VERTEX ENERGY, INC.
Strategy and Plan of Operations
The Principal elements of our strategy include:
• 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 innew 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, oracquire 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 for the implementation
of TCEP, if we deem such commercially reasonable. In addition, we intend
to pursue further vertical integration opportunities by acquiring
complementary recycling and processing technologies where we can realize
synergies by leveraging our customer and vendor relationships,
infrastructure, and personnel, and by eliminating duplicative overhead
costs.
RESULTS OF OPERATIONS
Description of Material Financial Line Items:
Revenues
We generate revenues from three existing operating segments as follows:
BLACK OIL - Revenues for 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. The
Houston, Texas TCEP facility finished product is then sold by barge as a fuel
oil cutterstock (provided that TCEP has only once again been used for this
purpose since the fourth quarter of 2019, and prior to that, beginning in the
third quarter of 2015, due to economic reasons, was temporarily being used to
pre-treat our used motor oil feedstock prior to shipping to our facility in
Marrero, Louisiana ). Through the operations at our Marrero, 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, as well as to the marine fuels market.
Through the operations at our Columbus, Ohio facility, the ownership of 65% of
which was transferred to Tensile in connection with the Heartland SPV (discussed
above under "Part I" - "Item 1. Business" - " Recent Material Transactions "),
effectiveJanuary 1, 2020 , 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. 60 -------------------------------------------------------------------------------- REFINING AND MARKETING - The Refining and Marketing segment generates revenues relating to the sales of finished products. The Refining and Marketing segment gathers hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have become off-specification during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and then processed at a third-party facility under our direction. The end products are typically three distillate petroleum streams (gasoline blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large petroleum trading and blending companies. The end products are delivered by barge and truck to customers. RECOVERY - The Recovery segment is a generator solutions company for the proper recovery and management of hydrocarbon streams. We own and operate a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials. Our revenues are affected by changes in various commodity prices including crude oil, natural gas, #6 oil and metals. Cost of Revenues BLACK OIL - Cost of revenues for our Black Oil segment are comprised primarily of feedstock purchases from a network of providers. Other cost of revenues include processing costs, transportation costs, purchasing and receiving costs, analytical assessments, brokerage fees and commissions, and surveying and storage costs. 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, and inspection. Cost of revenues also includes broker's fees, inspection and transportation costs. Our cost of revenues are 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 fixed assets and intangible assets acquired in connection with theVertex Holdings, L.P. (formerlyVertex Energy, L.P. ), aTexas limited partnership ("Holdings"),Omega Refining, LLC's ("Omega Refining") andWarren Ohio Holdings Co., LLC , f/k/aHeartland Group Holdings, LLC ("Heartland"),Acadiana Recovery, LLC ("Acadiana"),Nickco Recycling, Inc. ("Nickco"),Ygriega Environmental Services, LLC ("Ygriega") and Specialty Environmental Services ("SES") acquisitions. 61
-------------------------------------------------------------------------------- RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDEDDECEMBER 31, 2019 COMPARED TO THE THREE MONTHS ENDEDDECEMBER 31, 2018 Set forth below are our results of operations for the three months endedDecember 31, 2019 , as compared to the same period in 2018. Three Months Ended December 31, 2019 2018 $ Change % Change Revenues$ 42,588,302 $ 41,801,748 $ 786,554 2 % Cost of revenues 31,045,027 36,879,263 (5,834,236 ) (16 )% Gross profit 11,543,275 4,922,485 6,620,790 135 % Selling, general and administrative expenses 6,652,623 5,258,572 1,394,051 27 % Depreciation and amortization 1,846,604 1,756,996 89,608 5 % Total operating expenses 8,499,227 7,015,568 1,483,659 21 % Income (loss) from operations 3,044,048 (2,093,083 ) 5,137,131 245 % Other Income 126 - 126 100 % Loss on sale of assets (105,554 ) (5,970 ) (99,584 ) (1,668 )% Gain (loss) on change in derivative warrant liability (819,239 ) 2,888,687 (3,707,926 ) (128 )% Interest Expense (747,291 ) (833,084 ) 85,793 10 % Total other income (expense) (1,671,958 ) 2,049,633 (3,721,591 ) (182 )% Income (loss) before income tax 1,372,090 (43,450 ) 1,415,540 3,258 % Income tax provision - - - - % Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest (62,112 ) 157,883 (219,995 ) (139 )% Net income (loss) attributable toVertex Energy, Inc. $ 1,434,202 $ (201,333 ) $ 1,635,535 812 % 62
--------------------------------------------------------------------------------
Each of our segments' gross profit (loss) during the three months ended
Three Months Ended December 31,
2019 2018 $ Change % Change
Black Oil
Revenues $ 36,215,635 $ 32,730,540 $ 3,485,095 11 %
Cost of Revenues 24,822,137 27,280,433 (2,458,296 ) (9 )%
Gross profit $ 11,393,498 $ 5,450,107 $ 5,943,391 109 %
Three Months Ended December 31,
2019 2018 $ Change % Change
Refining And Marketing
Revenues $ 3,745,290 $ 5,553,741 $ (1,808,451 ) (33 )%
Cost of Revenues 2,883,187 5,972,018 (3,088,831 ) (52 )%
Gross profit (deficit) $ 862,103 $ (418,277 ) $ 1,280,380 (306 )%
Three Months Ended December 31,
2019 2018 $ Change % Change
Recovery
Revenues $ 2,627,377 $ 3,517,467 $ (890,090 ) (25 )%
Cost of Revenues 3,339,703 3,626,812 (287,109 ) (8 )%
Gross deficit $ (712,326 ) $ (109,345 ) $ (602,981 ) (551 )%
Our revenues and cost of revenues are significantly impacted by fluctuations in
commodity prices. Increases in commodity prices typically result in increases in
revenue and cost of revenues. 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.
Revenues increased 2% for the fourth quarter of 2019, compared to the same
period in 2018, due primarily to increased volumes of products sold during the
period. Total volume increased 23% and gross profit increased 135% for the three
months ended December 31, 2019 , compared to same period in 2018. Additionally,
our per barrel margin increased 91% relative to the three months ended December
31, 2018 . The majority of this increase was the result of the drop in High
Sulfur Fuel Oil commodity prices during the fourth quarter of 2019, which
resulted in lowering the index that we purchase the majority of our feedstock
against, which improved our product spreads during this period.
