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;
• risks associated with COVID-19, the global efforts to stop the spread of
COVID-19, potential downturns in the
and the efforts to stop the spread of the virus, and 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;
"IMO 2020" effective
"MDO" means marine diesel oil, which is a type of fuel oil and is a blend of gasoil and heavy fuel oil, with less gasoil than intermediate fuel oil used in the maritime field;
"Naphthas" means any of various volatile, highly flammable liquid hydrocarbon mixtures used chiefly as solvents and diluents and as raw materials for conversion to gasoline;
"Pygas" means pyrolysis gasoline, an aromatics-rich gasoline stream produced in sizeable quantities by an ethylene plant. These plants are designed to crack a number of feedstocks, including ethane, propane, naphtha, and gasoil. Pygas can serve as a high-octane blendstock for motor gasoline or as a feedstock for an aromatics extraction unit;
"SEC" or the "Commission" refers to the
"Securities Act" refers to the Securities Act of 1933, as amended; and
"VGO" refers to Vacuum Gas Oil (also known as cat feed) - a feedstock for a fluid catalytic cracker typically found in a crude oil refinery and used to make gasoline No. 2 oil and other byproducts.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with theSecurities and Exchange Commission ("SEC"). OurSEC filings (reports, proxy and information statements, and other information) are available to the public over the Internet at theSEC's website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to theSEC , on the "Investor Relations," "SEC Filings" page of our website at www.vertexenergy.com. Information on our website is not part of this Report, and we do not desire to incorporate by reference such information herein. Copies of documents filed by us with theSEC are also available from us without charge, upon oral or written request to our Secretary,who can be contacted at the address and telephone number set forth on the cover page of this Report. Novel Coronavirus (COVID-19) 3
-------------------------------------------------------------------------------- InDecember 2019 , a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported inWuhan, China . TheWorld Health Organization declared COVID-19 a "Public Health Emergency of International Concern" onJanuary 30, 2020 and a global pandemic onMarch 11, 2020 . In March and April, manyU.S. states and local jurisdictions began issuing 'stay-at-home' orders, which continue in various forms as of the date of this report. Notwithstanding such 'stay-at-home' orders, to date, our operations have for the most part been deemed an essential business under applicable governmental orders based on the critical nature of the products we offer. We sell products and services primarily in theU.S. domestic oil and gas commodity markets. Throughout the first quarter of 2020, the industry experienced multiple factors which lowered both the demand for, and prices of, oil and gas. First, the COVID-19 pandemic lowered global demand for hydrocarbons, as social distancing and travel restrictions were implemented across the world. Second, the lifting ofOrganization of the Petroleum Exporting Countries (OPEC)+ supply curtailments, and the associated increase in production of oil, drove the global supply of hydrocarbons higher through the first quarter of 2020. As a result of both dynamics, prices for hydrocarbons declined 67% from peak prices within the quarter. In addition, while global gross domestic product (GDP) growth was impacted by COVID-19 during the first half of 2020, we expect GDP to continue to decline globally in the third and fourth quarters of 2020 and for at least the early part of 2021, as a result of the COVID-19 pandemic. As a result, we expect oil and gas related markets will continue to experience significant volatility in 2020 and 2021. Our goal through this downturn has been to remain disciplined in allocating capital and to focus on liquidity and cash preservation. We are taking the necessary actions to right-size the business for expected activity levels. As a result of the impact of the COVID-19 outbreak, some of our feedstock suppliers have permanently or temporarily closed their businesses, limited our access to their businesses, or have experienced a decreased demand for services. As a result of the above, and due to 'stay-at-home' and other social distancing orders, as well as the decline inU.S. travel caused by COVID-19, we have seen a significant decline in the amount of feedstocks (specifically used oil) that we have been able to collect, and therefore process through our facilities. A prolonged economic slowdown, period of social quarantine (imposed by the government or otherwise), or a prolonged period of decreased travel due to COVID-19 or the responses thereto, will likely have a material negative adverse impact on our ability to produce products, and consequently our revenues and results of operations.
