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 inthe United States and globally; •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; •our ability to acquire sufficient amounts of used oil feedstock through our collection routes, to produce finished products, and in the absence of such internally collected feedstocks, our ability to acquire third-party feedstocks on commercially reasonable terms;
•risks associated with COVID-19, the global efforts to stop the spread of
COVID-19, potential downturns in the
•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. 2 --------------------------------------------------------------------------------
Please see the " Glossary of Selected Terms " incorporated by reference hereto as Exhibit 99.1, for a list of abbreviations and definitions used throughout this Report.
Unless the context requires otherwise, references to the "Company," "we," "us," "our," "Vertex", "Vertex Energy " and "Vertex Energy, Inc. " refer specifically toVertex Energy, Inc. and its consolidated subsidiaries.
In addition, unless the context otherwise requires and for the purposes of this report only:
"Base Oil" means the lubrication grade oils initially produced from refining crude oil (mineral base oil) or through chemical synthesis (synthetic base oil). In general, only 1% to 2% of a barrel of crude oil is suitable for refining into base oil. The majority of the barrel is used to produce gasoline and other hydrocarbons;
"Cutterstock" means fuel oil used as a blending agent added to other fuels. For example, to lower viscosity;
"Crack" means breaking apart crude oil into its component products, including gases like propane, heating fuel, gasoline, light distillates like jet fuel, intermediate distillates like diesel fuel and heavy distillates like grease;
"Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
"Feedstock" means a product or a combination of products derived from crude oil and destined for further processing in the refining or re-refining industries. It is transformed into one or more components and/or finished products;
"Gasoline Blendstock" means naphthas and various distillate products used for blending or compounding into finished motor gasoline. These components can include reformulated gasoline blendstock for oxygenate blending (RBOB) but exclude oxygenates (alcohols and ethers), butane, and pentanes (an organic compound with properties similar to a butane);
"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.
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--------------------------------------------------------------------------------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) 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 nine months of 2020, we expect GDP to continue to decline globally in the fourth quarter 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 volume 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.
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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 the Gulf Coast ,
Midwest and Mid-Atlantic regions of the United States . For the rolling
twelve-month period ending September 30, 2020 , we aggregated approximately 81.4
million gallons of used motor oil and other petroleum by-product feedstocks and
managed the re-refining of approximately 69.8 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 TCEP for the purposes of pre-treating our used motor oil feedstock
prior to shipping to our facility in Marrero, 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 in Marrero,
Louisiana , beginning in the first quarter of 2020, and continuing through the
filing date of this report.
We also acquired our Marrero, Louisiana facility, which facility re-refines used
motor oil and also produces VGO and the Myrtle Grove re-refining complex in
Belle Chasse, Louisiana (which is now owned by a special purpose entity which we
own an approximate 85% interest of) in May 2014 .
Our Refining and Marketing 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 the Gulf 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 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 in Marrero, Louisiana . In addition, at our Marrero, Louisiana
facility, we produce a Vacuum Gas Oil (VGO) product that is sold to refineries
as well as to the marine fuels market. At our Columbus, Ohio facility (Heartland
Petroleum), we produce a base oil product that is sold to lubricant packagers
and distributors.
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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 customers who typically resell these
products to retailers and end consumers.
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 eight product categories. All of these products are commodities that are subject to various degrees of product quality and performance specifications.
Base Oil
Base oil is an oil to which other oils or substances are added to produce a lubricant. Typically the main substance in lubricants, base oils, are refined from crude oil.
Pygas Pygas, or pyrolysis gasoline, is a product that can be blended with gasoline as an octane booster or that can be distilled and separated into its components, including benzene and other hydrocarbons.
Industrial Fuel
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Industrial fuel is a distillate fuel oil which is typically a blend of lower
quality fuel oils. It can include diesel fuels and fuel oils such as No. 1, No.
2 and No. 4 diesel fuels that are historically used for space heating and power
generation. Industrial fuel is typically a fuel with low viscosity, as well as
low sulfur, ash, and heavy metal content, making it an ideal blending agent.
Distillates
Distillates are finished fuel products such as gasoline and diesel fuels.
Oil Collection Services
Oil collection services include the collection, handling, treatment and sales of used motor oil and products which include used motor oil (such as oil filters) which are collected from our customers.
Metals
Metals consist of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes, barges, boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut-up and sent back to a steel mill for re-purposing.
Other re-refinery products
Other re-refinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.
VGO/Marine fuel sales
VGO/Marine fuel sales relate to the sale of low sulfur fuel meeting the criteria for IMO 2020 compliant marine fuels.
The way that the product categories above fit into our three operating segments
(1) Black Oil; (2) Refining and Marketing; and (3) Recovery, are indicated
below:
Black Oil(1) Refining and Marketing(2) Recovery(3)
Base oil X X
Pygas X
Industrial fuel X X
Distillates X
Oil collection services X
Metals X
Other re-refinery products X X
VGO/Marine fuel sales X
(1) As discussed in greater detail above under "Black Oil Division", the Black
Oil segment consists primary of the sale of (a) petroleum products which include
base oil and industrial fuels-which consist of used motor oils, cutterstock and
fuel oil generated by our facilities; (b) oil collection services-which consist
of used oil sales, burner fuel sales, antifreeze sales and service charges; (c)
the sale of other re-refinery products including asphalt, condensate, recovered
products, and used motor oil; (d) transportation revenues; and (e) the sale of
VGO (vacuum gas oil)/marine fuel.