During the three months ended December 31, 2019 , total cost of revenues was
$31,045,027 , compared to $36,879,263 for the three months ended December 31,
2019 , a decrease of $5,834,236 or 16% from the prior period. The main reason for
the decrease was the result of a decline in commodity prices, which impacted our
feedstock pricing and a decrease in volumes in our Refining & Marketing
division, as well as our metals facilities.
Our Black Oil segment's volume increased approximately 17% during the three
months ended December 31, 2019 compared to the same period in 2018. This
increase was mainly due to steady production during the period and not having a
turnaround during the period at either of our refining facilities during the
three months ended December 31, 2019 , compared to turn arounds during last
year's period. Overall volume for the Refining and Marketing segment decreased
26% during the three month period ended December 31, 2019 , as compared to the
same period in 2018. This is a result of a focus on the production of higher
quality finished products, which in turn has decreased the amount of volume
being produced. This segment experienced a decrease in production of 54% for its
cutterstock for the three months ended December 31, 2019 , compared to the same
period in 2018. Our gasoline blendstock volumes were down 100% for the three
months ended December 31, 2019 , compared to the same period in 2018. Our pygas
volumes increased 8% for the three months ended December 31, 2019 , as compared
to the same period in 2018.
63
--------------------------------------------------------------------------------
During the three months ended December 31, 2019 , our Refining and Marketing cost
of revenues were $2,883,187 of which the processing costs for our Refining and
Marketing business located at KMTEX were $588,070 . Revenues for the same period
were $3,745,290 while gross profit from operations was $862,103 . During the
three months ended December 31, 2018 , our Refining and Marketing cost of
revenues were $5,972,018 , which included the processing costs at KMTEX of
$650,481 . Revenues for the same period were $5,553,741 , while gross deficit from
operations was $418,277 .
Commodity prices decreased approximately 34% for the three months ended December
31, 2019 , compared to the same period in 2018. The average posting (U.S.
Gulfcoast Residual Fuel No. 6 3%) for the three months ended December 31, 2019
decreased $21.02 per barrel from a three month average of $61.59 per barrel
during the three months ended December 31, 2018 to $40.57 per barrel during the
three months ended December 31, 2019 .
Overall gross profit increased 135% and our margin per barrel increased
approximately 91% for the three months ended December 31, 2019 , compared to the
same period in 2018. In our street collections and third party purchasing we
were focused on lowering the prices paid to generators and suppliers for used
motor oil during 2019. Additionally, our street collections operations had to
quickly shift its services model where we implemented service fees for the
handling of used motor oil, the managing of used oil filters, and various other
services performed by our collection division during the period compared to this
being a cost and us paying for these services to be completed in certain prior
periods. Volumes in our street collections were up 19% for the three months
ended December 31, 2019 as compared to the same period in 2018. One of our key
initiatives continues to be a focus on growing our own volumes of collected
material and displacing the third party oil processed in our facilities.
We had selling, general and administrative expenses of $6,652,623 for the three
months ended December 31, 2019 , compared to $5,258,572 from the prior year's
period, an increase of $1,394,051 or 27% from the prior period. This increase is
primarily due to the additional selling, general and administrative expenses
incurred during the period as a result of increased personnel costs, legal
expenses, and insurance expenses related to our expansion of trucks and
facilities through organic growth, as well as increased accounting, legal and
consulting expenses related to our Tensile transaction.
We had total other expense of $1,671,958 for the three months ended December 31,
2019 , compared to total other income of $2,049,633 for the three months ended
December 31, 2018 . The main reason for the change in other expense during 2019
was the loss of $819,239 during 2019, compared to the gain of $2,888,687 during
2018, on change in value of derivative liability, in connection with certain
warrants granted in June 2015 and May 2016 , as described in greater detail in
" Note 14. Preferred Stock and Temporary Equity " to the consolidated
financial statements included herein under "Part II"-"Item 8- Financial
Statements and Supplementary Data".
We had income before income taxes of $1,372,090 for the three months ended
December 31, 2019 compared to a loss before income taxes of $43,450 for the
three months ended December 31, 2018 . The increase in income was mainly due to
the decrease in costs of revenues as discussed above, partially offset by a
$3,707,926 increase in loss on change in derivative warrant liability related to
the non-cash adjustment relating to the value of the June 2015 and May 2016
warrants, as discussed above.
We had net income attributable to Vertex Energy, Inc. of $1,434,202 for the
three months ended December 31, 2019 , compared to a net loss attributable to
Vertex Energy, Inc. of $201,333 for the three months ended December 31, 2018 .
The increase in net income was primarily due to increased direct collection
volumes of product into our facilities during the current year and increased
finished product volumes, coupled with the decrease in cost of revenues as
discussed above.
64
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED
Year Ended December 31,
2019 2018 $ Change % Change
Revenues $ 163,365,565 $ 180,720,661 $ (17,355,096 ) (10 )%
Cost of revenues 134,777,113 151,314,039 (16,536,926 ) (11 )%
Gross profit 28,588,452 29,406,622 (818,170 ) (3 )%
Selling, general and administrative
expenses 24,182,407 21,927,264 2,255,143 10 %
Depreciation and amortization 7,180,089 6,991,010 189,079 3 %
Total operating expenses 31,362,496 28,918,274 2,444,222 8 %
Income (loss) from operations (2,774,044 ) 488,348 (3,262,392 ) (668 )%
Other income (expense) Other income 920,197 659 919,538 139,535 % Gain (loss) on sale of assets (74,111 ) 45,553 (119,664 ) (263 )% Gain (loss) on change in value of derivative warrant liability (487,524 ) 763,716 (1,251,240 ) (164 )% Interest expense (3,070,071 ) (3,281,855 ) 211,784 6 % Total other expense (2,711,509 ) (2,471,927 ) (239,582 ) (10 )% Loss before income tax (5,485,553 ) (1,983,579 ) (3,501,974 ) (177 )% Income tax benefit - - - - % Net loss (5,485,553 ) (1,983,579 ) (3,501,974 ) (177 )% Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest (436,974 ) 234,188
(671,162 ) (287 )%
Net loss attributable toVertex Energy, Inc. $ (5,048,579 ) $ (2,217,767 ) $ (2,830,812 ) (128 )% 65
--------------------------------------------------------------------------------
Each of our segment's gross profit during these periods was as follows:
Year Ended December 31,
2019 2018 $ Change % Change
Black Oil
Revenues $ 139,269,164 $ 143,836,981 $ (4,567,817 ) (3 )%
Cost of revenues 113,196,583 116,524,465 (3,327,882 ) (3 )%
Gross profit $ 26,072,581 $ 27,312,516 $ (1,239,935 ) (5 )%
Refining And Marketing
Revenues $ 12,957,767 $ 22,935,482 $ (9,977,715 ) (44 )%
Cost of revenues 10,651,069 22,290,277 (11,639,208 ) (52 )%
Gross profit $ 2,306,698 $ 645,205 $ 1,661,493 258 %
Recovery
Revenues $ 11,138,634 $ 13,948,198 $ (2,809,564 ) (20 )%
Cost of revenues 10,929,461 12,499,297 (1,569,836 ) (13 )%
Gross profit $ 209,173 $ 1,448,901 $ (1,239,728 ) (86 )%
Our revenues and cost of revenues are significantly impacted by fluctuations in
commodity prices. Increases in commodity prices typically result in increases in
revenue and cost of revenues. 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.