The full extent of the impact of COVID-19 on our business and operations currently cannot be estimated and will depend on a number of factors including the scope and duration of the global pandemic.
Currently we believe that we have sufficient cash on hand and will generate sufficient cash through operations to support our operations for the foreseeable future; however, we will continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of any new developments regarding the pandemic. The pandemic is developing rapidly and the full extent to which COVID-19 will ultimately impact us depends on future developments, including the duration and spread of the virus, as well as potential seasonality of new outbreaks. 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 endingJune 30, 2020 , we aggregated approximately 83.1 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 69.7 million gallons of used motor oil with our proprietary vacuum gas oil ("VGO") and Base Oil processes. 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 4 -------------------------------------------------------------------------------- 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, and continuing through the filing date of this report. 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 supplierswho operate similar collection businesses to ours. We manage the logistics of transport, storage and delivery of used oil to our customers. We own a fleet of 30 transportation trucks and more than 80 aboveground storage tanks with over 8.6 million gallons of storage capacity. These assets are used by both the Black Oil 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 Activities", from time to time, when market conditions warrant (i.e., when oil prices are sufficiently high), we have used our proprietary TCEP technology to re-refine used oil into marine fuel cutterstock. Due to the recent decline in oil prices and challenges in obtaining feedstock, since 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. In addition, we are distributing refined motor fuels such as gasoline, blended gasoline products and diesel used as engine fuels, to third party customerswho typically resell these products to retailers and end consumers. 5 -------------------------------------------------------------------------------- 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. 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. We are not currently processing gasoline blendstocks as the processing margins are not currently economically feasible. 6 -------------------------------------------------------------------------------- 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. 7 -------------------------------------------------------------------------------- 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. 8 -------------------------------------------------------------------------------- Depreciation and Amortization Expenses Our depreciation and amortization expenses are primarily related to the property, plant and equipment and intangible assets acquired in connection with ourVertex Holdings, L.P. (formerlyVertex Energy, L.P. ), aTexas limited partnership ("Holdings"),Omega Refining, LLC's ("Omega Refining") andWarren Ohio Holdings Co., LLC , f/k/aHeartland Group Holdings, LLC ("Heartland"),Acadiana Recovery, LLC ,Nickco Recycling, Inc. ,Ygriega Environmental Services, LLC ,Specialty Environmental Services and Crystal Energy, LLC acquisitions, described in greater detail in the 2019 Annual Report and herein (as to Crystal). 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 (as defined in Note 14 of the unaudited notes to the consolidated financial statements); (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
9 -------------------------------------------------------------------------------- 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.
