VERTEX ENERGY, INC. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by the following words: "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "ongoing," "plan," "potential," "predict," "project," "should," or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Report. These factors include:
• risks associated with our outstanding credit facilities, including amounts
owed, restrictive covenants, security interests thereon and our ability to
repay such facilities and amounts due thereon when due;
• risks associated with our outstanding preferred stock, including redemption
obligations in connection therewith, restrictive covenants and our ability to
redeem such securities when required pursuant to the terms of such securities
and applicable law;
• the level of competition in our industry and our ability to compete;
• our ability to respond to changes in our industry;
• the loss of key personnel or failure to attract, integrate and retain
additional personnel;
• our ability to protect our intellectual property and not infringe on others'
intellectual property;
• our ability to scale our business;
• our ability to maintain supplier relationships and obtain adequate supplies of
feedstocks;
• our ability to obtain and retain customers;
• our ability to produce our products at competitive rates;
• our ability to execute our business strategy in a very competitive
environment;
• trends in, and the market for, the price of oil and gas and alternative energy
sources;
• our ability to maintain our relationship with KMTEX;
• the impact of competitive services and products;
• our ability to integrate acquisitions;
• our ability to complete future acquisitions;
• our ability to maintain insurance;
• potential future litigation, judgments and settlements;
• rules and regulations making our operations more costly or restrictive,
including IMO 2020 (defined below);
• changes in environmental and other laws and regulations and risks associated
with such laws and regulations;
• economic downturns both in
• risk of increased regulation of our operations and products;
1
--------------------------------------------------------------------------------• negative publicity and public opposition to our operations;
• disruptions in the infrastructure that we and our partners rely on;
• an inability to identify attractive acquisition opportunities and successfully
negotiate acquisition terms;
• our ability to effectively integrate acquired assets, companies, employees or
businesses;
• liabilities associated with acquired companies, assets or businesses;
• interruptions at our facilities;
• unexpected changes in our anticipated capital expenditures resulting from
unforeseen required maintenance, repairs, or upgrades;
• our ability to acquire and construct new facilities;
• certain events of default which have occurred under our debt facilities and
previously been waived;
• prohibitions on borrowing and other covenants of our debt facilities;
• our ability to effectively manage our growth;
• decreases in global demand for, and the price of, oil, due to COVID-19, state,
federal and foreign responses thereto;
• risk associated with COVID-19 and the global efforts to stop the spread of
COVID-19 in general;
• the lack of capital available on acceptable terms to finance our continued
growth; and
• other risk factors included under "Risk Factors" in our latest Annual Report
on Form 10-K and set forth below under "Risk Factors".
You should read the matters described in, and incorporated by reference in, " Risk Factors " and the other cautionary statements made in this Report, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future. 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, 2019 , filed with theSecurities and Exchange Commission onMarch 4, 2020 (the "Annual Report").
Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited consolidated financial statements included above under " Part I - Financial Information" - "Item 1. Financial Statements ".
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.
Please see the " Glossary of Selected Terms " incorporated by reference hereto
as Exhibit 99.1, for a list of abbreviations and definitions used throughout
this Report.
2-------------------------------------------------------------------------------- Unless the context requires otherwise, references to the "Company," "we," "us," "our," "Vertex", "Vertex Energy " and "Vertex Energy, Inc. " refer specifically toVertex Energy, Inc. and its consolidated subsidiaries.
In addition, unless the context otherwise requires and for the purposes of this report only:
"Base Oil" means the lubrication grade oils initially produced from refining crude oil (mineral base oil) or through chemical synthesis (synthetic base oil). In general, only 1% to 2% of a barrel of crude oil is suitable for refining into base oil. The majority of the barrel is used to produce gasoline and other hydrocarbons;
"Cutterstock" means fuel oil used as a blending agent added to other fuels. For example, to lower viscosity;
"Crack" means breaking apart crude oil into its component products, including gases like propane, heating fuel, gasoline, light distillates like jet fuel, intermediate distillates like diesel fuel and heavy distillates like grease;
"Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
"Feedstock" means a product or a combination of products derived from crude oil and destined for further processing in the refining or re-refining industries. It is transformed into one or more components and/or finished products;
"Gasoline Blendstock" means naphthas and various distillate products used for blending or compounding into finished motor gasoline. These components can include reformulated gasoline blendstock for oxygenate blending (RBOB) but exclude oxygenates (alcohols and ethers), butane, and pentanes (an organic compound with properties similar to a butane);
"Hydrotreating" means the process of reacting oil fractions with hydrogen in the presence of a catalyst to produce high-value clean products;
"MDO" means marine diesel oil, which is a type of fuel oil and is a blend of gasoil and heavy fuel oil, with less gasoil than intermediate fuel oil used in the maritime field;
"Naphthas" means any of various volatile, highly flammable liquid hydrocarbon mixtures used chiefly as solvents and diluents and as raw materials for conversion to gasoline;
"Pygas" means pyrolysis gasoline, an aromatics-rich gasoline stream produced in sizeable quantities by an ethylene plant. These plants are designed to crack a number of feedstocks, including ethane, propane, naphtha, and gasoil. Pygas can serve as a high-octane blendstock for motor gasoline or as a feedstock for an aromatics extraction unit;
"SEC" or the "Commission" refers to the
"Securities Act" refers to the Securities Act of 1933, as amended; and
"VGO" refers to Vacuum Gas Oil (also known as cat feed) - a feedstock for a fluid catalytic cracker typically found in a crude oil refinery and used to make gasoline No. 2 oil and other byproducts.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with theSecurities and Exchange Commission ("SEC"). OurSEC filings (reports, proxy and information statements, and other information) are available to the public over the Internet at theSEC's website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to theSEC , on the "Investor Relations," "SEC Filings" page of our website at www.vertexenergy.com. Information on our website is not part of this Report, and we do not desire to incorporate by reference such information herein. Copies of documents filed by us with theSEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report. 3