Total revenues decreased 10% for the year ended December 31, 2019 , compared to
the year ended December 31, 2018 , due primarily to decreases in commodity prices
during the period of approximately 10%. The average posting (U.S. Gulfcoast
Residual Fuel No. 6 3%) for 2019 decreased $7.31 per barrel from a 2018 average
of $61.21 per barrel to an average of $53.90 per barrel during 2019. On average,
prices we received for our products decreased 10% for the year ended December
31, 2019 , compared to the year ended December 31, 2018 .
Volume for our Black Oil segment increased 5% during fiscal 2019 compared to
2018. This volume increase is attributable to the increased amount of product
which was processed through our facilities in Columbus, Ohio , the ownership of
65% of which was transferred to Tensile in connection with the Heartland SPV
(discussed above under "Part I" - "Item 1. Business" - " Recent Material
Transactions "), effective January 1, 2020 , and Marrero, Louisiana during the
period ended December 31, 2019 , as compared to the same period in 2018. Our per
barrel margin in the Black Oil segment decreased approximately 10% for the year
ended December 31, 2019 from the same period in 2018. The decrease in margins
was due to the issues experienced during the first half of the year at our
refining facilities relating to weather events, extended turnarounds and overall
operational challenges which caused an increase in operating expenses. Our Black
Oil segment, which includes our TCEP facility, the Marrero facility and the
Heartland facility (of which we own 35% effective January 1, 2020 ), generated
revenues of $139,269,164 for the year ended December 31, 2019 , with cost of
revenues of $113,196,583 , producing a gross profit of $26,072,581 . During the
year ended December 31, 2018 , these revenues were $143,836,981 with cost of
revenues of $116,524,465 , producing a gross profit of $27,312,516 . Gross profit
decreased for the year ended December 31, 2019 , compared to 2018, as a result of
increased operating expenses through our various facilities offset by diligent
management of our street collections and pricing.
Total volume company-wide was up 5% during fiscal 2019 compared to 2018, and our
total per barrel margin decreased approximately 8% for fiscal 2019, compared to
2018. This decrease was a result of increased operating expenses experienced at
our facilities during 2019. We experienced increased turnaround costs during the
year as a result of hurricane/weather delays as well as substantially increased
transportation expenses due to weather and fog along the Gulf Coast and
Mississippi River .
Our Refining and Marketing segment experienced a decrease in production of 63%
for its fuel oil cutterstock product for the year ended December 31, 2019 ,
compared to the same period in 2018, as a result of a focus on the production of
higher quality finished products, which in turn has decreased the amount of
volume being produced, and our fuel oil cutterstock commodity prices decreased
approximately 12% over the same period. The average posting (U.S. Gulfcoast No.
2 Waterborne) during 2019 decreased $7.18 per barrel from $61.08 per barrel for
the year ended December 31, 2018 to $53.90 per barrel for the year ended
December 31, 2019 .
66
--------------------------------------------------------------------------------
Our pygas production decreased 3% for the year ended December 31, 2019 , compared
to the same period in 2018 and commodity prices decreased approximately 10% for
our pygas finished product for 2019, compared to the same period in 2018.
Our gasoline blendstock volumes decreased 100% for the year ended December 31,
2019 as compared to 2018. This was a result of no longer processing gasoline
blendstocks in our Refining and Marketing division as the processing margins
were no longer economically feasible. The lower margins were a result of
decreases in available feedstock volumes. We have also had to assess the volume
of fuel oil cutterstocks that we manage due to enhanced quality of products
being demanded in the marketplace.
Overall volume for the Refining and Marketing segment decreased 34% during the
year ended December 31, 2019 , compared to the year ended December 31, 2018 .
Margins per barrel increased in the Refining and Marketing segment as a result
of changes we have made in the products being managed and processed as well as
the pricing of these products.
During the year ended December 31, 2019 , our Refining and Marketing cost of
revenues were $10,651,069 , of which the processing costs for our Refining and
Marketing business located at KMTEX were $2,007,295 . Revenues for the same
period were $12,957,767 , while gross profit from operations was $2,306,698 .
During the year ended December 31, 2018 , our Refining and Marketing cost of
revenues were $22,290,277 , which included the processing costs at KMTEX of
$2,223,633 . Revenues for the same period were $22,935,482 , while gross profit
was $645,205 .
Our Recovery segment includes the business operations of Vertex Recovery
Management as well as our Group III base oil business. Vertex acts as Penthol's
exclusive agent to provide marketing, sales, and logistical duties of Group III
base oil from the United Arab Emirates to the United States . Revenues for this
segment decreased during 2019, as compared to the same period in 2018. This
segment periodically participates in project work that is not ongoing, thus we
expect to see fluctuations in revenue and gross profit 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. Revenues for this division decreased
20% as a result of a significant decrease in steel volumes and prices during
2019, as compared to 2018. Volumes of petroleum products acquired in our
Recovery business were up 36% during the twelve months ended December 31, 2019 ,
as compared to the same period in 2018. We are continuing to focus on volume
growth in this division.
Prevailing prices of certain commodity products can significantly impact our
revenues and cash flows. As noted above the revenue variances from fiscal 2018
to 2019 were largely impacted due to the changes in commodity pricing between
the two periods as detailed below.