OnJune 1, 2020 , the Company entered into and closed a Member Interest Purchase Agreement withCrystal Energy, LLC ("Crystal') pursuant to which the Company agreed to buy the outstanding membership interests of Crystal for aggregate cash consideration of$1,822,690 . This resulted in the recognition of$1,939,364 in accounts receivable,$976,512 in inventory,$14,484 in other current assets, and$1,107,670 in current liabilities. Upon the closing of the acquisition, Crystal became a wholly-owned subsidiary of the Company. Crystal is anAlabama limited liability company that was organized onSeptember 7, 2016 , for the purpose of purchasing, storing, selling, and distributing refined motor fuels. These activities include the wholesale distribution of gasoline, blended gasoline, and diesel for use as engine fuel to operate automobiles, trucks, locomotives, and construction equipment. Crystal markets its products to third-party customers, and customers will typically resell these products to retailers, end use consumers, and others. These assets are used in our Refining division. 10
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Set forth below are our results of operations for the three months ended
Three Months Ended June 30, $ Change - Favorable % Change - Favorable 2020 2019 (Unfavorable) (Unfavorable) Revenues$ 21,374,127 $ 43,657,292 $ (22,283,165 ) (51 )% Cost of revenues (exclusive of depreciation and amortization shown separately below) 22,197,805 36,515,421 14,317,616 39 % Gross profit (loss) (823,678 ) 7,141,871 (7,965,549 ) (112 )% Selling, general and administrative expenses 6,030,560 6,028,859 (1,701 ) - % Depreciation and amortization 1,713,461 1,780,890 67,429 4 % Total operating expenses 7,744,021 7,809,749 65,728 1 % Loss from operations (8,567,699 ) (667,878 ) (7,899,821 ) (1,183 )% Other income (expense): Interest income 20 1,918 (1,898 ) (99 )% Gain on asset sales 12,344 29,150 (16,806 ) (58 )% Gain (loss) on change in value of derivative liability (110,965 ) 746,017 (856,982 ) (115 )% Interest expense (222,173 ) (738,972 ) 516,799 70 % Total other income (expense) (320,774 ) 38,113 (358,887 ) (942 )% Loss before income tax (8,888,473 ) (629,765 ) (8,258,708 ) (1,311 )% Income tax benefit (expense) - - - - % Net Loss (8,888,473 ) (629,765 ) (8,258,708 ) (1,311 )% Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest 109,165 (202,329 ) 311,494 154 % Net loss attributable toVertex Energy, Inc. $ (8,997,638 ) $ (427,436 ) $ (8,570,202 ) (2,005 )% 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. Total revenues decreased by 51% for the three months endedJune 30, 2020 , compared to the same period in 2019, due primarily to lower commodity prices and decreased volumes at our refineries for the three months endedJune 30, 2020 , compared to the same period in 2019. Total volume decreased 33% during the three months endedJune 30, 2020 compared to the same period in 2019. Volumes were impacted as a result of decreased availability of feedstocks, specifically used motor oil, in the overall marketplace which forced us to reduce production rates at our Heartland facility, as well as ourMarrero facility. In addition, ourMarrero facility was brought down for an extended turnaround during the three months endedJune 30, 2020 . Gross profit decreased by 112% for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 . This decrease was largely a result of decreases in volumes at both our Heartland andMarrero facilities, along with lower commodity prices which had an impact on margins during the period. 11
-------------------------------------------------------------------------------- We had a gross loss as a percentage of revenues of 3.9% for the three months endedJune 30, 2020 , compared to gross profit as a percentage of revenues of 16.4% for the three months endedJune 30, 2019 . The main reason for the decrease was largely due to shelter in place orders in the locations in which we collect used motor oil as a result of the COVID-19 pandemic, which directly impacted the generation of used oil, and caused a dramatic reduction in volumes of feedstock available for use in our refineries. Additionally, our per barrel margin decreased 117% for the three months endedJune 30, 2020 , relative to the three months endedJune 30, 2019 . This decrease was a result of the decreases in our product spreads related to sharp decreases in finished product prices and operating costs at ourGulf Coast operations, during the three months endedJune 30, 2020 , compared to the same period during 2019. The 39% decrease in cost of revenues for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , is mainly a result of the lower production volumes at ourMarrero facility during the period, as well as lower operating costs and commodity prices during the period.