(2) As discussed in greater detail above under "Refining and Marketing
Division", the Refining and Marketing segment consists primarily of the sale of
pygas; industrial fuels, which are produced at a third-party facility (KMTEX);
and distillates.
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(3) As discussed in greater detail above under "Recovery Division", the Recovery
segment consists primarily of revenues generated from the sale of ferrous and
non-ferrous recyclable Metal(s) products that are recovered from manufacturing
and consumption. It also includes revenues generated from trading/marketing of
Group III Base Oils.
8-------------------------------------------------------------------------------- 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. 9 -------------------------------------------------------------------------------- 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). Depreciation and amortization expense attributable to cost of revenues reflects the depreciation and amortization of the fixed assets at our refineries along with rolling stock at our collection branches.
Depreciation and amortization expense attributable to operating expenses reflects depreciation and amortization related to our corporate and administrative offices along with internet technology (IT) related items and intangibles.
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 described in Note
14 to the unaudited notes to the consolidated financial statements included
herein); (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
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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
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.
Marrero Refinery Fire
OnOctober 7, 2020 , we had a fire at ourMarrero refinery which took the facility offline for repairs for about two weeks. The refinery suffered some minor structural damage along with piping, valves and instrumentation in the immediate area of the fire, the largest impact was the damage to the electrical conduit that feeds the power to the refinery equipment. As ofOctober 26, 2020 , the facility was back up and running and in the process of filing a claim with our insurance company. The Company believes that it maintains adequate insurance coverage. 11
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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 September 30, $ Change -
Favorable % Change - Favorable
2020 2019 (Unfavorable) (Unfavorable)
Revenues $ 37,383,632 $ 37,799,259 $ (415,627) (1) %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 31,186,684 32,372,316 1,185,632 4 %
Depreciation and amortization attributable to
costs of revenues 1,313,162 1,359,629 46,467 3 %
Gross profit 4,883,786 4,067,314 816,472 20 %
Operating expenses:
Selling, general and administrative expenses 6,241,570 6,153,184 (88,386) (1) %
Depreciation and amortization attributable to
operating expenses 482,869 455,953 (26,916) (6) %
Total operating expenses 6,724,439 6,609,137 (115,302) (2) %
Loss from operations (1,840,653) (2,541,823) 701,170 28 %
Other income (expense):
Other income 1 918,153 (918,152) (100) %
Gain (loss) on asset sales (136,434) - (136,434) (100) %
Gain (loss) on change in value of derivative
liability 256,587 1,290,792 (1,034,205) (80) %
Interest expense (234,671) (826,005) 591,334 72 %
Total other income (expense) (114,517) 1,382,940 (1,497,457) (108) %
Loss before income tax (1,955,170) (1,158,883) (796,287) (69) %
Income tax benefit (expense) - - - - %
Net Loss (1,955,170) (1,158,883) (796,287) (69) %
Net income (loss) attributable to
non-controlling interest and redeemable
non-controlling interest 480,215 (67,102) 547,317 816 %
Net loss attributable to
(123) %
Our revenues and cost of revenues are significantly impacted by fluctuations in
commodity prices; increases in commodity prices typically result in increases in
revenue and cost of revenues (i.e., feedstock acquisition costs). Our gross
profit is to a large extent a function of the market discount we are able to
obtain in purchasing feedstock, as well as how efficiently management conducts
operations. Additionally, we use hedging instruments to manage our exposure to
underlying commodity prices. During the three months ended September 30, 2020 ,
we had a gain of $5 thousand in our hedging instruments as compare to a loss of
$1.6 million for the three months ended September 30, 2019 . We recognize our
hedging activities from commodity derivatives in our cost of goods sold. During
the three months ended September 30, 2020 , compared to the same period in 2019,
we saw a 10% decrease in the discount we were paying for feedstock into our
refineries. In addition, we saw a 3% decrease in operating costs (inclusive of
depreciation and amortization) on a per barrel basis for the third quarter of
2020 as compared to the same period in 2019.
Total revenues decreased by 1% for the three months ended September 30, 2020 ,
compared to the same period in 2019, due primarily to lower commodity prices and
decreased volumes at our refineries; offset by the $17 million of revenue
generated in from our newly acquired Crystal opertations for the three months
ended September 30, 2020 , compared to the same period in 2019. Total volume
increased 1% during the three months ended September 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
12
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to have reduced production rates at each of our facilities. This decrease was
largely due to continued impacts of the 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 reduction in
volumes of feedstock available for use in our refineries. The Company saw an
increase in the volume of Group III base oil during the three months ended
September 30, 2020 . Gross profit increased by 20% for the three months ended
September 30, 2020 , compared to the three months ended September 30, 2019 . This
increase was largely a result of lower operating costs at our facilities
relating to decreased transportation expenses, maintenance and contract labor,
which had an impact on margins during the period, and the increases in volumes
as noted above.
During the three months ended September 30, 2020 , total cost of revenues
(exclusive of depreciation and amortization) was $31,186,684 , compared to
$32,372,316 for the three months ended September 30, 2019 , a decrease of
$1,185,632 or 4% from the prior period. The main reason for the decrease was the
result of a decline in commodity prices, which impacted our feedstock pricing
and a decrease in overall operating costs at our refining facilities.