The following table sets forth the high and low spot prices during 2019 for our
key benchmarks.
2019
Benchmark High Date Low Date
U.S. Gulfcoast No. 2
Waterborne (dollars per
gallon) $ 2.01 September 16 $ 1.53 January 2
U.S. Gulfcoast Unleaded 87
Waterborne (dollars per
gallon) $ 2.08 April 10 $ 1.31 January 2
U.S. Gulfcoast Residual Fuel
No. 6 3% (dollars per barrel) $ 68.54 April 25 $ 32.05 November 19
NYMEX Crude Oil (dollars per
barrel) $ 66.30 April 23 $ 46.54 January 2
Reported in Platt's US Marketscan (Gulf Coast )
67
--------------------------------------------------------------------------------
The following table sets forth the high and low spot prices during 2018 for our
key benchmarks.
2018
Benchmark High Date Low Date
U.S. Gulfcoast No. 2
Waterborne (dollars per
gallon) $ 2.32 October 1 $ 1.50 December 28
U.S. Gulfcoast Unleaded 87
Waterborne (dollars per
gallon) $ 2.20 October 3 $ 1.26 December 27
U.S. Gulfcoast Residual Fuel
No. 6 3% (dollars per barrel) $ 73.42 October 9 $ 47.27 December 27
NYMEX Crude Oil (dollars per
barrel) $ 76.41 October 1 $ 44.61 December 27
Reported in Platt's US Marketscan (Gulf Coast )
We saw a steady decline in each of the benchmark commodities we track during
2019 and 2018. During 2018 and specifically the second half of 2019, the
commodity markets experienced a steady decline due to overall global economic
conditions mostly related to supply and demand for the products we track.
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 the New York Mercantile
Exchange ("NYMEX"). These prices are determined by a global market and can be
influenced by many factors, including but not limited to supply/demand, weather,
politics, and global/regional inventory levels. As such, we cannot provide any
assurances regarding results of operations for any future periods, as numerous
factors outside of our control affect the prices paid for raw materials and the
prices (for the most part keyed to the NYMEX) that can be charged for such
products. Additionally, for the near term, results of operations will be subject
to further uncertainty, as the global markets and exchanges, including the
NYMEX, continue to experience volatility.
Gross profit decreased 3% to $28,588,452 for the year ended December 31, 2019
from $29,406,622 for the year ended December 31, 2018 , primarily due to
operational impacts to our business at our refining locations. We experienced
extended delays due to weather events in the Gulf Coast which caused extended
downtime at our facility during the year ended December 31, 2019 . This resulted
in higher turnaround costs as well as decreased production. In addition we
experienced increased costs around our metals division during the year due to an
increase in the market price of metals.
We had selling, general and administrative expenses of $24,182,407 for the year
ended December 31, 2019 , compared to $21,927,264 for the prior year's period, an
increase of $2,255,143 or 10% from the prior period, due to the additional
selling, general and administrative expenses incurred during the period as a
result of increased personnel costs, legal expenses, and insurance expenses
related to expansion of trucks and facilities through organic growth, as well as
increased accounting, legal and consulting expenses related to our Tensile
transaction.
We had total other expense of $2,711,509 for the year ended December 31, 2019 ,
compared to total other expense of $2,471,927 for the year ended December 31,
2018 . The main reasons for the change in other expense during 2019 was the
receipt of a payment of $907,500 related to the proceeds of an insurance
settlement for a fire that had occurred at the used oil re-refining plant
located in Churchill County, Nevada , which we previously rented during the year
ended December 31, 2019 as compared to year ended December 31, 2018 , and the
loss of $487,524 during 2019, compared to the gain of $763,716 during 2018, on
change in value of derivative liability, in connection with certain warrants
granted in June 2015 and May 2016 , as described in greater detail in " Note 14.
Preferred Stock and Temporary Equity " to the consolidated financial statements
included herein under "Part II"-"Item 8- Financial Statements and Supplementary
Data".
We had a loss before income taxes of $5,485,553 for the year ended December 31,
2019 , compared to a loss before income taxes of $1,983,579 , for the year ended
December 31, 2018 , a 177% increase. The increase in net loss before taxes was
attributable to the decline in market and commodity prices, which reduced
revenues during the period, as well as the increase in selling, general and
administrative expenses.
We had a net loss attributable to Vertex Energy, Inc. of $5,048,579 for the year
ended December 31, 2019 , compared to a net loss of $2,217,767 for the year ended
December 31, 2018 , an increase in net loss of $2,830,812 or 128% from the prior
period for the reasons described above.
68
--------------------------------------------------------------------------------
Our revenues and cost of revenues are significantly impacted by fluctuations in
commodity prices; decreases in commodity prices typically result in decreases in
revenue and cost of revenues. 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.
Set forth below, we have disclosed a quarter-by-quarter summary of our
statements of operations and statements of operations by segment information for
the quarters ended December 31 , September 30 , June 30 , and March 31, 2019 and
2018, respectively.