Each of our segments' income (loss) from operations during the three months
ended
Three Months Ended
$ Change -
June 30, Favorable % Change - Favorable Black Oil Segment 2020 2019 (Unfavorable) (Unfavorable) Total revenue$ 11,543,135 $ 37,907,811 $ (26,364,676 ) (70 )% Total cost of revenue (exclusive of depreciation and amortization shown separately below) 11,848,334 31,368,939 19,520,605 62 % Gross profit (loss) (305,199 ) 6,538,872 (6,844,071 ) (105 )% Selling general and administrative expense 4,869,391 5,037,708 168,317 3 % Depreciation and amortization 1,329,751 1,375,313 45,562 3 %
Income (loss) from operations
Refining and Marketing Segment Total revenue$ 6,297,328 $ 3,277,402 $ 3,019,926 92 % Total cost of revenue (exclusive of depreciation and amortization shown separately below) 5,958,778 2,705,031 (3,253,747 ) (120 )% Gross profit 338,550 572,371 (233,821 ) (41 )% Selling general and administrative expense 578,027 459,600 (118,427 ) (26 )% Depreciation and amortization 219,766 245,179 25,413 10 % Loss from operations$ (459,243 ) $ (132,408 ) $ (326,835 ) (247 )% Recovery Segment Total revenue$ 3,533,664 $ 2,472,079 $ 1,061,585 43 % Total cost of revenue (exclusive of depreciation and amortization shown separately below) 4,390,693 2,441,451 (1,949,242 ) (80 )% Gross profit (loss) (857,029 ) 30,628 (887,657 ) (2,898 )% Selling general and administrative expense 583,142 531,551 (51,591 ) (10 )% Depreciation and amortization 163,944 160,398 (3,546 ) (2 )% Loss from operations$ (1,604,115 ) $ (661,321 ) $ (942,794 ) (143 )% Our Black Oil division's volume decreased approximately 45% during the three months endedJune 30, 2020 , compared to the same period in 2019. This decrease was largely due to shelter in place orders in the locations in which we collect used motor oil as a result of the COVID-19 pandemic, which directly impacted the generation of used oil, which caused a dramatic reduction in volumes of feedstock available for use in our refineries. In addition, we had a turn around at ourMarrero facility during the period. The Heartland facility experienced lower demands for finished products during the three months endedJune 30, 2020 than 2019. Volumes collected through ourH&H Oil, L.P. ("H&H Oil")(based inHouston ,Austin andCorpus Christi, Texas ) and Heartland (based inOhio andWest Virginia ) collection facilities decreased 21% during the three months endedJune 30, 2020 , compared to the same 12 -------------------------------------------------------------------------------- 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. We started to see improvements in our collection volumes at the end of the period.
Overall volumes of product sold decreased 33% for the three months ended
Overall, commodity prices were down for the three months endedJune 30, 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 endedJune 30, 2020 decreased$36.45 per barrel from a three month average of$61.15 for the three months endedJune 30, 2019 to$24.71 per barrel for the three months endedJune 30, 2020 . The average posting (U.S. Gulfcoast Unleaded 87 Waterborne) for the three months endedJune 30, 2020 decreased$43.18 per barrel from a three month average of$78.86 for the three months endedJune 30, 2019 to$35.67 per barrel for the three months endedJune 30, 2020 . Our Refining division includes the business operations of Refining and Marketing, as well as our newly acquired assets from Crystal. With the acquisition of the Crystal assets, we now operate as a wholesale distributer of motor fuels which include gasoline, blended gasoline and diesel. Revenues in the Refining division were up 92% during the three months endedJune 30, 2020 , as compared to the same period in 2019 mostly as a result of the added business line. Overall volume for the Refining and Marketing division decreased 18% during the three months endedJune 30, 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. In addition, volumes were slightly impacted as a result of 'stay-at-home' orders during the period. Our pygas volumes increased 2% for the three months endedJune 30, 2020 , as compared to the same period in 2019. Our gasoline blendstock and fuel oil cutter volumes decreased 100% for the three months endedJune 30, 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 C.V .'s ("Penthol's") ofthe Netherlands akaPenthol LLC (aPenthol subsidiary inthe United States )'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 43% as a result of an increase in volumes during the three months endedJune 30, 2020 , compared to the same period in 2019. Volumes were up in our metals division during the three months endedJune 30, 2020 , compared to the same period during 2019, due to certain one-time projects. 