-------------------------------------------------------------------------------- Description of Business Activities: We are an environmental services company that recycles industrial waste streams and off-specification commercial chemical products. Our primary focus is recycling used motor oil and other petroleum by-products. We are engaged in operations across the entire petroleum recycling value chain including collection, aggregation, transportation, storage, re-refinement, and sales of aggregated feedstock and re-refined products to end users. We operate in three divisions: Black Oil, Refining and Marketing, and 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 endingMarch 31, 2020 , we aggregated approximately 93.8 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 78.8 million gallons of used motor oil with our proprietary vacuum gas oil ("VGO") and Base Oil processes. We sell products and services primarily in theU.S. domestic oil and gas commodity markets. Throughout the first quarter of 2020, the industry experienced multiple factors which lowered both the demand for, and prices of, oil and gas. First, the COVID-19 pandemic lowered global demand for hydrocarbons, as social distancing and travel restrictions were implemented across the world. Second, the lifting ofOrganization of the Petroleum Exporting Countries (OPEC)+ supply curtailments, and the associated increase in production of oil, drove the global supply of hydrocarbons higher through the first quarter of 2020. As a result of both dynamics, prices for hydrocarbons declined 67% from peak prices within the quarter. In addition, while global gross domestic product (GDP) growth was impacted by COVID-19 during the first quarter of 2020, we expect GDP to decline globally in the second quarter of 2020 and for the total year 2020 as a result of the COVID-19 pandemic. As a result, we expect oil and gas related markets will continue to experience significant volatility in 2020. Our goal through this downturn is to remain disciplined in allocating capital and to focus on liquidity and cash preservation. We are taking the necessary actions to right-size the business for expected activity levels. Our Black Oil division collects and purchases used motor oil directly from third-party generators, aggregates used motor oil from an established network of local and regional collectors, and sells used motor oil to our customers for use as a feedstock or replacement fuel for industrial burners. We operate a refining facility that uses our proprietary Thermal Chemical Extraction Process ("TCEP") and we also utilize third-party processing facilities. TCEP's original purpose was to re-fine used oil into marine cutterstock; however, in the third quarter of fiscal 2015, that use ceased to be economically accretive, and instead, we operated TCEP for the purposes of pre-treating our used motor oil feedstock prior to shipping to our facility inMarrero, Louisiana from the third quarter of fiscal 2015 to the third quarter of 2019. During the fourth quarter of 2019, the original purpose of TCEP once again became economically viable and at that time we switched to using TCEP to re-fine used oil into marine cutterstock; provided that with the recent decline in oil prices and challenges in obtaining feedstock, we switched back to using TCEP for the purposes of pre-treating our used motor oil feedstock prior to shipping to our facility inMarrero, Louisiana , beginning in the first quarter of 2020. We also acquired ourMarrero, Louisiana facility, which facility re-refines used motor oil and also produces VGO and theMyrtle Grove re-refining complex inBelle Chasse, Louisiana (which is now owned by a special purpose entity which we own an approximate 85% interest of) inMay 2014 . Our Refining and Marketing division aggregates and manages the re-refinement of used motor oil and other petroleum by-products and sells the re-refined products to end customers. Our Recovery division includes a generator solutions company for the proper recovery and management of hydrocarbon streams as well as metals which includes transportation and marine salvage services throughout theGulf Coast . Black Oil Division Our Black Oil division is engaged in operations across the entire used motor oil recycling value chain including collection, aggregation, transportation, storage, refinement, and sales of aggregated feedstock and re-refined products to end users. We collect and purchase used oil directly from generators such as oil change service stations, automotive repair shops, manufacturing facilities, petroleum refineries, and petrochemical manufacturing operations. We own a fleet of 41 collection vehicles, which routinely visit generators to collect and purchase used motor oil. We also aggregate used oil from a diverse network of approximately 50 suppliers who operate similar collection businesses to ours. We manage the logistics of transport, storage and delivery of used oil to our customers. We own a fleet of 30 transportation trucks and more than 80 aboveground storage tanks with over 8.6 million gallons of storage capacity. These assets are used by 4 -------------------------------------------------------------------------------- both the Black Oil division and the Refining and Marketing division. In addition, we also utilize third parties for the transportation and storage of used oil feedstocks. Typically, we sell used oil to our customers in bulk to ensure efficient delivery by truck, rail, or barge. In many cases, we have contractual purchase and sale agreements with our suppliers and customers, respectively. We believe these contracts are beneficial to all parties involved because it ensures that a minimum volume is purchased from collectors and generators, a minimum volume is sold to our customers, and we are able to minimize our inventory risk by a spread between the costs to acquire used oil and the revenues received from the sale and delivery of used oil. Also, as discussed above under "Description of Business", 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. Due to the recent decline in oil prices and challenges in obtaining feedstock, beginning the first quarter of 2020, we have used TCEP solely to pre-treat our used motor oil feedstock prior to shipping to our facility inMarrero, Louisiana . In addition, at ourMarrero, Louisiana facility we produce a Vacuum Gas Oil (VGO) product that is sold to refineries as well as to the marine fuels market. At ourColumbus, Ohio facility (Heartland Petroleum) we produce a base oil product that is sold to lubricant packagers and distributors. Refining and Marketing Division Our Refining and Marketing division is engaged in the aggregation of feedstock, re-refining it into higher value-end products, and selling these products to our customers, as well as related transportation and storage activities. We aggregate a diverse mix of feedstocks including used motor oil, petroleum distillates, transmix and other off-specification chemical products. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and are also transferred from our Black Oil division. We have a toll-based processing agreement in place with KMTEX to re-refine feedstock streams, under our direction, into various end products that we specify. KMTEX uses industry standard processing technologies to re-refine our feedstocks into pygas, gasoline blendstock and marine fuel cutterstock. We sell all of our re-refined products directly to end-customers or to processing facilities for further refinement. Recovery Division The Company's Recovery Segment includes a generator solutions company for the proper recovery and management of hydrocarbon streams, the sales and marketing of Group III base oils and other petroleum-based products, together with the recovery and processing of metals.