For the three months ended
We had gross profit as a percentage of revenue of 13% for the three months endedSeptember 30, 2020 , compared to gross profit as a percentage of revenues of 10.7% for the three months endedSeptember 30, 2019 . The main reason for the improvement was the slight increase in volumes, along with decreases in operating expenses at our refineries during the period. In addition, the company was proactive in its risk management of commodity prices through the use of derivative instruments which resulted in a$1.6 million positive impact on gross margins when compared to the same period a year ago. Additionally, our per barrel margin increased 19% for the three months endedSeptember 30, 2020 , relative to the three months endedSeptember 30, 2019 . Our per barrel margin is calculated by dividing the total volume of product sold (in bbls) by total gross profit for the applicable period ($4,883,786 for the 2020 period versus$4,067,314 for the 2019 period). This increase was a result of the improvements in our product spreads related to decreases in feedstock product prices and decreases in operating costs at our refining facilities, during the three months endedSeptember 30, 2020 , compared to the same period during 2019. Overall, commodity prices were down for the three months endedSeptember 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 endedSeptember 30, 2020 , decreased$13.62 per barrel from a three-month average of$51.56 for the three months endedSeptember 30, 2019 to$37.95 per barrel for the three months endedSeptember 30, 2020 . The average posting (U.S. Gulfcoast Unleaded 87 Waterborne) for the three months endedSeptember 30, 2020 decreased$22.74 per barrel from a three-month average of$72.97 for the three months endedSeptember 30, 2019 to$50.22 per barrel for the three months endedSeptember 30, 2020 . We had a loss from operations of$1,840,653 for the three months endedSeptember 30, 2020 , compared to a loss from operations of$2,541,823 for the three months endedSeptember 30, 2019 , a decrease of$701,170 or 28% from the prior year's three-month period. The decrease in loss from operations was due to the overall reduction in operating expenses at our facilities along with increases in charges throughout our collection operations. As market conditions change, the charges for our oil collection services will fluctuate. We had interest expense of$234,671 for the three months endedSeptember 30, 2020 , compared to interest expense of$826,005 for the three months endedSeptember 30, 2019 , a decrease in interest expense of$591,334 or 72% 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 endedSeptember 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$256,587 gain on change in value of derivative liability for the three months endedSeptember 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$1,290,792 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 other income of
13
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oil re-refining plant located in Churchill County, Nevada , which we previously
rented. The Company previously determined this loan was uncollectible and wrote
it off.
We had a loss on asset sales of $136,434 for the three months ended September
30, 2020 , in connection with sale of equipment compared to no gain or loss on
asset sales in the prior year's period.
We had a net loss of $1,955,170 for the three months ended September 30, 2020 ,
compared to a net loss of $1,158,883 for the three months ended September 30,
2019 , an increase in net loss of $796,287 or 69% from the prior period. The main
reason for the increase in net loss for the three months ended September 30,
2020 , compared to the three months ended September 30, 2019 , was attributable to
the decrease in gain in derivative liability for the three months ended
September 30, 2020 , which decreased to $256,587 for such period, compared to
$1,290,792 for the period ended September 30, 2019 , offset by the $816,472
increase in gross profit as discussed above.
Each of our segments' income (loss) from operations during the three months
ended
Three Months Ended $ Change -
September 30, Favorable % Change - Favorable
Black Oil Segment 2020 2019 (Unfavorable) (Unfavorable)
Revenues $ 19,988,122 $ 32,330,531 $ (12,342,409) (38) %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 14,687,141 27,663,983 12,976,842 47 %
Depreciation and amortization attributable
to costs of revenues 1,041,719 1,073,520 31,801 3 %
Gross profit 4,259,262 3,593,028 666,234 19 %
Selling general and administrative expense 4,899,956 5,040,772 140,816 3 %
Depreciation and amortization attributable
to operating expenses 390,105 335,105 (55,000) (16) %
Loss from operations $ (1,030,799) $ (1,782,849) $ 752,050 42 %
Refining and Marketing Segment
Revenues $ 13,501,749 $ 3,076,454 $ 10,425,295 339 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 13,217,757 2,511,314 (10,706,443) (426) %
Depreciation and amortization attributable
to costs of revenues 121,744 147,658 25,914 18 %
Gross profit 162,248 417,482 (255,234) (61) %
Selling general and administrative expense 696,611 494,781 (201,830) (41) %
Depreciation and amortization attributable
to operating expenses 72,314 100,398 28,084 28 %
Loss from operations $ (606,677) $ (177,697) $ (428,980) (241) %
Recovery Segment
Revenues $ 3,893,761 $ 2,392,274 $ 1,501,487 63 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 3,281,786 2,197,019 (1,084,767) (49) %
Depreciation and amortization attributable
to costs of revenues 149,699 138,451 (11,248) (8) %
Gross profit 462,276 56,804 405,472 714 %
Selling general and administrative expense 645,003 617,631 (27,372) (4) %
Depreciation and amortization attributable
to operating expenses 20,450 20,450 - - %
Loss from operations $ (203,177) $ (581,277) $ 378,100 65 %