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 a loss from operations of$8,567,699 for the three months endedJune 30, 2020 , compared to a loss from operations of$667,878 for the three months endedJune 30, 2019 , an increase of$7,899,821 or 1,183% from the prior year's three-month period. The increase in loss was due to the overall economic impact of the "stay-at-home" orders that were imposed as a result of the COVID-19 pandemic and the impact those had on theU.S. economy and the Company. We experienced a decrease in gross profit resulting from a decrease in production at our facilities as noted previously and decreased volumes across our business units during the period, as discussed above, all as a result of decreased supply of feedstocks and decreased demand for finished products, due to COVID-19. We had interest expense of$222,173 for the three months endedJune 30, 2020 , compared to interest expense of$738,972 for the three months endedJune 30, 2019 , a decrease in interest expense of$516,799 or 70% from the prior period, due to having a lower balance owed under our line of credit and term loan along with a lower interest rate on the term debt outstanding during the three months endedJune 30, 2020 , compared to the prior year's period. 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. We had a$110,965 loss on change in value of derivative liability for the three months endedJune 30, 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 gain on change in the value of our derivative liability of$746,017 in the prior year's period. This change was mainly due to the fluctuation in the market price of our common stock and non-cash accounting adjustments in connection therewith. This resulted in a significant change in non-cash expense for the period, compared to the prior year's period. We had a net loss of$8,888,473 for the three months endedJune 30, 2020 , compared to a net loss of$629,765 for the three months endedJune 30, 2019 , an increase in net loss of$8,258,708 or 1,311% from the prior period, which was a result of the factors described above. The majority of our net loss for the three months endedJune 30, 2020 , was attributable to the decrease in volumes sold throughout our business lines, and specifically around ourMarrero facility. 13 -------------------------------------------------------------------------------- During the three months endedJune 30, 2020 and 2019, the processing costs for our Refining and Marketing division located at KMTEX were$419,818 and$474,134 , respectively.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
Set forth below are our results of operations for the six months ended
Six Months Ended June 30, $ Change - % Change - Favorable Favorable 2020 2019 (Unfavorable) (Unfavorable) Revenues$ 57,577,556 $ 82,978,004 $ (25,400,448 ) (31 )% Cost of Revenues (exclusive of depreciation shown separately below) 49,034,659 71,359,770 22,325,111 31 % Gross Profit 8,542,897 11,618,234 (3,075,337 ) (26 )% Selling, general and administrative expenses 12,731,078 11,376,600 (1,354,478 ) (12 )%
Depreciation and amortization 3,348,008 3,517,903
169,895 5 % Loss from operations (7,536,189 ) (3,276,269 ) (4,259,920 ) (130 )% Interest Income 100 1,918 (1,818 ) (95 )% Gain on sale of assets 12,344 31,443 (19,099 ) (61 )% Gain (loss) on change in value of derivative liability 1,587,782 (959,077 ) 2,546,859 266 % Interest expense (562,259 ) (1,496,775 ) 934,516 62 % Total other income (expense) 1,037,967 (2,422,491 ) 3,460,458 143 % Loss before income taxes (6,498,222 ) (5,698,760 ) (799,462 ) (14 )% Income tax (expense) benefit - - - - % Net loss (6,498,222 ) (5,698,760 ) (799,462 ) (14 )% Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest (289,444 ) (307,760 ) 18,316 6 % Net loss attributable toVertex Energy, Inc. $ (6,208,778 ) $ (5,391,000 ) $ (817,778 ) (15 )% 14
-------------------------------------------------------------------------------- Each of our segments' gross profit (loss) during the six months endedJune 30, 2020 and 2019 was as follows: Six Months Ended June 30, $ Change - % Change - Favorable Favorable Black Oil Segment 2020 2019 (Unfavorable) (Unfavorable) Total revenue$ 41,074,507 $ 70,722,998 $ (29,648,491 ) (42 )% Total cost of revenue (exclusive of depreciation and amortization shown separately below) 31,914,575 60,710,464 28,795,889 47 % Gross profit 9,159,932 10,012,534 (852,602 ) (9 )% Selling, general and administrative expense 10,280,614 9,459,534 (821,080 ) (9 )%