Thermal Chemical Extraction Process
We own the intellectual property for our patented TCEP. TCEP is a technology which utilizes thermal and chemical dynamics to extract impurities from used oil which increases the value of the feedstock. We intend to continue to develop our TCEP technology and design with the goal of producing additional re-refined products, including lubricating base oil. TCEP differs from conventional re-refining technologies, such as vacuum distillation and hydrotreatment, by relying more heavily on chemical processes to remove impurities rather than temperature and pressure. Therefore, the capital requirements to build a TCEP plant are typically much less than a traditional re-refinery because large feed heaters, vacuum distillation columns, and a hydrotreating unit are not required. The end product currently produced by TCEP is used as fuel oil cutterstock. Conventional re-refineries produce lubricating base oils or product grades slightly lower than base oil that can be used as industrial fuels or transportation fuel blendstocks. We currently estimate the cost to construct a new, fully-functional, commercial facility using our TCEP technology, with annual processing capacity of between 25 and 50 million gallons at another location would be approximately$10 -$15 million , which could fluctuate based on throughput capacity. The facility infrastructure would require additional capitalized expenditures which would depend on the location and site specifics of the facility. Our TCEP technology converts feedstock into a low sulfur marine fuel that can be sold into the new 0.5% low sulfur marine fuel specification mandated underInternational Maritime Organization (IMO) rules which went into effect onJanuary 1, 2020 . As described above, due to the recent decline in oil prices and challenges in obtaining feedstock, we switched back to using TCEP for the purposes of pre-treating our used motor oil feedstock prior to shipping to our facility inMarrero, Louisiana beginning in the first quarter of 2020. We have no current plans to construct any other TCEP facilities at this time. 5 -------------------------------------------------------------------------------- Products and Services We generate substantially all of our revenue from the sale of six product categories. All of these products are commodities that are subject to various degrees of product quality and performance specifications. Used Motor Oil Used motor oil is a petroleum-based or synthetic lubricant that contains impurities such as dirt, sand, water, and chemicals. Fuel Oil Fuel oil is a distillate fuel which is typically blended with lower quality fuel oils. The distillation of used oil and other petroleum by-products creates a fuel with low viscosity, as well as low sulfur, ash, and heavy metal content, making it an ideal blending agent. Pygas Pygas, or pyrolysis gasoline, is a product that can be blended with gasoline as an octane booster or that can be distilled and separated into its components, including benzene and other hydrocarbons. Gasoline Blendstock Gasoline blendstock includes Naphthas and various distillate products used for blending or compounding into finished motor gasoline. These components can include reformulated gasoline blendstock for oxygenate blending (RBOB) but exclude oxygenates (alcohols and ethers), butane, and pentanes plus. Base Oil An oil to which other oils or substances are added to produce a lubricant. Typically, the main substance in lubricants and base oils is refined from crude oil. Scrap Metal(s) Consists 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. 6 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Description of Material Financial Line Items: Revenues We generate revenues from three existing operating divisions as follows: BLACK OIL - Revenues from our Black Oil division 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. REFINING AND MARKETING - The Refining and Marketing division generates revenues relating to the sales of finished products. The Refining and Marketing division 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 division 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 division 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 division 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 division incurs cost of revenues relating to the purchase of hydrocarbon products, purchasing and receiving costs, inspection, and transporting of metals and other salvage and materials. Cost of revenues also includes broker's fees, inspection and transportation costs. Our cost of revenues is affected by changes in various commodity indices, including crude oil, natural gas, #6 oil and metals. For example, if the price for crude oil increases, the cost of solvent additives used in the production of blended oil products, and fuel cost for transportation cost from third party providers will generally increase. Similarly, if the price of crude oil falls, these costs may also decline. 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. 7 -------------------------------------------------------------------------------- Depreciation and Amortization Expenses Our depreciation and amortization expenses are primarily related to the property, plant and equipment and intangible assets acquired in connection withVertex 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, Nickco, Ygriega, and SES acquisitions, described in greater detail in the 2019 Annual Report. Recent Events Heads of Agreement OnJanuary 10, 2020 , Vertex Operating entered into a Heads of Agreement (the "Heads of Agreement") withBunker One (USA) Inc. , which is owned byBunker Holding , a Danish holding company ("Bunker One"). Pursuant to the Heads of Agreement, the Company and Bunker One agreed to form a joint decision-making body (the "JDMB") to focus on strategic matters related to the overall cooperation of the parties and to establish rules and procedures for identifying and undertaking joint projects. The Heads of Agreement is described in greater detail in the Current Report on Form 8-K filed by the Company with theSecurities and Exchange Commission onJanuary 13, 2020 .