14-------------------------------------------------------------------------------- Our Black Oil segment generated revenues of$19,988,122 for the three months endedSeptember 30, 2020 , with cost of revenues (exclusive of depreciation and amortization) of$14,687,141 , and depreciation and amortization attributable to cost of revenues of$1,041,719 . During the three months endedSeptember 30, 2019 , these revenues were$32,330,531 with cost of revenues (exclusive of depreciation and amortization) of$27,663,983 and depreciation and amortization attributable to cost of revenues of$1,073,520 . Loss from operations improved for the three months endedSeptember 30, 2020 , compared to 2019, as a result of improvements in operating expenses through our various facilities as well as by diligent management of our street collections and pricing. Our Black Oil segment's volume decreased approximately 6% during the three months endedSeptember 30, 2020 , compared to the same period in 2019. This decrease was largely due to continued impacts of the 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 reduction in volumes of feedstock available for use in our refineries. In addition, we were impacted in theGulf Coast region by weather delays experienced from the various hurricanes in the region during the period. The Heartland facility experienced lower demands for finished products during the three months endedSeptember 30, 2020 compared to the same period in 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 increased 5% during the three months endedSeptember 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. We started to see improvements in our collection volumes at the end of the period. During the three months endedSeptember 30, 2020 , our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were$13,217,757 , of which the processing costs for our Refining and Marketing business located at KMTEX were$328,225 , and depreciation and amortization attributable to cost of revenues was$121,744 . Revenues for the same period were$13,501,749 . During the three months endedSeptember 30, 2019 , our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were$2,511,314 , which included the processing costs at KMTEX of$434,046 , and depreciation and amortization attributable to cost of revenues was$147,658 . Revenues for the same period were$3,076,454 . Our Refining segment includes the business operations of our Refining and Marketing operations, 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 339% during the three months endedSeptember 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 21% during the three months endedSeptember 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 decreased 24% for the three months endedSeptember 30, 2020 , as compared to the same period in 2019. Our fuel oil cutter volumes decreased 10% for the three months endedSeptember 30, 2020 , as compared to the same period in 2019, due to lower volumes of feedstock available from third party facilities in theGulf coast region as a result of weather delays. We have also had to assess the volume of fuel oil cutterstocks that we manage due to enhanced quality of products being demanded in the marketplace. Our Recovery segment generated revenues of$3,893,761 for the three months endedSeptember 30, 2020 , with cost of revenues (exclusive of depreciation and amortization) of$3,281,786 , and depreciation and amortization attributable to cost of revenues of$149,699 . During the three months endedSeptember 30, 2019 , these revenues were$2,392,274 with cost of revenues (exclusive of depreciation and amortization) of$2,197,019 , and depreciation and amortization attributable to cost of revenues of$138,451 . Income from operations increased for the three months endedSeptember 30, 2020 , compared to 2019, as a result of increased volumes attributable to our Recovery division and margins related thereto, through our various facilities. Our Recovery segment includes the business operations of Vertex Recovery Management as well as our Group III base oil business. Vertex acts asPenthol C.V . ofthe Netherlands akaPenthol LLC's (aPenthol subsidiary inthe United States ) ("Penthol'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 63% as a result of an increase in volumes during the three months endedSeptember 30, 2020 , compared to the same period in 2019. Volumes were up in our metals division during the three months endedSeptember 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. 15 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
Set forth below are our results of operations for the nine months ended
Nine Months Ended September 30, $ Change -
Favorable % Change - Favorable
2020 2019 (Unfavorable) (Unfavorable)
Revenues $ 94,961,188 $ 120,777,263 $ (25,816,075) (21) %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 80,221,343 103,732,086 23,510,743 23 %
Depreciation and amortization attributable to
costs of revenues 3,731,320 3,965,626 234,306 6 %
Gross Profit 11,008,525 13,079,551 (2,071,026) (16) %
Operating expenses:
Selling, general and administrative expenses 18,972,648 17,529,784 (1,442,864) (8) %
Depreciation and amortization attributable to
operating expenses 1,412,719 1,367,859 (44,860) (3) %
Total operating expenses 20,385,367 18,897,643 (1,487,724) (8) %
Loss from operations (9,376,842) (5,818,092) (3,558,750) (61) %
Other income (expense):
Other Income 101 920,071 (919,970) (100) %
Gain (loss) on sale of assets (124,090) 31,443 (155,533) (495) %
Gain (loss) on change in value of derivative
liability 1,844,369 331,715 1,512,654 456 %
Interest expense (796,930) (2,322,780) 1,525,850 66 %
Total other income (expense) 923,450 (1,039,551) 1,963,001 189 %
Loss before income taxes (8,453,392) (6,857,643) (1,595,749) (23) %
Income tax (expense) benefit - - - - %
Net loss (8,453,392) (6,857,643) (1,595,749) (23) %
Net income (loss) attributable to
non-controlling interest and redeemable
non-controlling interest 190,771 (374,862) 565,633 151 %
Net loss attributable to Vertex Energy , Inc. $ (8,644,163) $ (6,482,781) $ (2,161,382) (33) %
Our revenues and cost of revenues are significantly impacted by fluctuations in
commodity prices; increases in commodity prices typically result in increases in
revenue and cost of revenues (i.e., feedstock acquisition costs). Additionally,
we use hedging instruments to manage our exposure to underlying commodity
prices. During the nine months ended September 30, 2020 , we had a gain of $4.4
million in our hedging instruments, which lowered our cost of goods sold. As
demand for used oil feedstock increases, the prices we are required to pay for
such feedstock typically increases as well - i.e., the discount pricing to
non-used oil shrinks, which increases our acquisition costs. Our gross profit is
to a large extent a function of the market discount we are able to obtain in
purchasing feedstock, as well as how efficiently management conducts operations.
As demand for used oil feedstock increases, the prices we are required to pay
for such feedstock typically increases as well - i.e., the discount pricing to
non-used oil shrinks, which increases our acquisition costs.
Our cost of revenues are a function of the ultimate price we are required to pay
to acquire feedstocks, how efficient we are in acquiring such feedstocks (which
relates to everything from how efficient our collection trucks are in their
collection routes to how efficiently we operate our facilities), and the cost of
turn-arounds and other maintenance at our facilities.
