation and amortization attributable to cost of revenues of$39 thousand . Loss from operations decreased for the six months endedJune 30, 2022 , compared to 2021, as a result of higher commodity prices and increased operating expenses during the six months endedJune 30, 2022 . In addition, a new Marine Division which provided positive revenue and profit for the period, was created at the end of 2021 for blending bunker fuels into the Gulf Coast Market. Our Refining segment includes the business operations of our Refining and Marketing operations, as well as theMobile Refinery acquired onApril 1, 2022 . During the six months endedJune 30, 2022 , our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were approximately$993 million , of which the processing costs for theMobile Refinery were$917 million , and depreciation and amortization attributable to cost of revenues was$3.0 million . Revenues for the 29 -------------------------------------------------------------------------------- same period were$1 billion , of which$922 million related to theMobile Refinery operation. During the six months endedJune 30, 2021 , our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were$40 million , and depreciation and amortization attributable to cost of revenues of$63 thousand . Revenues for the same period were$43 million . Our Recovery segment generated revenues of approximately$9 million for the six months endedJune 30, 2022 , with cost of revenues (exclusive of depreciation and amortization) of$8 million , and depreciation and amortization attributable to cost of revenues of$0.2 million . During the six months endedJune 30, 2021 , these revenues were$12 million with cost of revenues (exclusive of depreciation and amortization) of$10 million , and depreciation and amortization attributable to cost of revenues of$0.1 million . Income from operations decreased for the six months endedJune 30, 2022 , compared to 2021, as a result of decreased volumes attributable to our Recovery segment and margins related thereto, through our various facilities. For the six months ended onJune 30, 2021 , this segment benefited from certain one-time projects that drive increases in volumes as well as revenues and margins from time to time and were completed within 2021. Our Recovery segment includes the business operations of Vertex Recovery Management as well as our Group III base oil business. Vertex previously acted asPenthol's exclusive agent to provide marketing, sales, and logistical duties of Group III base oil from theUnited Arab Emirates tothe United States fromJune 2016 toJanuary 2021 . Vertex andPenthol 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 23% as a result of increased commodity prices when compared to the same period in 2021. Volumes of products acquired in our Recovery business were down 12% during the six months endedJune 30, 2022 , compared to the same period during 2021. 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 six
months ended
High Date Low Date
U.S. Gulfcoast No. 2 Waterborne
(dollars per gallon) $ 4.36 March 8 $ 2.15 January 3
U.S. Gulfcoast Unleaded 87 Waterborne
(dollars per gallon) $ 4.35 June 3 $ 2.26 January 3
U.S. Gulfcoast Residual Fuel No. 6 3%
(dollars per barrel) $ 112.93 March 8 $ 67.84 January 3
NYMEX Crude oil (dollars per barrel) $ 123.70 March 8 $ 76.08 January 3
Reported in Platt's US Marketscan (
The following table sets forth the high and low spot prices during the six months endedJune 30, 2021 , for our key benchmarks. 2021 Benchmark High Date Low DateU.S. Gulfcoast No. 2 Waterborne (dollars per gallon)$ 2.10 June 22$ 1.32 January 4U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)$ 2.21 June 23$ 1.36 January 4 U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)$ 64.92 June 25$ 45.08 January 4 NYMEX Crude oil (dollars per barrel)$ 74.05 June 25$ 47.62 January 4
Reported in Platt's US Marketscan (
We saw an increase in the first six months of 2022, in each of the benchmark commodities we track compared to the same period in 2021. The increase in market prices was a result of a continued recovery of the economy from the pandemic together with geopolitical tensions. 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 30 -------------------------------------------------------------------------------- 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
Our primary sources of liquidity have historically included cash flow from operations, proceeds from notes offerings, bank borrowings, term loans, public equity offerings and other financial arrangements. Uses of cash have included capital expenditures, acquisitions and general working capital. The success of our current business operations has been dependent on 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 (including Shell, Macquarie and others), 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 approximately$690.7 million as ofJune 30, 2022 , compared to$266.1 million atDecember 31, 2021 . The increase was mainly due to the acquisition of theMobile Refinery , increases in accounts receivable and inventory levels, due to the increases in commodity prices and volumes during the six months endedJune 30, 2022 . We had total current liabilities of approximately$339.6 million as ofJune 30, 2022 , compared to$49.2 million atDecember 31, 2021 . We had total liabilities of$593.0 million as ofJune 30, 2022 , compared to total liabilities of$192.5 million as ofDecember 31, 2021 . The increase in current liabilities was mainly due to the inventory financing liabilities, increase in accounts payable and accrued liabilities as a result of rises in commodity prices and volumes along with the increase in commodity derivative liabilities and the term loan balance, thereof during the six months endedJune 30, 2022 . We had working capital of approximately$180.1 million as ofJune 30, 2022 , compared to working capital of$185.0 million as ofDecember 31, 2021 . The decrease in working capital fromDecember 31, 2021 toJune 30, 2022 is mainly due to the increase in inventory, accounts payable and accrued liabilities, and obligations under our inventory financing agreement (discussed above), for which the inventory was purchased inJune 2022 to be used for the product and sale in early ofJuly 2022 . Also we had a$3 million break fee paid for the termination of the Sales Agreement with Safety-Kleen, and$8.2 million acquisition costs paid in connection with theMobile Refinery purchase onApril 1, 2022 . Market conditions have improved through the end of 2021 and into 2022, as COVID-19 restrictions have eased and demand for refined products has rebounded. Although commodity prices have rebounded, we are still seeing extreme volatility in commodity pricing, however, the increase in refined product pricing has had a positive impact on our business and overall liquidity. 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 more capital expenditures related to theMobile Refinery in the future.