Statements of Operations by Quarter
Fiscal 2019 Fiscal 2018
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Revenues $ 42,588,302 $ 37,799,259 $ 43,657,292
31,045,027 32,372,316 36,515,421 34,844,349 36,879,263 42,593,367 36,796,258 35,045,151
Gross profit 11,543,275 5,426,943 7,141,871 4,476,363 4,922,485 8,039,581 10,121,512 6,323,044
Selling, general and
administrative expenses 6,652,623 6,153,184 6,028,859 5,347,741 5,258,572 5,658,659 5,364,591 5,645,442
Depreciation and
amortization 1,846,604 1,815,582 1,780,890 1,737,013 1,756,996 1,806,839 1,733,076 1,694,099 Total operating expenses 8,499,227 7,968,766 7,809,749
7,084,754 7,015,568 7,465,498 7,097,667 7,339,541
Income (loss) from
operations 3,044,048 (2,541,823 ) (667,878 ) (2,608,391 ) (2,093,083 ) 574,083 3,023,845 (1,016,497 )
Other income (expense)
Interest income 126 918,153 1,918 - - - 659 -
Gain(loss) Asset Sales (105,554 ) - 29,150 2,293 (5,970 ) - 8,843 42,680
Gain on change in value of derivative liability (819,239 ) 1,290,792 746,017 (1,705,094 ) 2,888,687 (2,169,133 ) 475,913 (431,751 ) Interest expense (747,291 ) (826,005 ) (738,972 ) (757,803 ) (833,084 ) (798,800 ) (847,456 ) (802,515 ) Total other income (expense) (1,671,958 ) 1,382,940 38,113 (2,460,604 ) 2,049,633 (2,967,933 ) (362,041 ) (1,191,586 ) Income (loss) before income taxes 1,372,090 (1,158,883 ) (629,765 ) (5,068,995 ) (43,450 ) (2,393,850 ) 2,661,804 (2,208,083 ) Income tax benefit - - - - - - - - Net income (loss) 1,372,090 (1,158,883 ) (629,765 ) (5,068,995 ) (43,450 ) (2,393,850 ) 2,661,804 (2,208,083 ) Net income (loss)attributable to non-controlling interest (62,112 ) (67,102 ) (202,329 ) (105,431 ) 157,883 (105,970 ) 131,736 50,539 Net income (loss)attributable toVertex Energy , Inc.$ 1,434,202 $ (1,091,781 ) $ (427,436 ) $ (4,963,564 ) $ (201,333 ) $ (2,287,880 ) $ 2,530,068 $ (2,258,622 ) Number of weighted average common shares outstanding Basic 42,063,871 41,376,335 40,294,870 40,195,925 40,062,779 35,144,113 33,300,456 33,063,732 Diluted 42,783,248 41,376,335 40,294,870 40,195,925 40,062,779 35,144,113 37,013,651 33,063,732 69
--------------------------------------------------------------------------------
Statements of Operations by Quarters
Fiscal 2019 Fiscal 2018
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Black Oil
Revenues $ 36,215,635 $ 32,330,530 $ 37,907,811 $ 32,815,187 $ 32,730,540 $ 40,400,064 $ 38,469,131 $ 32,237,246
Cost of revenues 24,822,137 27,663,982 31,368,939 29,341,525 27,280,433 32,550,126 29,723,927 26,969,978
Gross profit $ 11,393,498 $ 4,666,548 $ 6,538,872 $ 3,473,662 $ 5,450,107 $ 7,849,938 $ 8,745,204 $ 5,267,268
Refining & Marketing
Revenues $ 3,745,290 $ 3,076,454 $ 3,277,402 $ 2,858,621 $ 5,553,741 $ 7,313,630 $ 4,392,870 $ 5,675,241
Cost of revenues 2,883,187 2,511,314 2,705,031
2,551,537 5,972,018 7,044,218 4,034,509 5,239,532
Gross profit (loss)
307,084$ (418,277 ) $ 269,412 $ 358,361 $ 435,709 Recovery Revenues$ 2,627,377 $ 2,392,274 $ 2,472,079 $ 3,646,904 $ 3,517,467 $ 2,919,254 $ 4,055,769 $ 3,455,708 Cost of revenues 3,339,703 2,197,019 2,441,451
2,951,287 3,626,812 2,999,023 3,037,821 2,835,641
Gross profit (loss)
695,617
The below graph charts our total quarterly revenue over time from
[[Image Removed: chart-849cd8c03265553484d.jpg]]
Liquidity and Capital Resources
The success of our current business operations has become more dependent on
repairs, and maintenance to our facilities and our ability to make routine
capital expenditures. We also must maintain relationships with feedstock
suppliers and end product customers, and operate with efficient management of
overhead costs. Through these relationships, we have historically been able to
achieve volume discounts in the procurement of our feedstock, thereby increasing
the margins of our segments' operations. The resulting operating cash flow is
crucial to the viability and growth of our existing business lines.
We had total assets of $120,759,919 as of December 31, 2019 , compared to
$84,160,408 at December 31, 2018 . The increase was mainly due to the
implementation of the new lease accounting requirements during the year ended
December 31, 2019 , which mandated the recognition of operating lease right of
use assets totaling an aggregate of $35,586,885 . The recognition of these right
of use assets on the balance sheet existed in prior periods as well, but were
not, due to the then accounting requirements, treated as assets on our balance
sheet. Without taking into account the operating lease right to use assets, our
total assets would have been $85,173,034 at December 31, 2019 .
70
--------------------------------------------------------------------------------
We had total liabilities of $69,511,546 as of December 31, 2019 , compared to
total liabilities of $33,171,401 as of December 31, 2018 . The increase in
liabilities was mainly in connection with the implementation of the new lease
accounting requirements, which created a new line item on the balance sheet,
operating lease liability, which totaled $35,586,885 as of December 31, 2019 .
We had working capital of $2,609,609 as of December 31, 2019 , compared to
working capital of $6,547,301 as of December 31, 2018 . The decrease in working
capital is mainly due to the addition in the current period of the current
portion of the operating lease liability in connection with the implementation
of the new lease accounting requirements.
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 future
capital expenditures related to new refining facilities.
The Company financed insurance premiums through various financial institutions
bearing interest rates from 4.00% to 4.90%. All such premium finance agreements
have maturities of less than one year and have a balance of $1,165,172 at
December 31, 2019 .
Credit and Guaranty Agreement and Revolving Credit Facility with Encina Business
Credit, LLC and Credit Agreement Amendments
Our outstanding EBC Credit Agreement and the Revolving Credit Agreement are
defined and described in greater detail under "Part II" - "Item 8. Financial
Statements and Supplementary Data" - " Note 9. Line of Credit and Long-Term
Debt " - "Credit and Guaranty Agreement and Revolving Credit Facility with
Encina Business Credit, LLC " and "Credit Agreement Amendments".
The principal balances of the EBC Credit Agreement and the Revolving Credit
Agreement as of December 31, 2019 are $13,333,000 and $3,276,230 , respectively.
Need for additional funding
Our re-refining business will require significant capital to design and
construct any new facilities. The facility infrastructure would be an additional
capitalized expenditure to these process costs and would depend on the location
and site specifics of the facility.
Additionally, as part of our ongoing efforts to maintain a capital structure
that is closely aligned with what we believe to be the potential of our business
and goals for future growth, which is subject to cyclical changes in commodity
prices, we will be exploring additional sources of external liquidity. The
receptiveness of the capital markets to an offering of debt or equities cannot
be assured and may be negatively impacted by, among other things, debt
maturities, current market conditions, and potential stockholder dilution. The
sale of additional securities, if undertaken by us and if accomplished, may
result in dilution to our shareholders. However, such future financing may not
be available in amounts or on terms acceptable to us, or at all.