Depreciation and amortization 2,601,752 2,719,354
117,602 4 % Loss from operations$ (3,722,434 ) $ (2,166,354 ) $ (1,556,080 ) (72 )% Refining Segment Total revenue$ 8,807,921 $ 6,136,023 $ 2,671,898 44 % Total cost of revenue (exclusive of depreciation and amortization shown separately below) 8,554,830 5,256,568 (3,298,262 ) (63 )% Gross profit 253,091 879,455 (626,364 ) (71 )% Selling, general and administrative expense 1,170,416 929,791 (240,625 ) (26 )% Depreciation and amortization 425,932 485,086 59,154 12 % Loss from operations$ (1,343,257 ) $ (535,422 ) $ (807,835 ) (151 )% Recovery Segment Total revenue$ 7,695,128 $ 6,118,983 $ 1,576,145 26 % Total cost of revenue (exclusive of depreciation and amortization shown separately below) 8,565,254 5,392,738 (3,172,516 ) (59 )% Gross profit (loss) (870,126 ) 726,245 (1,596,371 ) (220 )% Selling, general and administrative expense 1,280,048 987,275 (292,773 ) (30 )% Depreciation and amortization 320,324 313,463 (6,861 ) (2 )% Loss from operations$ (2,470,498 ) $ (574,493 ) $ (1,896,005 ) (330 )% 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 endedJune 30, 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 31% for the six months endedJune 30, 2020 compared to the same period in 2019, due primarily to lower commodity prices and decreased volumes at our refineries, specifically ourMarrero facility, during the six months endedJune 30, 2020 , compared to the prior year's period. Total volume was down 8% during the six months endedJune 30, 2020 , compared to the same period in 2019. Gross profit decreased by 26% for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 . This decrease was the result of our overall revenue decline due to decreases in finished product prices, and a decrease in volumes at our Refining and Marketing division, as well as ourMarrero facility. Additionally, our per barrel margin decreased 20% for the six months endedJune 30, 2020 , relative to the six months endedJune 30, 2019 , due to lower volumes, along with decreases in commodity prices for the finished products we sell during the six months endedJune 30, 2020 , compared to the same period during 2019. The 31% decrease in cost of revenues for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , is mainly a result of the decrease in commodity prices and lower volumes at our refining facilities during the period. Our Black Oil division's volume decreased approximately 23% during the six months endedJune 30, 2020 , compared to the same period in 2019. This decrease was largely due to the overall economic impact of the 'stay-at-home' orders that were imposed as 15 -------------------------------------------------------------------------------- a result of the COVID-19 pandemic. Volumes collected through our H&H Oil and Heartland collection facilities decreased 6% during the six months endedJune 30, 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 was down 8% for the six months ended
In addition, commodity prices decreased approximately 42% for the six months endedJune 30, 2020 , compared to the same period in 2019. For example, the average posting (U.S. Gulfcoast No. 2 Waterbone) for the six months endedJune 30, 2020 , decreased$30.72 per barrel from a six month average of$77.25 for the six months endedJune 30, 2019 , to$46.53 per barrel for the six months endedJune 30, 2020 . Overall volume for the Refining and Marketing division decreased 13% during the six months endedJune 30, 2020 , as compared to the same period in 2019. Our fuel oil cutter volumes decreased 59% for the six months endedJune 30, 2020 , compared to the same period in 2019. Our pygas volumes increased 3% for the six months endedJune 30, 2020 , as compared to the same period in 2019. This division experienced a decrease in production of 100% for its gasoline blendstock for the six months endedJune 30, 2020 , 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. Revenues for this division increased 26% as a result of volumes compared to the same period in 2019. Volumes of petroleum products acquired in our Recovery business were up 25% during the six months endedJune 30, 2020 , compared to the same period during 2019. 