The Company's outstanding debt facilities as of
31
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Balance on June Balance on December
Creditor Loan Type 30, 2022 31, 2021
Term Loan 2025 Loan $ 165,000 $ -
John Deere Note Note - 93
AVT Equipment Lease-HH Finance Lease - 302
SBA Loan SBA Loan 59 59
VRA Finance lease Finance Lease 45,291 -
Insurance premiums
Various institutions financed 9,236 2,375
Total $ 219,586 $ 2,829
Future contractual maturities of notes payable are summarized as follows (in thousands):
Creditor Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter
Totals $ 14,013 $ 9,514 $ 154,049 $ 1,605 $ 1,809 $ 38,596 Our Convertible Senior Notes will mature on
June 30, 2022
Principal Amounts $ 155,000
Conversion of principal into common stock (59,822)
Unamortized discount and issuance costs (53,635)
Net Carrying Amount $ 41,543
Interest of the Convertible Senior Notes is payable semiannually in arrears on
April 1 and October 1 of each year, beginning on April 1, 2022 . The following
table represents the future interest payment (in thousands):
Interest payable Year 1 Year 2 Year 3 Year 4
Year 5 Thereafter
Interest payable
Cash Flows from Operating, Investing and Financing Activities
We believe that we have sufficient liquid assets, cash flow from operations, borrowing capacity and adequate access to capital markets to meet our financial commitments, debt service obligations and anticipated capital expenditures for at least the next 12 months. We expect that our short-term liquidity needs which include debt service, working capital, and capital expenditures related to currently planned growth projects (including the renewable diesel conversion project designed to modify theMobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis) will be met through projected cash flow from operations, borrowings under our various facilities and asset sales. Our current near term plans include 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 recent acquisition of theMobile Refinery . The refinery, which has a long track record of safe, reliable operations and consistent financial performance, has, effective onApril 1, 2022 , upon the closing of the acquisition, become our flagship refining asset, which we believe positions us 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$90 to$100 million planned capital project at the facility, theMobile Refinery is projected to produce approximately 8,000 to 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 southeasternUnited States . 32 -------------------------------------------------------------------------------- Additionally, we or our affiliates may, at any time and from time to time, retire or repurchase our outstanding Convertible Senior Notes in open-market purchases, privately negotiated transactions, refinancing or otherwise, through cash purchases and/or exchanges for equity or debt. Such repurchases, refinancings or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. Repurchases, if any, will be funded through available cash from operations. The amounts involved may be material.
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 ongoing capital projects at our facilities; 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, there could be extreme fluctuations in the price 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.
Cash flows for the six months ended
Six Months Ended
2022 2021
Beginning cash, cash equivalents and restricted cash $ 136,627 $ 10,995
Net cash provided by (used in):
Operating activities (88,194) 5,045
Investing activities (230,211) (2,745)
Financing activities 279,792 1,772Net increase (decrease) in cash, cash equivalents and restricted cash
(38,613) 4,072
Ending cash, cash equivalents and restricted cash $
98,014
The analysis of cash flow activities below and the table above, is combined for both continued and discontinued operations, whereas the consolidated statement of cash flows included in this report.
Our primary sources of liquidity are cash flows from the Convertible Senior Notes and Term Loan.
Net cash used in operating activities was approximately$88.2 million for the six months endedJune 30, 2022 , as compared to net cash provided by operating activities of$5.0 million during the corresponding period in 2021. The primary reason for the increase in cash used by operating activities for the six month period endedJune 30, 2022 , compared to the same period in 2021, was theMobile Refinery inventory purchase of$68 million ,$13.6 million of acquisition costs related to theMobile Refinery purchase,$65 million cash settlement on inventory hedging activities, and the cash paid for the termination of the Sales Agreement with Safety-Kleen inJanuary 2022 .
Investing activities used cash of approximately
33
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Financing activities provided cash of approximately $279.8 million for the six
months ended June 30, 2022 , as compared to providing cash of $1.8 million during
the corresponding period in 2021. Financing activities for the six months ended
June 30, 2022 were comprised of proceeds from Term Loan and insurance premium
finance of $166 million , from inventory financing of $173 million and from the
exercise of options and warrants of $0.7 million offset by the payment on
redemption of non-controlling interest of $51 million , distribution to
noncontrolling interest of $0.4 million and payment on notes payable and capital
leases of $8 million . Financing activities for the six months ended June 30,
2021 were comprised of proceeds from the exercise of options and warrants of $3
million and from line of credit proceeds of $1 million offset by the payment on
notes payable and capital leases of $2 million .
More information regarding our loan agreements, leases, and Convertible Senior
Notes, can be found under " Note 6. Financing Arrangements " 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, 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 " 2021 Form 10-K "), and "Critical Accounting Policies and Estimates" in Part II, Item 7 of the 2021 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 2021 Form 10-K. 34
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