In addition to the above, we may also seek to acquire additional businesses or
assets. In addition, the Company could consider selling assets if a more
strategic acquisition presents itself. Finally, in the event we deem such
transaction in our best interest, we may enter into a business combination or
similar transaction in the future.
We will also need additional capital in the future to redeem our Series B
Preferred Stock and Series B1 Preferred Stock, provided that the required
redemption date of such preferred stock (June 24, 2020 ), provided that, as
discussed above under "Part I" - "Item 1A. Risk Factors" - "We do not anticipate
redeeming our Series B and B1 Preferred Stock on June 24, 2020 , notwithstanding
the fact that our Series B and B1 Preferred Stock is required to be redeemed on
June 24, 2020 , subject to the terms of the Certificate of Designations of such
Preferred Stock and applicable law, and the dividend rate of such Preferred
Stock increases to 10% per annum in the event the Company is unable to complete
such redemptions.", we do not anticipate being contractually, or legally, able
to redeem such stock on such date, and further do not anticipate having
sufficient cash on hand to complete such redemption on such date, or in the near
term. In the event such preferred stock is not redeemed on June 24, 2020 , the
preferred stock will accrue a 10% per annum dividend (payable in-kind at the
option of the Company), until such preferred stock is redeemed or converted into
common stock.
71-------------------------------------------------------------------------------- There is currently only a limited market for our common stock, and as such, we anticipate that such market will be illiquid, sporadic and 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; and (4) the number of shares in our public float. Furthermore, because our common stock is traded on the NASDAQ Capital Market, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, at present, we have a limited number of shares in our public float, and as a result, there could be extreme fluctuations in the price of our common stock. We believe that our stock prices (bid, ask and closing prices) may not relate to the actual value of our company, and may not reflect the actual value of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in our common stock, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in our public reports, industry information, and those business valuation methods commonly used to value private companies. Cash flows for the fiscal year endedDecember 31, 2019 compared to the fiscal year endedDecember 31, 2018 were as follows: Twelve Months Ended
2019 2018
Beginning cash, cash equivalents, and restricted cash$ 2,849,831 $
1,105,787
Net cash provided by (used in): Operating activities 2,473,167 5,376,287 Investing activities (3,626,440 ) (2,768,943 ) Financing activities 2,503,267 (863,300 ) Net increase in cash, cash equivalents, and restricted cash 1,349,994
1,744,044
Ending cash, cash equivalents, and restricted cash
2,849,831
Operating activities provided cash of$2,473,167 for the year endedDecember 31, 2019 , as compared to providing cash of$5,376,287 in 2018. Our primary sources of liquidity are cash flows from our operations and the availability to borrow funds under our credit and loan facilities, as well as private sales of securities. The primary reason for the decrease in cash provided by operating activities for the year endedDecember 31, 2019 , compared to the same period in 2018, was the increase in net loss, increase in accounts receivable and decrease in accounts payable, the loss on commodity derivative contracts, decrease in inventory and increase in accrued expenses. Investing activities used cash of$3,626,440 for the year endedDecember 31, 2019 as compared to using cash of$2,768,943 in 2018, due mainly to the purchase of fixed assets. Financing activities provided cash of$2,503,267 during the year endedDecember 31, 2019 , as compared to using cash of$863,300 in 2018. The financing activities were comprised of note proceeds of approximately$2.8 million and contributions from the noncontrolling interest of Tensile of$3.2 million and proceeds from issuance of common stock and warrants to Tensile of$2.2 million , offset by approximately$4.6 million used to pay down our long-term debt, and$0.6 million of payments on our line of credit. Financing activities for 2018 were comprised of note proceeds of approximately$4.0 million , offset by approximately$4.1 million used to pay down our long-term debt, and$0.7 million of payments on our line of credit. 72 -------------------------------------------------------------------------------- Contractual Obligations Future maturities of long term debt as ofDecember 31, 2019 andDecember 31, 2018 were as follows: Maturity
Creditor Loan Type Origination Date Date Loan Amount
February
Credit, LLC Term Loan February 1, 2017 1, 2021 $ 20,000,000 $ 13,333,000 $ 15,350,000
Encina
Business
Credit SPV, February
LLC Revolving Note February 1, 2017 1, 2021 $ 10,000,000 3,276,230 3,844,636
Tetra Capital
Lease Finance Lease May, 2018 May, 2022 $ 419,690 264,014 349,822
Wells Fargo
Equipment March,
Lease-VRM LA Finance Lease March, 2018 2021
12,341 22,390
Wells Fargo
Equipment April-May,
Lease-
551,260 -
Insurance
Various premiums
institutions financed Various < 1 year $ 2,902,428 1,165,172 999,152
Total 18,602,017 20,566,000
Deferred
finance costs (47,826 ) (621,733 )
Total, net of
deferred
finance costs Future contractual maturities on notes payable are summarized as follows:
Creditor 2020 2021 2022 2023 2024 Thereafter
Encina Business
Credit, LLC $ 900,000 $ 12,433,000 $ - $ - $ - $ -
Encina Business Credit
SPV, LLC 3,276,230 - - - - -
Tetra Capital Lease 91,779 98,167 74,068 - - -
Wells Fargo Equipment
Lease-VRM LA 10,537 1,804 - - - -
Wells Fargo Equipment
Lease-Ohio 114,848 120,895 127,264 138,476 49,777 -
Various institutions 1,165,172 - - - - -
Totals 5,558,566 12,653,866 201,332 138,476 49,777 -
Deferred finance costs (47,826 ) - - - - -
Totals, net of
deferred finance costs $ 5,510,740 $ 12,653,866 $ 201,332 $ 138,476 $ 49,777 $ -
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with U.S. generally accepted
accounting principles (GAAP). The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. Management regularly
evaluates its estimates and judgments, including those related to revenue
recognition, goodwill, intangible assets, long-lived assets valuation, and legal
matters. Actual results may differ from these estimates. (See Note 2 to the
financial statements included herein).
73
--------------------------------------------------------------------------------
Revenue Recognition.