JSMA
Also onJanuary 10, 2020 , Vertex Operating entered into a Joint Supply and Marketing Agreement (the "JSMA"), with Bunker One. The JSMA is effective as ofMay 1, 2020 , and provides for Bunker One to acquire 100% of the production from the Company'sMarrero, Louisiana re-refining facility (which produces approximately 100,000 barrels per month of a bunker suitable fuel for offshore use and use as a marine vessel's propulsion system ("Bunker Fuel")) at the arithmetic mean of Platts #2 USGC Pipe and Platt's ULSD USGC Waterborne on agreed pricing days less an agreed upon discount, adjusted every three months. The JSMA is described in greater detail in the Current Report on Form 8-K filed by the Company with theSecurities and Exchange Commission onJanuary 13, 2020 .
Heartland Share Purchase, Subscription Agreement and Heartland Limited Liability Company Agreement
Our Heartland Share Purchase and Subscription Agreement and the Heartland Limited Liability Company Agreement are described in greater detail under "Part I" - "Item 1. Financial Statements" - " Note 14. Share Purchase and Subscription Agreements " - "Heartland Share Purchase and Subscription Agreement".
Administrative Services Agreement
Pursuant to an Administrative Services Agreement, entered into on the Heartland
Closing Date, Heartland SPV engaged Vertex Operating and the Company to provide
administrative/management services and day-to-day operational management
services of Heartland SPV in connection with the collection, storage,
transportation, transfer, refining, re-refining, distilling, aggregating,
processing, blending, sale of used motor oil, used lubricants, wholesale
lubricants, recycled fuel oil, or related products and services such as vacuum
gas oil, base oil, and asphalt flux, in consideration for a monthly fee. The
Administrative Services Agreement has a term continuing until the earlier of
(a) the date terminated with the mutual consent of the parties; (b) a
liquidation of Heartland SPV; (c) a Heartland Redemption (defined below);
(d) the determination of Heartland SPV to terminate following a change of
control (as described in the Administrative Services Agreement) of Heartland SPV
or the Company; or (e) written notice from the non-breaching party upon the
occurrence of a breach which is not cured within the cure period set forth in
the Administrative Services Agreement.
The Administrative Services Agreement also provides that in the event that
Heartland SPV is unable to procure used motor-oil ("UMO") through its ordinary
course operations, subject to certain conditions, Vertex Operating and the
Company are required to use their best efforts to sell (or cause an affiliate to
sell) UMO to Heartland SPV, at the lesser of the (i) then-current market price
for UMO sold in the same geography area and (ii) price paid by such entity for
such UMO. Finally, the Administrative Services Agreement provides that in the
event that the Heartland SPV is unable to procure vacuum gas oil
("VGO") feedstock through its ordinary course operations, subject to certain
conditions, Vertex Operating and the Company are required to use their best
efforts to sell (or cause an affiliate to sell) VGO to Heartland SPV, at the
lesser of the (i) then-current market price for VGO sold in the same geographic
area and (ii) price paid for such VGO.
Advisory Agreement
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On the Heartland Closing Date, Heartland SPV entered into an Advisory Agreement
with Tensile, pursuant to which Tensile agreed to provide advisory and
consulting services to Heartland SPV and Heartland SPV agreed to reimburse and
indemnify Tensile and its representatives, in connection therewith.
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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 March 31, $ Change - % Change -
Favorable Favorable
2020 2019 (Unfavorable) (Unfavorable)
Revenues $ 36,203,429 $ 39,320,712 $ (3,117,283 ) (8 )%
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 26,836,854 34,844,349 8,007,495 23 %
Gross profit 9,366,575 4,476,363 4,890,212 109 %
Selling, general and administrative
expenses 6,700,518 5,347,741 (1,352,777 ) (25 )%
Depreciation and amortization 1,634,547 1,737,013 102,466 6 %
Total operating expenses 8,335,065 7,084,754 (1,250,311 ) (18 )%
Income (loss) from operations 1,031,510 (2,608,391 ) 3,639,901 140 %
Other income (expense):
Interest income 80 - 80 100 %
Gain on asset sales - 2,293 (2,293 ) (100 )%
Gain (loss) on change in value of
derivative liability 1,698,747 (1,705,094 ) 3,403,841 200 %
Interest expense (340,086 ) (757,803 ) 417,717 55 %
Total other income (expense) 1,358,741 (2,460,604 ) 3,819,345 155 %
Income (loss) before income tax 2,390,251 (5,068,995 ) 7,459,246 147 %
Income tax benefit (expense) - - - - %
Net income (loss) 2,390,251 (5,068,995 ) 7,459,246 147 %
Net loss attributable to
non-controlling interest and
redeemable non-controlling interest (398,609 ) (105,431 ) (293,178 ) (278 )%
Net income (loss) attributable to
Vertex Energy , Inc. $ 2,788,860 $ (4,963,564 ) $ 7,752,424 156 %
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. Additionally, we use hedging
instruments to manage our exposure to underlying commodity prices. During the
three months ended March 31, 2020 , we saw an offset to our feedstock in the
amount of $4.4 million , which lowered our cost of goods sold.