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$12,731,078 for the six months endedJune 30, 2020 , compared to$11,376,600 of selling, general, and administrative expenses for the prior year's period, an increase of$1,354,478 or 12%. This increase is primarily due to the additional selling, general and administrative expenses incurred during the period as a result of increased personnel costs, legal expenses, and insurance expenses related to expansion of trucks and facilities through organic growth, as well as increased accounting, legal and consulting expenses related to our Tensile transaction which closed in the first part of the year. We had a loss from operations of$7,536,189 for the six months endedJune 30, 2020 , compared to a loss from operations of$3,276,269 for the six months endedJune 30, 2019 , an increase of$4,259,920 or 130% from the prior year's six-month period. The increase was mainly due to a decrease in overall gross profit for the six months endedJune 30, 2020 , due to the reasons discussed above. We had interest expense of$562,259 for the six months endedJune 30, 2020 , compared to interest expense of$1,496,775 for the six months endedJune 30, 2019 , a decrease in interest expense of$934,516 or 62%, due to a lower amount of term debt outstanding during the six months endedJune 30, 2020 , compared to the prior period. 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. We had a gain on the sale of assets of$12,344 for the six months endedJune 30, 2020 , compared to a gain on the sale of assets of$31,443 for the six months endedJune 30, 2019 . We had a$1,587,782 gain on change in value of derivative liability for the six months endedJune 30, 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$959,077 in the prior year's period. This change was mainly due to a fluctuation in the market price of our common stock. We had a net loss of$6,498,222 for the six months endedJune 30, 2020 , compared to a net loss of$5,698,760 for the six months endedJune 30, 2019 , an increase in net loss of$799,462 or 14% from the prior period due to the reasons described above. The majority of our net loss for the six months endedJune 30, 2020 , was attributable to the decline in market and commodity prices. 16 -------------------------------------------------------------------------------- During the six months endedJune 30, 2020 and 2019, the processing costs for our Refining and Marketing division located at KMTEX were$873,825 and$985,179 , respectively.
The following table sets forth the high and low spot prices during the six
months ended
2020 Benchmark High Date Low DateU.S. Gulfcoast No. 2 Waterborne (dollars per gallon)$ 1.95 January 3$ 0.42 April 27U.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$ 12.00 April 21 NYMEX Crude oil (dollars per barrel)$ 63.27 January 6$ (37.63 ) April 20 Reported in Platt's US Marketscan (Gulf Coast )
The following table sets forth the high and low spot prices during the six
months ended
2019 Benchmark High Date Low DateU.S. Gulfcoast No. 2 Waterborne (dollars per gallon)$ 2.05 April 23$ 1.53 January 2U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)$ 2.08 April 10$ 1.31 January 2U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)$ 68.54 April 25$ 49.82 January 2 NYMEX Crude oil (dollars per barrel)$ 66.30 April 23$ 46.54 January 2 Reported in Platt's US Marketscan (Gulf Coast ) We saw an extreme drop in March and April 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. 17 --------------------------------------------------------------------------------
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$125,250,538 as ofJune 30, 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 six months endedJune 30, 2020 . We had total current liabilities of$21,492,029 as ofJune 30, 2020 , compared to$24,797,299 atDecember 31, 2019 . We had total liabilities of$59,151,607 as ofJune 30, 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 six months endedJune 30, 2020 . We had working capital of$11,837,472 as ofJune 30, 2020 , compared to working capital of$2,609,609 as ofDecember 31, 2019 . The increase in working capital fromDecember 31, 2019 toJune 30, 2020 is mainly due to the generation of additional liquidity from the closing of the Heartland SPV transaction during the six months endedJune 30, 2020 .
The Company received a total of
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.