We account for a contract when it has approval and commitment from both parties,
the rights of the parties are identified, payment terms are identified, the
contract has commercial substance and collectability of consideration is
probable. Revenue is recognized when our performance obligations under the terms
of a contract with our customers are satisfied. Recognition occurs when the
Company transfers control by completing the specified services at the point in
time the customer benefits from the services performed or once our products are
delivered. Revenue is measured as the amount of consideration we expect to
receive in exchange for completing our performance obligations. Sales tax and
other taxes we collect with revenue-producing activities are excluded from
revenue. In the case of contracts with multiple performance obligations, the
Company allocates the transaction price to each performance obligation based on
the relative stand-alone selling prices of the various goods and/or services
encompassed by the contract. We do not have any material significant payment
terms, as payment is generally due within 30 days after the performance
obligation has been satisfactorily completed. The Company has elected the
practical expedient to recognize the incremental costs of obtaining a contract
as an expense when incurred if the amortization period of the asset that we
otherwise would have recognized is one year or less. In applying the guidance in
Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)
Topic 606, there were no judgments or estimates made that the Company deems
significant.
The nature of the Company's contracts give rise to certain types of variable
consideration. The Company estimates the amount of variable consideration to
include in the estimated transaction price based on historical experience,
anticipated performance and its best judgment at the time and to the extent it
is probable that a significant reversal of cumulative revenue recognized will
not occur when the uncertainty associated with the variable consideration is
resolved.
From time to time, our fuel oil customers in our Black Oil segment may request
that we store product which they purchase from us in our facilities. We
recognize revenues for these "bill and hold" sales once the following criteria
have been met: (1) there is a substantive reason for the arrangement, (2) the
product is segregated and identified as the customer's asset, (3) the product is
ready for delivery to the customer, and (4) we cannot use the product or direct
it to another customer.
Fair value of financial instruments
Under the Financial Accounting Standards Board Accounting Standards Codification
("FASB ASC"), we are permitted to elect to measure financial instruments and
certain other items at fair value, with the change in fair value recorded in
earnings. We elected not to measure any eligible items using the fair value
option. Consistent with the Fair Value Measurement Topic of the FASB ASC, we
implemented guidelines relating to the disclosure of our methodology for
periodic measurement of our assets and liabilities recorded at fair market
value.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. A three-tier fair value hierarchy
prioritizes the inputs used in measuring fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). These tiers include:
• Level 1, defined as observable inputs such as quoted prices for identical
instruments in active markets;
• Level 2, defined as inputs other than quoted prices in active markets that
are either directly or indirectly observable such as quoted prices for
similar instruments in active markets or quoted prices for identical or
similar instruments in markets that are not active; and
• Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own assumptions, such
as valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable.
Our Level 1 assets primarily include our cash and cash equivalents. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the immediate or short-term maturities of these financial instruments. Our Level 2 liabilities include our marked to market changes in the estimated value of our open derivative contracts held at the balance sheet date.
Our Level 3 liabilities include our marked to market changes in the estimated value of our derivative warrants issued in connection with our Series B Preferred Stock and Series B1 Preferred Stock.
74
--------------------------------------------------------------------------------
The Company estimates the fair values of the crude oil swaps and collars based
on published forward commodity price curves for the underlying commodity as of
the date of the estimate for which published forward pricing is readily
available. The determination of the fair values above incorporates various
factors including the impact of the Company's non-performance risk and the
credit standing of the counterparty involved in the Company's derivative
contracts. In addition, the Company routinely monitors the creditworthiness of
its counterparty.
Nonfinancial assets and liabilities measured at fair value on a nonrecurring
basis include certain nonfinancial assets and liabilities as may be acquired in
a business combination and thereby measured at fair value.
Impairment of long-lived assets
The Company evaluates the carrying value and recoverability of its long-lived
assets when circumstances warrant such evaluation by applying the provisions of
the FASB ASC regarding long-lived assets. It requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable through the
estimated undiscounted cash flows expected to result from the use and eventual
disposition of the assets. Whenever any such impairment exists, an impairment
loss will be recognized for the amount by which the carrying value exceeds the
fair value. The Company determined that no long-lived asset impairment existed
at December 31, 2019 .
Derivative transactions.
All derivative instruments are recorded on the accompanying balance sheets at
fair value. These derivative transactions are not designated as cash flow hedges
under FASB ASC 815, Derivatives and Hedges. Accordingly, these derivative
contracts are marked-to-market and any changes in the estimated value of
derivative contracts held at the balance sheet date are recognized in the
accompanying statements of operations as net gain or loss on derivative
contracts. The derivative assets or liabilities are classified as either current
or noncurrent assets or liabilities based on their anticipated settlement date.
The Company nets derivative assets and liabilities for counterparties where it
has a legal right of offset.
The Company, in accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and
Hedging and ASC 480-10-25 Liabilities-Distinguishing from Equity, convertible
preferred shares are accounted for net, outside of shareholders' equity and
warrants are accounted for as liabilities at their fair value during periods
where they can be net cash settled in case of a change in control transaction.
The warrants are accounted for as a liability at their fair value at each
reporting period. The value of the derivative warrant liability will be
re-measured at each reporting period with changes in fair value recorded as
earnings. To derive an estimate of the fair value of these warrants, a Dynamic
Black Scholes model is utilized that computes the impact of a possible change in
control transaction upon the exercise of the warrant shares. This process relies
upon inputs such as shares outstanding, estimated stock prices, strike price and
volatility assumptions to dynamically adjust the payoff of the warrants in the
presence of the dilution effect.
Preferred Stock Classification.
A mandatorily redeemable financial instrument shall be classified as a liability
unless the redemption is required to occur only upon the liquidation or
termination of the reporting entity. A financial instrument issued in the form
of shares is mandatorily redeemable if it embodies an unconditional obligation
requiring the issuer to redeem the instrument by transferring its assets at a
specified or determinable date (or dates) or upon an event certain to occur. A
financial instrument that embodies a conditional obligation to redeem the
instrument by transferring assets upon an event not certain to occur becomes
mandatorily redeemable-and, therefore, becomes a liability-if that event occurs,
the condition is resolved, or the event becomes certain to occur. The Series B
Preferred Stock and Series B1 Preferred Stock require the Company to redeem such
preferred stock on the fifth anniversary of the issuance of the Series B
Preferred Stock and Series B1 Preferred Stock. SEC reporting requirements
provide that any possible redemption outside of the control of the Company
requires the preferred stock to be classified outside of permanent equity.