Total revenues decreased by 21% for the nine months ended September 30, 2020
compared to the same period in 2019, due primarily to lower commodity prices and
decreased volumes at our refineries, during the nine months ended September 30,
2020 ,
16
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compared to the prior year's period. Total volume was down 5% during the nine
months ended
During the nine months endedSeptember 30, 2020 , total cost of revenues (exclusive of depreciation and amortization) was$80,221,343 , compared to$103,732,086 for the nine months endedSeptember 30, 2019 , a decrease of$23,510,743 or 23% from the prior period. The main reason for the decrease was the result of a decline in commodity prices, which impacted our feedstock pricing, a decrease in volumes throughout the business as well as recent efforts in reducing operating costs at our facilities. Additionally, our per barrel margin decreased 11% for the nine months endedSeptember 30, 2020 , relative to the nine months endedSeptember 30, 2019 , due to lower volumes, along with decreases in commodity prices for the finished products we sell during the nine months endedSeptember 30, 2020 , compared to the same period during 2019. Our per barrel margin is calculated by dividing the total volume of product sold (in bbls) by total gross profit for the applicable period ($11,008,525 for the 2020 period versus$13,079,551 for the 2019 period). The 23% decrease in cost of revenues (exclusive of depreciation and amortization) for the nine months endedSeptember 30, 2020 , compared to the nine months endedSeptember 30, 2019 , is mainly a result of the decrease in commodity prices, lower volumes at our refining facilities during the period and decreases in operating expenses at our facilities. Volumes in our street collections were down 2% for the nine months endedSeptember 30, 2020 , as compared to the same period in 2019, and we saw a 10% decrease in the discount we were paying for feedstock into our refineries during the period. In addition, we saw an 8% decrease in operating costs (inclusive of depreciation and amortization) on a per barrel basis for the nine months endedSeptember 30, 2020 , as compared to the same period in 2019. The cost of the oil collected was down 10% and revenue was up 34% from the prior period. The reduction in collection costs is a function of route efficiencies and increased volumes of collections when compared to fixed costs across our collection operations, as well as aggressive price changes on the street. Overall, this provided an additional 15% of gross margin to the business or approximately$2 million , for the nine-month period endedSeptember 30, 2020 . These improvements were mostly a result of an improvement in logistic costs for the period, as well as efficiencies in operations of our refineries and reductions in maintenance costs for the period. 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.
For the nine months ended
We had gross profit as a percentage of revenue of 11.6% for the nine months endedSeptember 30, 2020 , compared to gross profit as a percentage of revenues of 10.8% for the nine months endedSeptember 30, 2019 . The main reason for the improvement was a combination of reduced operating costs along with reduced product pricing on a per barrel basis. In addition, the company was proactive in its risk management of commodity prices through the use of derivative instruments which resulted in a$4.4 million positive impact on gross margins when compared to the same period a year ago. In addition, commodity prices decreased approximately 35% for the nine months endedSeptember 30, 2020 , compared to the same period in 2019. For example, the average posting (U.S. Gulfcoast No. 2 Waterbone) for the nine months endedSeptember 30, 2020 , decreased$24.92 per barrel from a nine-month average of$58.35 for the nine months endedSeptember 30, 2019 , to$33.43 per barrel for the nine months endedSeptember 30, 2020 . We had selling, general, and administrative expenses of$18,972,648 for the nine months endedSeptember 30, 2020 , compared to$17,529,784 of selling, general, and administrative expenses for the prior year's period, an increase of$1,442,864 or 8%. 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, as disclosed in greater detail under "Part I" - "Item 1. Financial Statements" - " Note 14. Share Purchase and Subscription Agreement s". We had a loss from operations of$9,376,842 for the nine months endedSeptember 30, 2020 , compared to a loss from operations of$5,818,092 for the nine months endedSeptember 30, 2019 , an increase of$3,558,750 or 61% from the prior year's nine-month period. The increase was mainly due to a decrease in overall revenues for the nine months endedSeptember 30, 2020 , due to the reasons discussed above. We had interest expense of$796,930 for the nine months endedSeptember 30, 2020 , compared to interest expense of$2,322,780 for the nine months endedJune 30, 2019 , a decrease in interest expense of$1,525,850 or 66%, due to a lower amount of 17 -------------------------------------------------------------------------------- term debt outstanding during the nine months endedSeptember 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 other income of$101 for the nine months endedSeptember 30, 2020 , compared to$920,071 for the nine months endedSeptember 30, 2019 , which was in connection with the Company receiving a payment of$907,500 related to the proceeds of an insurance settlement for a fire that had occurred at the used oil re-refining plant located inChurchill County, Nevada , which we previously rented. The Company previously determined this loan was uncollectible and wrote it off.