Total revenues decreased by 8% for the three months ended March 31, 2020 ,
compared to the same period in 2019, due primarily to lower commodity prices and
slightly decreased volumes at the Heartland refinery , which were off-set by
increased volumes at our Marrero refinery for the three months ended March 31,
2020 , compared to the same period in 2019. Total volume increased 20% during the
three months ended March 31, 2020 compared to the same period in 2019. Volumes
were impacted as a result of a turn around at our Heartland facility as well as
a decrease in demand for our Base Oil finished products at the end of the
period. Gross profit increased by 109% for the three months ended March 31, 2020
compared to the three months ended March 31, 2019 . This increase was a result of
increases in volumes at our Marrero facility, higher production and lower
operating costs at our refineries.
10
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Additionally, our per barrel margin increased 74% for the three months ended
March 31, 2020 , relative to the three months ended March 31, 2019 . This increase
was a result of the increases in our product spreads related to increases in
finished product prices, as well as decreased operating costs at our refineries
as well as our Gulf Coast operations, related to our metals business, during the
three months ended March 31, 2020 , compared to the same period during 2019. The
23% decrease in cost of revenues for the three months ended March 31, 2020 ,
compared to the three months ended March 31, 2019 , is mainly a result of the
higher production volumes at our Marrero facility during the period, as well as
lower overhead operating expenses and gain in commodity derivate contracts
during the period.
Each of our segments' income (loss) from operations during the three months
ended
Three Months Ended $ Change -
March 31, Favorable % Change - Favorable
Black Oil Segment 2020 2019 (Unfavorable) (Unfavorable)
Total revenue $ 29,531,370 $ 32,815,187 $ (3,283,817 ) (10 )%
Total cost of revenue (exclusive of
depreciation and amortization shown
separately below) 20,066,241 29,341,525 9,275,284 32 %
Gross profit 9,465,129 3,473,662 5,991,467 172 %
Selling general and administrative
expense 5,411,221 4,421,826 (989,395 ) (22 )%
Depreciation and amortization 1,272,000 1,344,041 72,041 5 %
Income (loss) from operations
221 %
Refining and Marketing Segment
Total revenue $ 2,510,593 $ 2,858,621 $ (348,028 ) (12 )%
Total cost of revenue (exclusive of
depreciation and amortization shown
separately below) 2,596,052 2,551,537 (44,515 ) (2 )%
Gross profit (loss) (85,459 ) 307,084 (392,543 ) (128 )%
Selling general and administrative
expense 592,389 470,191 (122,198 ) (26 )%
Depreciation and amortization 206,166 239,907 33,741 14 %
Loss from operations $ (884,014 ) $ (403,014 ) $ (481,000 ) (119 )%
Recovery Segment
Total revenue $ 4,161,466 $ 3,646,904 $ 514,562 14 %
Total cost of revenue (exclusive of
depreciation and amortization shown
separately below) 4,174,562 2,951,287 (1,223,275 ) (41 )%
Gross profit (loss) (13,096 ) 695,617 (708,713 ) (102 )%
Selling general and administrative
expense 696,907 455,724 (241,183 ) (53 )%
Depreciation and amortization 156,381 153,065 (3,316 ) (2 )%
Income (loss) from operations $ (866,384 ) $ 86,828 $ (953,212 ) (1,098 )%
Our Black Oil division's volume decreased approximately 0.3% during the three
months ended March 31, 2020 compared to the same period in 2019. This decrease
was due to a turn around at the Heartland facility during the period, as well as
lower demands for finished products beginning at the end of the three months
ended March 31, 2020 . Volumes collected through our H&H Oil, L.P. ("H&H
Oil")(based in Houston , Austin and Corpus Christi, Texas ) and Heartland (based
in Ohio and West Virginia ) collection facilities increased 12% during the three
months ended March 31, 2020 , compared to the same period in 2019. 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.