Redeemable Noncontrolling Interest
As more fully described in "Part II" - "Item 8. Financial Statements and
Supplementary Data" - " Note 6. Myrtle Grove Share Purchase and Subscription
Agreement ", the Company is party to a put/call option agreement with the
holder of MG SPV's non-controlling interest. The put option permits the MG SPV's
non-controlling interest holder, at any time on or after the earlier of (a) July
26, 2024 and (ii) the occurrence of certain triggering events (a "MG
Redemption") to require MG SPV to redeem the non-controlling interest from the
holder of such interest. Per the agreement, the cash purchase price for such
redeemed Class B Units is the greater of (y) the fair market value of such units
(without discount for illiquidity, minority status or otherwise) as determined
by a qualified third party agreed to in writing by a majority of the holders
seeking an MG Redemption and Vertex Operating
75
--------------------------------------------------------------------------------
(provided that Vertex Operating still owns Class A Units on such date) and
(z) the original per-unit price for such Class B Units plus fifty percent
(50%) of the aggregate capital invested by the Class B Unit holders through such
MG Redemption date. The agreement also permits the Company to acquire the
non-controlling interest from the holder thereof upon certain events. Applicable
accounting guidance requires an equity instrument that is redeemable for cash or
other assets to be classified outside of permanent equity if it is redeemable
(a) at a fixed or determinable price on a fixed or determinable date, (b) at the
option of the holder, or (c) upon the occurrence of an event that is not solely
within the control of the issuer.Distributions of available cash of MG SPV
pursuant to the MG Company Agreement (including pursuant to liquidations of MG
SPV), subject to certain exemptions and exemptions set forth therein, are to be
made (a) first, to the holders of the Class B Units , in an amount equal to the
greater of (A) the aggregate unpaid "Class B Yield " (equal to an annual return
of 22.5% per annum) and (B) an amount equal to fifty percent (50%) of the
aggregate capital invested by the Class B Unit holders (initially
Tensile-MG)(such aggregate capital invested by the Class B Unit holders, the "MG
Invested Capital ", which totals $3 million as of the Closing Date), less prior
distributions (the greater amount of (A) and (B), the "Class B Priority
Distributions"); (b) second, the Class B Unitholders , together as a separate and
distinct class, are entitled to receive an amount equal to the aggregate MG
Invested Capital ; (c) third, the Class A Unitholders (other than Class A
Unitholders which received Class A Units upon conversion of Class B Units ),
together as a separate and distinct class, are entitled to receive all or a
portion of any distribution equal to the sum of all distributions made under
sections (a) and (b) above; and (d) fourth, to the holders of Units who are
eligible to receive such distributions in proportion to the number of Units held
by such holders. Based on this guidance, the Company has classified the MG SPV
non-controlling interest between the liabilities and equity sections of the
accompanying December 31, 2019 and December 31, 2018 consolidated balance
sheets. If an equity instrument subject to the guidance is currently redeemable,
the instrument is adjusted to its maximum redemption amount at the balance sheet
date. If the equity instrument subject to the guidance is not currently
redeemable but it is probable that the equity instrument will become redeemable
(for example, when the redemption depends solely on the passage of time), the
guidance permits either of the following measurement methods: (a) accrete
changes in the redemption value over the period from the date of issuance (or
from the date that it becomes probable that the instrument will become
redeemable, if later) to the earliest redemption date of the instrument using
an appropriate methodology, or (b) recognize changes in the redemption value
immediately as they occur and adjust the carrying amount of the instrument to
equal the redemption value at the end of each reporting period. The amount
presented in temporary equity should be no less than the initial amount reported
in temporary equity for the instrument. Because the MG SPV equity instrument
will become redeemable solely based on the passage of time, the Company
determined that it is probable that the MG SPV equity instrument will become
redeemable. The Company has elected to apply the second of the two measurement
options described above. An adjustment to the carrying amount of a
non-controlling interest from the application of the above guidance does not
impact net income in the consolidated financial statements. Rather, such
adjustments are treated as equity transactions.
Leases
InFebruary 2016 , the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. We adopted ASU 2016-02, Leases (Topic 842) effectiveJanuary 1, 2019 and will not recast comparative periods in transition to the new standard. In addition, we elected certain practical expedients which permit us to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing leases, to not reassess initial direct costs for any existing leases, and to not separate lease and nonlease components for all classes of underlying assets. We also made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet for all classes of underlying assets. Adoption of the new standard resulted in an increase in the Company's assets and liabilities of approximately$37.8 million . The ASU did not have an impact on our consolidated results of operations or cash flows. Additional information and disclosures required by this new standard are contained in "Part II" - "Item 8. Financial Statements and Supplementary Data" - " Note 18. Leases ".Internal Use Software and Cloud Computing Costs We adopted the guidance in ASU 2018-15, Intangibles -Goodwill and Other -Internal-Use Software (Subtopic 350-40) -Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, onJanuary 1, 2019 . This ASU requires entities in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40,Internal-Use Software , to determine which costs to implement the service contract would be capitalized as an asset related to the service contract and which costs would be expensed. The requirements of ASU 2018-15 have been applied on a prospective basis to implementation costs incurred on or afterJanuary 1, 2019 . As a result of the adoption of ASU 2018-15, we capitalized$0.7 million of implementation costs for the year endedDecember 31, 2019 . We have not recognized any amortization related to these implementation costs for the year endedDecember 31, 2019 . 76
-------------------------------------------------------------------------------- Market Risk Our revenues and cost of revenues are affected by fluctuations in the value of energy related products. We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly, and by selling our products into markets where we believe we can achieve the greatest value. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk We are exposed to interest rate risks primarily through borrowings under various bank facilities. Interest on these facilities is based upon variable interest rates using LIBOR or Prime as the base rate. AtDecember 31, 2019 , the Company had about$13.3 million of variable-rate term debt outstanding. At this borrowing level, a hypothetical relative increase of 10% in interest rates would have an unfavorable but insignificant impact on the Company's pre-tax earnings and cash flows. The primary interest rate exposure on variable-rate debt is based on the LIBOR rate (1.69% atDecember 31, 2019 ) plus 6.50% per year. Commodity Price Risk We are exposed to market risks related to the volatility of crude oil and refined oil products. Our financial results can be significantly affected by changes in these prices which are driven by global economic and market conditions. We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly, and by selling our products into markets where we believe we can achieve the greatest value. 77
--------------------------------------------------------------------------------
© Edgar Online, source