We had a loss on the sale of assets of
We had a$1,844,369 gain on change in value of derivative liability for the nine months endedSeptember 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$331,715 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$8,453,392 for the nine months endedSeptember 30, 2020 , compared to a net loss of$6,857,643 for the nine months endedSeptember 30, 2019 , an increase in net loss of$1,595,749 or 23% from the prior period due to the reasons described above. The majority of our net loss for the nine months endedSeptember 30, 2020 , was attributable to the decline in market conditions and commodity prices. 18 --------------------------------------------------------------------------------
Each of our segments' income (loss) from operations during the nine months ended
Nine Months Ended September 30, $ Change -
Favorable % Change - Favorable
Black Oil Segment 2020 2019 (Unfavorable) (Unfavorable)
Revenues $ 61,062,628 $ 103,053,529 $ (41,990,901) (41) %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 46,601,716 88,374,446 41,772,730 47 %
Depreciation and amortization attributable to
costs of revenues 2,960,699 3,122,664 161,965 5 %
Gross profit 11,500,213 11,556,419 (56,206) *%
Selling, general and administrative expense 15,180,569 14,500,306 (680,263) (5) %
Depreciation and amortization attributable to
operating expenses 1,072,877 1,005,315 (67,562) (7) %
Loss from operations $ (4,753,233) $ (3,949,202) $ (804,031) (20) %
Refining Segment
Revenues $ 22,309,670 $ 9,212,477 $ 13,097,193 142 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 21,772,587 7,767,882 (14,004,705) (180) %
Depreciation and amortization attributable to
costs of revenues 341,498 431,948 90,450 21 %
Gross profit 195,585 1,012,647 (817,062) (81) %
Selling, general and administrative expense 1,867,027 1,424,572 (442,455) (31)%
Depreciation and amortization attributable to operating expenses 278,492 301,194 22,702 8% Loss from operations $ (1,949,934)$ (713,119) $ (1,236,815) (173)% Recovery Segment Revenues $ 11,588,890$ 8,511,257 $ 3,077,633 36% Cost of revenues (exclusive of depreciation and amortization shown separately below) 11,847,040 7,589,758 (4,257,282)
(56)%
Depreciation and amortization attributable to costs of revenues 429,123 411,014 (18,109) (4)% Gross profit (loss) (687,273) 510,485 (1,197,758) (235)% Selling, general and administrative expense 1,925,052 1,604,906 (320,146)
(20)%
Depreciation and amortization attributable to operating expenses 61,350 61,350 - -% Loss from operations $ (2,673,675)$ (1,155,771) $ (1,517,904) (131)% * Less than 1%. Our Black Oil segment generated revenues of$61,062,628 for the nine months endedSeptember 30, 2020 , with cost of revenues (exclusive of depreciation and amortization) of$46,601,716 , and depreciation and amortization attributable to cost of revenues of$2,960,699 . During the nine months endedSeptember 30, 2019 , these revenues were$103,053,529 with cost of revenues (exclusive of depreciation and amortization) of$88,374,446 , and depreciation and amortization attributable to cost of revenues of$3,122,664 Income from operations decreased for the nine months endedSeptember 30, 2020 , compared to 2019, as a result of lower volumes of processed products at the refineries, and other facilities, as well as an overall decrease in margins throughout the business as a result of lower commodity pricing, offset by decreased operating expenses through our various facilities, along with diligent management of our street collections and pricing. Our Black Oil segment's volume decreased approximately 18% during the nine months endedSeptember 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 a result of the COVID-19 pandemic. Volumes collected through our H&H Oil and Heartland collection facilities decreased 2% during the nine months endedSeptember 30, 2020 , compared to the same period in 2019. One of our key initiatives 19 --------------------------------------------------------------------------------
continues to be a focus on growing our own volumes of collected material and displacing the third-party oil processed in our facilities.
Our Refining segment includes the business operations of our Refining and Marketing operations, 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. During the nine months endedSeptember 30, 2020 , our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were$21,772,587 , of which the processing costs for our Refining and Marketing business located at KMTEX were$1,202,050 , and depreciation and amortization attributable to cost of revenues of$341,498 . Revenues for the same period were$22,309,670 . During the nine months endedSeptember 30, 2019 , our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were$7,767,882 , which included the processing costs at KMTEX of$1,419,225 , and depreciation and amortization attributable to cost of revenues of$431,948 .Revenues for the same period were$9,212,477 . Overall volume for the Refining and Marketing division decreased 16% during the nine months endedSeptember 30, 2020 , as compared to the same period in 2019. Our fuel oil cutter volumes decreased 46% for the nine months endedSeptember 30, 2020 , compared to the same period in 2019. Our pygas volumes decreased 6% for the nine months endedSeptember 30, 2020 , as compared to the same period in 2019. The lower margins were a result of decreases in available feedstock volumes. We experienced a large decrease in volumes being received from third party facilities as a result of COVID-19 as well as recent weather delays as a result of the hurricanes in the Gulf which caused some of these facilities to shut-down operations for short periods of time. We have also had to assess the volume of fuel oil cutterstocks that we manage due to enhanced quality of products being demanded in the marketplace. Our Recovery segment generated revenues of$11,588,890 for the nine months endedSeptember 30, 2020 , with cost of revenues (exclusive of depreciation and amortization) of$11,847,040 , and depreciation and amortization attributable to cost of revenues of$429,123 . During the nine months endedSeptember 30, 2019 , these revenues were$8,511,257 with cost of revenues (exclusive of depreciation and amortization) of$7,589,758 , and depreciation and amortization attributable to cost of revenues of$411,014 . Income from operations decreased for the nine months endedSeptember 30, 2020 , compared to 2019, as a result of increased operating expenses through our various facilities. Our Recovery segment includes the business operations of Vertex Recovery Management as well as our Group III base oil business. Vertex 