Overall volumes of product sold increased 20% for the three months ended
Overall, commodity prices were down for the three months endedMarch 31, 2020 , compared to the same period in 2019. For example, the average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the three months endedMarch 31, 2020 decreased$24.68 per barrel from a three month average of$62.32 for the three months endedMarch 31, 2019 to$37.63 per barrel for the three months 11 --------------------------------------------------------------------------------
ended
Overall volume for the Refining and Marketing division decreased 9% during the three months endedMarch 31, 2020 , as compared to the same period in 2019. 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. Our fuel oil cutter volumes decreased 29% for the three months endedMarch 31, 2020 , compared to the same period in 2019. Our pygas volumes increased 4% for the three months endedMarch 31, 2020 , as compared to the same period in 2019. Our gasoline blendstock volumes decreased 100% for the three months endedMarch 31, 2020 , as compared to the same period in 2019, due to the fact that we are no longer processing gasoline blendstocks in this 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. Our Recovery division includes the business operations of Vertex Recovery Management as well as our Group III base oil business. Vertex acts asPenthol's exclusive agent to provide marketing, sales, and logistical duties of Group III base oil from theUnited Arab Emirates tothe United States . Revenues for this division increased 14% as a result of an increase in volumes during the three months endedMarch 31, 2020 , compared to the same period in 2019. Volumes of petroleum products acquired in our Recovery business were up 76% during the three months endedMarch 31, 2020 , compared to the same period during 2019, as a result of demand for higher quality lubricants in the marketplace, and as we continue to focus on volume growth in this division. This division periodically participates in project work that is not ongoing thus we expect to see fluctuations in revenue and gross profit from this division from period to period. We had selling, general, and administrative expenses of$6,700,518 for the three months endedMarch 31, 2020 , compared to$5,347,741 of selling, general, and administrative expenses for the three months endedMarch 31, 2019 , an increase of$1,352,777 from the prior period, mainly due to the additional selling, general and administrative expenses incurred during the period as a result of increased personnel costs, legal expense, and insurance expense related to the expansion of trucking operations and facilities through organic growth, as well as increased accounting, legal and consulting expenses related to our Tensile and Bunker One transaction closings. We had income from operations of$1,031,510 for the three months endedMarch 31, 2020 , compared to loss from operations of$2,608,391 for the three months endedMarch 31, 2019 , an increase of$3,639,901 or 140% from the prior year's three-month period. The increase was due to a decrease in cost of revenues resulting from an increase in production at ourMarrero facility as noted previously and decreased operating costs at our refineries and metals operations and gain in commodity derivative contracts during the period, as discussed above. We had interest expense of$340,086 for the three months endedMarch 31, 2020 , compared to interest expense of$757,803 for the three months endedMarch 31, 2019 , a decrease in interest expense of$417,717 or 55% from the prior period, due to paying down the line of credit and a portion of the term loan along with a lower interest rate on the term debt outstanding during the three months endedMarch 31, 2020 . We had a$1,698,747 gain on change in value of derivative liability for the three months endedMarch 31, 2020 , in connection with certain warrants granted inJune 2015 andMay 2016 , as described in greater detail in " Note 9. Preferred Stock and Detachable Warrants " to the unaudited consolidated financial statements included herein under "Part I"-"Item 1 Financial Statements", compared to a loss on change in the value of our derivative liability of$1,705,094 in the prior year's period. This change was mainly due to fluctuation in the market price of our common stock. This resulted in a significant non-cash benefit for the period. We had a net income of$2,390,251 for the three months endedMarch 31, 2020 , compared to net loss of$5,068,995 for the three months endedMarch 31, 2019 , an increase in net income of$7,459,246 or 147% from the prior period, which was a result of the factors described above. The majority of our net income for the three months endedMarch 31, 2020 , was attributable to the improvement in volumes sold throughout our business lines, and specifically around ourMarrero facility and commodity price reductions, along with a non-cash gain in change in value of derivative liability. During the three months endedMarch 31, 2020 and 2019, the processing costs for our Refining and Marketing division located at KMTEX were$454,007 and$511,046 , respectively. 12
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The following table sets forth the high and low spot prices during the three
months ended
2020 Benchmark High Date Low DateU.S. Gulfcoast No. 2 Waterborne (dollars per gallon)$ 1.95 January 3$ 0.74 March 18U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)$ 1.75 January 3$ 0.40 March 23U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)$ 47.34 January 29$ 15.64 March 31 NYMEX Crude oil (dollars per barrel)$ 63.27 January 6$ 20.09 March 30 Reported in Platt's US Marketscan (Gulf Coast )
The following table sets forth the high and low spot prices during the three
months ended
2019 Benchmark High Date Low DateU.S. Gulfcoast No. 2 Waterborne (dollars per gallon)$ 1.95 February 22$ 1.53 January 2U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)$ 1.93 March 26$ 1.31 January 2U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)$ 67.11 February 20$ 49.82 January 2 NYMEX Crude oil (dollars per barrel)$ 60.14 March 29$ 46.54 January 2 Reported in Platt's US Marketscan (Gulf Coast ) We saw an extreme drop in March of 2020, in each of the benchmark commodities we track compared to the same period in 2019. The extreme drop in market prices was a result of COVID-19 which led to worldwide shutdowns and halting of commercial and interpersonal activity, as governments around the world imposed regulations in response to efforts to control the spread of COVID-19, such as shelter-in-place orders, quarantines, executive orders and similar restrictions. As a result, the global economy has been marked by significant slowdown and uncertainty, which has led to a precipitous decline in oil prices in response to demand concerns, further exacerbated by the price war among members of theOrganization of Petroleum Exporting Countries ("OPEC") and other non-OPEC producer nations (collectively withOPEC members, "OPEC+") during the first quarter 2020 and global storage considerations. Moving forward in 2020 we anticipate that our results of operations will continue to be significantly impacted by the price of, and demand for oil, COVID-19 and the global response thereto. Our margins are a function of the difference between what we are able to pay for raw materials and the market prices for the range of products produced. The various petroleum products produced are typically a function of crude oil indices and are quoted on