The Company's outstanding debt facilities as of
18 --------------------------------------------------------------------------------
Balance on Maturity Balance on December 31, Creditor Loan Type Origination Date Date Loan Amount June 30, 2020 2019 Encina Business February
$ 5,883,000 $ 13,333,000 Encina Business Revolving February Credit SPV, LLC Note February 1, 2017 1, 2022$ 10,000,000 - 3,276,230Wells Fargo Equipment Finance April-May, Lease-Ohio Lease April-May, 2019 2024$ 621,000 494,573 551,260 AVT Equipment Finance April 2, Lease-Ohio Lease April 2, 2020 2023$ 337,155 313,272 - AVT Equipment Finance May 22, Lease-HH Lease May 22, 2020 2023$ 551,609 520,191 - June 24, John Deere Note Note May 27, 2020 2024$ 152,643 149,613 - Tetra Capital Finance Lease Lease May, 2018 May, 2022$ 419,690 218,896 264,014 Well Fargo Equipment Finance March, Lease-VRM LA Lease March, 2018 2021$ 30,408 7,135 12,341 Texas Citizens April 28, Bank PPP Loan May 5, 2020 2022$ 4,222,000 4,222,000 - Insurance Various premiums institutions financed Various < 1 year$ 2,902,428
- 1,165,172 Total 11,808,680 18,602,017 Deferred finance costs, net - (47,826 ) Total, net of deferred finance costs$ 11,808,680 $ 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 $ 4,983,000 $ - $ - $ - $ - Encina Business Credit SPV, LLC - - - - - - John Deere Note 36,845 37,759 38,695 36,313 - - Well Fargo Equipment Lease- Ohio 117,834 124,039 130,574 122,127 - - AVT Equipment Lease-Ohio 88,689 96,512 128,071 - - - AVT Equipment Lease-HH 142,258 154,805 223,128 - - - Tetra Capital Lease 94,920 123,976 - - - - Well Fargo Equipment Lease- VRM LA 7,135 - - - - - Texas Citizens Bank 1,877,461 2,344,539 - - - - Various institutions - - - - - - Totals$ 3,265,142 $ 7,864,630 $ 520,468 $ 158,440 $ - $ -
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. 19 -------------------------------------------------------------------------------- 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, which had a required redemption date ofJune 24, 2020 , provided that, as discussed below under " Risk Factors " - "We do not anticipate redeeming our Series B and B1 Preferred Stock in the near future.", we are not contractually, or legally, able to redeem such stock and do not anticipate having sufficient cash on hand to complete such redemption in the near term. Because such preferred stock was not redeemed onJune 24, 2020 , the preferred stock accrues 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 six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 : Six Months EndedJune 30, 2020 2019
Beginning cash, cash equivalents and restricted cash
2,849,831
Net cash provided by (used in): Operating activities 3,712,167 543,971 Investing activities (3,375,454 ) (2,332,753 ) Financing activities 13,317,899
(462,823 ) Net increase (decrease) in cash, cash equivalents and restricted cash
13,654,612 (2,251,605 ) Ending cash, cash equivalents and restricted cash$ 17,854,437 $ 598,226 20
-------------------------------------------------------------------------------- Net cash provided by operating activities was$3,712,167 for the six months endedJune 30, 2020 , as compared to net cash provided by operating activities of$543,971 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 in cash provided by operating activities for the six month period endedJune 30, 2020 , compared to the same period in 2019, was the fluctuation in market and commodity prices during the six months endedJune 30, 2020 ,$4,986,003 of decrease in accounts receivable,$3,711,239 of decrease in inventory, and$4,781,183 of net cash settlements on commodity derivatives. Investing activities used cash of$3,375,454 for the six months endedJune 30, 2020 , as compared to having used$2,332,753 of cash during the corresponding period in 2019, due mainly to the purchase of fixed assets and the acquisition of Crystal. Financing activities provided cash of$13,317,899 for the six months endedJune 30, 2020 , as compared to using cash of$462,823 during the corresponding period in 2019. Financing activities for the six months endedJune 30, 2020 were comprised of contributions from the Tensile transaction of$21.0 million , offset by approximately$8.6 million used to pay down our long-term debt,$4.2 million proceeds from PPP note, and$3.3 million of payments on our line of credit. Financing activities for the six months endedJune 30, 2019 were comprised of note proceeds of approximately$0.2 million , offset by approximately$1.5 million used to pay down our long-term debt, and$1.2 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 atJune 30, 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 ". 21
-------------------------------------------------------------------------------- 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 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 accompanyingJune 30, 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 consolidates the results of any such entity in which it determines that it has a controlling financial interest. The Company has a "controlling financial interest" in such an entity if the Company has both the power to direct the activities that most 22 -------------------------------------------------------------------------------- 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. 23
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