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 36% as a result of increased volumes compared to the same period in 2019. Volumes of petroleum products acquired in our Recovery business were up 20% during the nine months endedSeptember 30, 2020 , compared to the same period during 2019. This segment periodically participates in project work that is not ongoing, thus we expect to see fluctuations in revenue and income before income taxes from period to period. These projects are typically bid related and can take time to line out and get started; however, we believe these are very good projects for the Company and we anticipate more in the upcoming periods. The Company purchases product/feedstock from third-party collectors as well as internally collected product using its fleet of trucks. Our long-term goal is to collect as much of our product/feedstock as possible as this helps to improve margins and ultimately net income of the Company. The more product/feedstock we can collect with our own fleet and displace third-party purchases improves the overall profitability of the Company through cost reductions, as our internally collected product/feedstock is generally cheaper than product/feedstock we have to purchase from third-parties. In general, the more product/feedstock we are required to acquire from third-parties, the lower our margins. While the breakdown between internally sourced and third-party sourced product/feedstock has no effect on revenue (which is a function of fluctuating product spreads), it does have an effect on cost of revenues, and therefore our profit before corporate selling, general and administrative expenses. Specifically, a higher number of third-party sourced product/feedstock generally results in increases to costs of revenues. Inventories are also affected to a limited extent by collection and production values - the more product we collect, the greater our inventories of product/feedstock, at least until such product/feedstock is processed into end-products. The inventory levels of our end-products are determined based on supply and demand, and how quickly such products can be transported, and not typically dependent on the amount of products/feedstock we source internally or externally. 20 --------------------------------------------------------------------------------
The following table sets forth the high and low spot prices during the nine
months ended
High Date Low Date
U.S. Gulfcoast No. 2 Waterborne
(dollars per gallon) $ 1.95 January 3 $ 0.42 April 27
U.S. Gulfcoast Unleaded 87 Waterborne
(dollars per gallon) $ 1.75 January 3 $ 0.40 March 23
U.S. Gulfcoast Residual Fuel No. 6 3%
(dollars per barrel) $ 47.34 January 29 $ 12.00 April 21
NYMEX Crude oil (dollars per barrel) $ 63.27 January 6 $ (37.63) April 20
Reported in Platt's US Marketscan (
The following table sets forth the high and low spot prices during the nine months endedSeptember 30, 2019 , for our key benchmarks. 2019 Benchmark High Date Low DateU.S. Gulfcoast No. 2 Waterborne (dollars per gallon)$ 2.01 September 16$ 1.53 January 2U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)$ 2.08 April 10$ 1.31 January 2 U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)$ 68.54 April 25$ 49.82 January 2 NYMEX Crude oil (dollars per barrel)$ 66.30 April 23$ 46.54 January 2
Reported in Platt's US Marketscan (
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 of 2020 and global storage considerations. Moving towards the end of 2020 and into 2021, we anticipate that our results of operations will continue to be significantly impacted by the price of, and demand for oil, COVID-19 and the global response thereto. Our margins are a function of the difference between what we are able to pay for raw materials and the market prices for the range of products produced. The various petroleum products produced are typically a function of crude oil indices and are quoted on multiple exchanges such as theNew York Mercantile Exchange ("NYMEX"). These prices are determined by a global market and can be influenced by many factors, including but not limited to supply/demand, weather, politics, and global/regional inventory levels. As such, we cannot provide any assurances regarding results of operations for any future periods, as numerous factors outside of our control affect the prices paid for raw materials and the prices (for the most part keyed to the NYMEX) that can be charged for such products. Additionally, for the near term, results of operations will be subject to further uncertainty, as the global markets and exchanges, including the NYMEX, continue to experience volatility. As our competitors bring new technologies to the marketplace, which will likely enable them to obtain higher values for the finished products created through their technologies from purchased black oil feedstock, we anticipate that they will have to pay more for feedstock due to the additional value received from their finished product (i.e., as their margins increase, they are able to increase the prices they are willing to pay for feedstock). If we are not able to continue to refine and improve our technologies and gain efficiencies in our technologies, we could be negatively impacted by the ability of our competitors to bring new processes to market which compete with our processes, as well as their ability to outbid us for feedstock supplies. Additionally, if we are forced to pay more for feedstock, our cash flows will be negatively impacted and our margins will decrease. 21 --------------------------------------------------------------------------------
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$125,153,280 as ofSeptember 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 nine months endedSeptember 30, 2020 . We had total current liabilities of$23,391,460 as ofSeptember 30, 2020 , compared to$24,797,299 atDecember 31, 2019 . We had total liabilities of$61,069,930 as ofSeptember 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 nine months endedSeptember 30, 2020 , and the reduction of debt associated therewith. We had working capital of$9,534,250 as ofSeptember 30, 2020 , compared to working capital of$2,609,609 as ofDecember 31, 2019 . The increase in working capital fromDecember 31, 2019 toSeptember 30, 2020 is mainly due to the generation of additional liquidity from the closing of the Heartland SPV transaction during the nine months endedSeptember 30, 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$7.0 million is included in cash as ofSeptember 30, 2020 , and the remaining balance was used to fund 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.