multiple exchanges such as theNew York Mercantile Exchange ("NYMEX"). These prices are determined by a global market and can be influenced by many factors, including but not limited to supply/demand, weather, politics, and global/regional inventory levels. As such, we cannot provide any assurances regarding results of operations for any future periods, as numerous factors outside of our control affect the prices paid for raw materials and the prices (for the most part keyed to the NYMEX) that can be charged for such products. Additionally, for the near term, results of operations will be subject to further uncertainty, as the global markets and exchanges, including the NYMEX, continue to experience volatility. As our competitors bring new technologies to the marketplace, which will likely enable them to obtain higher values for the finished products created through their technologies from purchased black oil feedstock, we anticipate that they will have to pay more for feedstock due to the additional value received from their finished product (i.e., as their margins increase, they are able to increase the prices they are willing to pay for feedstock). If we are not able to continue to refine and improve our technologies and gain efficiencies in our technologies, we could be negatively impacted by the ability of our competitors to bring new processes to market which compete with our processes, as well as their ability to outbid us for feedstock supplies. Additionally, if we are forced to pay more for feedstock, our cash flows will be negatively impacted and our margins will decrease. 13 --------------------------------------------------------------------------------
Liquidity and Capital Resources
The success of our current business operations has become dependent on repairs and maintenance to our facilities and our ability to make routine capital expenditures, as well as our ability to manage our margins which are a function of the difference between what we are able to pay or charge for raw materials and the market prices for the range of products produced. We also must maintain relationships with feedstock suppliers and end-product customers, and operate with efficient management of overhead costs. Through these relationships, we have historically been able to achieve volume discounts in the procurement of our feedstock, thereby increasing the margins of our segments' operations. The resulting operating cash flow is crucial to the viability and growth of our existing business lines. We had total assets of$125,525,647 as ofMarch 31, 2020 , compared to$120,759,919 atDecember 31, 2019 . The increase was mainly due to the generation of additional liquidity from the closing of the Tensile transaction relating to Heartland SPV as discussed above, during the three months endedMarch 31, 2020 . We had total current liabilities of$15,382,926 as ofMarch 31, 2020 , compared to$24,797,299 atDecember 31, 2019 . We had total liabilities of$50,679,063 as ofMarch 31, 2020 , compared to total liabilities of$69,511,546 as ofDecember 31, 2019 . The decrease in current liabilities and total liabilities was mainly in connection with the generation of additional liquidity from the closing of the Heartland SPV transaction during the three months endedMarch 31, 2020 . We had working capital of$18,374,260 as ofMarch 31, 2020 , compared to working capital of$2,609,609 as ofDecember 31, 2019 . The increase in working capital fromDecember 31, 2019 toMarch 31, 2020 is mainly due to the generation of additional liquidity from the closing of the Heartland SPV transaction during the three months endedMarch 31, 2020 . The Company received a total of$21.0 million from the Tensile transaction, of which approximately$9.0 million was used to pay down our debt obligations, approximately$9.0 million is included in cash as ofMarch 31, 2020 , and the remaining balance was used to fund current operations. Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including commodity prices, the cost of recovered oil, and the ability to turn our inventory. Other factors that have affected and are expected to continue to affect earnings and cash flow are transportation, processing, and storage costs. Over the long term, our operating cash flows will also be impacted by our ability to effectively manage our administrative and operating costs. Additionally, we may incur capital expenditures related to new TCEP facilities in the future (provided that none are currently planned). Given the ongoing COVID-19 pandemic, challenging market conditions and recent market events resulting in industry-wide spending cuts, we continue to remain focused on maintaining a strong balance sheet and adequate liquidity. Over the near term, we plan to reduce, defer or cancel certain planned capital expenditures and reduce our overall cost structures commensurate with our expected level of activities. We believe that our cash on hand, internally generated cash flows and availability under the Revolving Credit Facility will be sufficient to fund our operations and service our debt in the near term. A prolonged period of weak, or a significant decrease in, industry activity and overall markets, due to COVID-19 or otherwise, may make it difficult to comply with our covenants and the other restrictions in the agreements governing our debt. Current global and market conditions have increased the potential for that difficulty. 14
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The Company's outstanding debt facilities as of
Balance on
Maturity Balance on December 31,
Creditor Loan Type Origination Date Date Loan Amount March 31, 2020 2019
Encina Business February
$ 6,108,000 $ 13,333,000 Encina Business Revolving February Credit SPV, LLC Note February 1, 2017 1, 2021$ 10,000,000 - 3,276,230Wells Fargo Equipment Finance April-May, Lease-Ohio Lease April-May, 2019 2024$ 621,000 523,098 551,260 Tetra Capital Finance Lease Lease May, 2018 May, 2022$ 419,690 241,645 264,014 Well Fargo Equipment Finance March, Lease-VRM LA Lease March, 2018 2021$ 30,408 9,753 12,341 Insurance Various premiums institutions financed Various < 1 year$ 2,902,428
291,293 1,165,172
Total 7,173,789 18,602,017
Deferred
finance costs,
net - (47,826 )
Total, net of
deferred
finance costs $ 7,173,789 $ 18,554,191 Future contractual maturities of notes payable are summarized as follows:
Creditor Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter
Encina Business
Credit, LLC $ 900,000 $ 5,208,000 $ - $ - $ - $ -
Encina Business
Credit SPV, LLC - - - - - -
Well Fargo Equipment
Lease- Ohio 116,031 122,458 128,908 135,698 20,003 -
Tetra Capital Lease 93,336 99,832 48,477 - - -
Well Fargo Equipment
Lease- VRM LA 9,753 - - - - -
Various institutions 291,293 - - - - -
Totals 1,410,413 5,430,290 177,385 135,698 20,003 -
Deferred finance
costs, net - - - - - -
Totals, net of
deferred finance
costs $ 1,410,413 $ 5,430,290 $ 177,385 $135,698$ 20,003 $ - 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. 15 -------------------------------------------------------------------------------- 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, which has a required redemption date ofJune 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 onJune 24, 2020 , notwithstanding the fact that our Series B and B1 Preferred Stock is required to be redeemed onJune 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 onJune 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. 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 three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 : Three Months EndedMarch 31, 2020 2019
Beginning cash, cash equivalents and restricted cash
$ 2,849,831 Net cash provided by (used in): Operating activities 3,115,008 (1,976,880 ) Investing activities (491,409 ) (764,897 ) Financing activities 9,571,772 1,668,754
Net increase (decrease) in cash, cash equivalents and restricted cash
12,195,371 (1,073,023 )
Ending cash, cash equivalents and restricted cash $ 16,395,196 Net cash provided by operating activities was$3,115,008 for the three months endedMarch 31, 2020 , as compared to net cash used in operating activities of$1,976,880 during the corresponding period in 2019. Our primary sources of liquidity are cash flows from our operations and the availability to borrow funds under our credit and loan facilities. The primary reason for the increase 16 --------------------------------------------------------------------------------
in cash provided by operating activities for the three month period ended
Investing activities used cash of
Financing activities provided cash of$9,571,772 for the three months endedMarch 31, 2020 , as compared to providing cash of$1,668,754 during the corresponding period in 2019. Financing activities for the three months endedMarch 31, 2020 were comprised of contributions from the Tensile transaction of$21.0 million , offset by approximately$8.1 million used to pay down our long-term debt, and$3.3 million of payments on our line of credit. Financing activities for the three months endedMarch 31, 2019 were comprised of note proceeds of approximately$0.2 million , offset by approximately$1.0 million used to pay down our long-term debt, and$2.5 million of proceeds on our line of credit.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management regularly evaluates its estimates and judgments, including those related to revenue recognition, goodwill, intangible assets, long-lived assets valuation, and legal matters. Actual results may differ from these estimates. (See "Part I" - "Item 1. Financial Statements" - " Note 1. Basis of Presentation and Nature of Operations " to the financial statements included herein). 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 atMarch 31, 2020 . Leases InFebruary 2016 , the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. We adopted ASU No. 2016-02, Leases (Topic 842) effectiveJanuary 1, 2019 and 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 I" - "Item 1. Financial Statements" - " Note 13. Leases ". 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 requires the Company to redeem such preferred stock on the fifth anniversary of the issuance of the Series B Preferred Stock and the Series B1 Preferred Stock requires the Company to redeem such preferred stock on the same date as the Series B Preferred Stock, in the event such redemptions are allowed pursuant to the Company's senior credit facilities and applicable law.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 17 -------------------------------------------------------------------------------- As more fully described in " Note 14. Share Purchase and Subscription Agreements ", the Company is party to put/call option agreements with the holder of MG SPV's and Heartland SPV's non-controlling interests. The put options permit MG SPV's and Heartland SPV's non-controlling interest holders, at any time on or after the earlier of (a) the fifth anniversary of the applicable closing date of such issuances and (ii) the occurrence of certain triggering events (an "MG Redemption" and "Heartland Redemption", as applicable) to require MG SPV and Heartland SPV to redeem the non-controlling interest from the holder of such interest. Per the agreements, the cash purchase price for such redeemed ClassB Units (MG SPV) and Class A Units (Heartland SPV) is the greater of (y) the fair market value of such units (without discount for illiquidity, minority status or otherwise) as determined by a qualified third party agreed to in writing by a majority of the holders seeking an MG SPV Redemption and Heartland SPV Redemption and Vertex Operating (provided that Vertex Operating still owns Class A Units (as to MG SPV) or ClassB Units (as to Heartland SPV) on such date, as applicable) and (z) the original per-unit price for such Class B Units/Class A Units plus any unpaid Class A/Class B preference. The preference is defined as the greater of (A) the aggregate unpaid "Class B/Class A Yield" (equal to an annual return of 22.5% per annum) and (B) an amount equal to fifty percent (50%) of the aggregate capital invested by the Class B/Class A Unit holders. The agreements also permit the Company to acquire the non-controlling interest from the holders thereof upon certain events. Applicable accounting guidance requires an equity instrument that is redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. Based on this guidance, the Company has classified the MG SPV and Heartland SPV non-controlling interests between the liabilities and equity sections of the accompanyingMarch 31, 2020 andDecember 31, 2019 consolidated balance sheets (provided that the Heartland SPV interest was not outstanding untilJanuary 2020 ). If an equity instrument subject to the guidance is currently redeemable, the instrument is adjusted to its maximum redemption amount at the balance sheet date. If the equity instrument subject to the guidance is not currently redeemable but it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the guidance permits either of the following measurement methods: (a) accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, or (b) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument. Because the MG SPV and Heartland SPV equity instruments will become redeemable solely based on the passage of time, the Company determined that it is probable that the MG SPV and Heartland SPV equity instruments will become redeemable. The Company has elected to apply the second of the two measurement options described above. An adjustment to the carrying amount of a non-controlling interest from the application of the above guidance does not impact net income in the consolidated financial statements. Rather, such adjustments are treated as equity transactions. Variable Interest Entities The Company accounts for the investments it makes in certain legal entities in which equity investors do not have (1) sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support, (2) as a group, (the holders of the equity investment at risk), do not have either the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impacts the entity's economic performance, or (3) the obligation to absorb the expected losses of the legal entity or the right to receive expected residual returns of the legal entity. These certain legal entities are referred to as "variable interest entities" or "VIEs." The Company would consolidate the results of any such entity in which it determined that it had a controlling financial interest. The Company would have a "controlling financial interest" in such an entity if the Company had both the power to direct the activities that most significantly affect the VIE's economic performance and the obligation to absorb the losses of, or right to receive benefits from, the VIE that could be potentially significant to the VIE. On a quarterly basis, the Company reassesses whether it has a controlling financial interest in any investments it has in these certain legal entities. 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. 18
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