The Company's outstanding debt facilities as of
22
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Balance on
September 30, Balance on
Creditor Loan Type Origination Date Maturity Date Loan Amount 2020 December 31, 2019
Encina Business
Credit, LLC Term Loan February 1, 2017 February 1, 2022 $ 20,000,000 $ 5,658,000 $ 13,333,000
Encina Business Credit SPV, LLC Revolving Note February 1, 2017 February 1, 2022$ 10,000,000 -
3,276,230
Encina Business Credit, LLC Capex Loan August 7, 2020 February 1, 2022$ 2,000,000 1,250,617
-
Wells Fargo Equipment Lease-Ohio Finance Lease April-May, 2019 April-May, 2024$ 621,000 465,678 551,260 AVT Equipment Lease-Ohio Finance Lease April 2, 2020 April 2, 2023$ 337,155 410,928 - AVT Equipment Lease-HH Finance Lease May 22, 2020 May 22, 2023$ 551,609 485,745 - John Deere Note Note May 27, 2020 June 24, 2024$ 152,643 140,487 - Tetra Capital Lease Finance Lease May, 2018 May, 2022$ 419,690 195,761 264,014 Well Fargo Equipment Lease-VRM LA Finance Lease March, 2018 March, 2021$ 30,408 4,485 12,341 Texas Citizens Bank PPP Loan May 5, 2020 April 28, 2022$ 4,222,000 4,222,000 - Insurance premiums Various institutions financed Various < 1 year$ 2,902,428 1,893,668 1,165,172 Total 14,727,369 18,602,017 Deferred finance costs - (47,826) Total, net of deferred finance costs$ 14,727,369 $ 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 $ 4,758,000 $ - $ - $ - $ -
Encina Business Credit SPV,
LLC - - - - - -
Encina Business Credit, LLC 158,966 1,091,651 - - - -
John Deere Note 37,071 37,991 38,934 26,491 - -
Well Fargo Equipment Lease-
Ohio 119,356 125,643 132,261 88,418 - -
AVT Equipment Lease-Ohio 124,308 135,272 151,348 - - -
AVT Equipment Lease-HH 145,296 158,111 182,338 - - -
Tetra Capital Lease 96,530 99,231 - - - -
Well Fargo Equipment Lease-
VRM LA 4,485 - - - - -
Texas Citizens Bank 1,877,461 2,344,539 - - - -
Various institutions 1,893,668 - - - - -
Totals $ 5,357,141 $ 8,750,438 $ 504,881 $ 114,909 $ - $ -
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Need for additional funding
Our re-refining business will require significant capital to design and construct any new facilities. The facility infrastructure would be an additional capitalized expenditure to these process costs and would depend on the location and site specifics of the facility. Additionally, as part of our ongoing efforts to maintain a capital structure that is closely aligned with what we believe to be the potential of our business and goals for future growth, which is subject to cyclical changes in commodity prices, we will be exploring additional sources of external liquidity. The receptiveness of the capital markets to an offering of debt or equities cannot be assured and may be negatively impacted by, among other things, debt maturities, current market conditions, and potential stockholder dilution. The sale of additional securities, if undertaken by us and if accomplished, may result in dilution to our shareholders. However, such future financing may not be available in amounts or on terms acceptable to us, or at all. In addition to the above, we may also seek to acquire additional businesses or assets. In addition, the Company could consider selling assets if a more strategic acquisition presents itself. Finally, in the event we deem such transaction in our best interest, we may enter into a business combination or similar transaction in the future. We will also need additional capital in the future to redeem our Series B Preferred Stock and Series B1 Preferred Stock, 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.
24
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Cash flows for the nine months ended
Nine Months Ended
2020 2019
Beginning cash, cash equivalents and restricted cash $ 4,199,825 $ 2,849,831
Net cash provided by (used in):
Operating activities 1,351,184 (3,058,106)
Investing activities (6,005,620) (3,200,700)
Financing activities 16,107,716 5,812,788
Net increase (decrease) in cash, cash equivalents and restricted cash
11,453,280 (446,018)
Ending cash, cash equivalents and restricted cash $
15,653,105
Net cash provided by operating activities was$1,351,184 for the nine months endedSeptember 30, 2020 , as compared to net cash used in operating activities of$3,058,106 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 nine month period endedSeptember 30, 2020 , compared to the same period in 2019, was the fluctuation in market and commodity prices during the nine months endedSeptember 30, 2020 , a decrease of$4,952,388 in accounts receivable and$3,939,674 in inventory, and$5,484,734 of net cash settlements on commodity derivatives. Investing activities used cash of$6,005,620 for the nine months endedSeptember 30, 2020 , as compared to having used$3,200,700 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$16,107,716 for the nine months endedSeptember 30, 2020 , as compared to providing cash of$5,812,788 during the corresponding period in 2019. Financing activities for the nine months endedSeptember 30, 2020 were comprised of contributions from the Tensile transaction of$21.0 million , offset by approximately$9.7 million used to pay down our long-term debt,$4.2 million of proceeds from our PPP loan (described in greater detail under " Note 6. Line of Credit and Long-Term Debt " to the unaudited financial statements included herein, under "Loan Agreements"), and$3.3 million of payments on our line of credit. Financing activities for the nine months endedSeptember 30, 2019 were comprised of note proceeds of approximately$2.8 million , offset by approximately$3.5 million used to pay down our long-term debt, and$1.5 million of proceeds on our line of credit.
More information regarding our outstanding line of credits, promissory notes and long-term debt can be found under " Note 6. Line of Credit and Long-Term Debt " to the unaudited financial statements included herein.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management regularly evaluates its estimates and judgments, including those related to revenue recognition, goodwill, intangible assets, long-lived assets valuation, 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 atSeptember 30, 2020 . 25 --------------------------------------------------------------------------------
Leases
InFebruary 2016 , the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. We adopted ASU No. 2016-02, Leases (Topic 842) effectiveJanuary 1, 2019 and elected certain practical expedients which permit us to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing leases, to not reassess initial direct costs for any existing leases, and to not separate lease and nonlease components for all classes of underlying assets. We also made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet for all classes of underlying assets. Additional information and disclosures required by this new standard are contained in "Part I" - "Item 1. Financial Statements" - " Note 13. Leases ". 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 accompanyingSeptember 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 26 --------------------------------------------------------------------------------
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 has investments in certain legal entities in which equity investors do not have (1) sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support, (2) as a group, (the holders of the equity investment at risk), do not have either the power, through voting or similar rights, to direct the activities of the legal entity that most 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 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.
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