VERTEX ENERGY, INC.
Strategy and Plan of Operations
The Principal elements of our strategy include:
•Expand Feedstock Supply Volume. We intend to expand our feedstock supply volume
by growing our collection and aggregation operations. We plan to increase the
volume of feedstock we collect directly by developing new relationships with
generators and working to displace incumbent collectors; increasing the number
of collection personnel, vehicles, equipment, and geographical areas we serve;
and acquiring collectors in new or existing territories. We intend to increase
the volume of feedstock we aggregate from third-party collectors by expanding
our existing relationships and developing new vendor relationships. We believe
that our ability to acquire large feedstock volumes will help to cultivate new
vendor relationships because collectors often prefer to work with a single,
reliable customer rather than manage multiple relationships and the uncertainty
of excess inventory.
•Broaden Existing Customer Relationships and Secure New Large Accounts. We
intend to broaden our existing customer relationships by increasing sales of
used motor oil and re-refined products to these accounts. In some cases, we may
also seek to serve as our customers' primary or exclusive supplier. We also
believe that as we increase our supply of feedstock and re-refined products that
we will secure larger customer accounts that require a partner who can
consistently deliver high volumes.
•Re-Refine Higher Value End Products. We intend to develop, lease, or acquire
technologies to re-refine our feedstock supply into higher-value end
products. We believe that the expansion of our facilities and our technology,
and investments in additional technologies, will enable us to upgrade feedstock
into end products, such as lubricating base oil, that command higher market
prices than the current re-refined products we produce.
•Pursue Selective Strategic Relationships or Acquisitions. We plan to grow
market share by consolidating feedstock supply through partnering with or
acquiring collection and aggregation assets. Such acquisitions and/or
partnerships could increase our revenue and provide better control over the
quality and quantity of feedstock available for resale and/or upgrading as well
as providing additional locations for the implementation of TCEP, if we deem
such commercially reasonable. In addition, we intend to pursue further vertical
integration opportunities by acquiring complementary recycling and processing
technologies where we can realize synergies by leveraging our customer and
vendor relationships, infrastructure, and personnel, and by eliminating
duplicative overhead costs.
RESULTS OF OPERATIONS
Description of Material Financial Line Items:
Revenues
We generate revenues from three existing operating segments as follows:
BLACK OIL - Revenues for our Black Oil segment are comprised primarily of
product sales from our re-refineries and feedstock sales (used motor oil) which
are purchased from generators of used motor oil such as oil change shops and
garages, as well as a network of local and regional suppliers. Volumes are
consolidated for efficient delivery and then sold to third-party re-refiners and
fuel oil blenders for the export market. In addition, through used oil
re-refining, we re-refine used oil into different commodity products. Through
the operations at our Marrero, Louisiana facility, we produce a Vacuum Gas Oil
(VGO) product from used oil re-refining which is then sold via barge to crude
refineries to be utilized as an intermediate feedstock in the refining process,
as well as to the marine fuels market.
Through the operations at our Columbus, Ohio facility, the ownership of 65% of
which was transferred to Tensile in connection with the Heartland SPV (discussed
above under "Part I" - "Item 1. Business" - " Prior Material Acquisitions and
Transactions "), effective January 1, 2020 , we produce a base oil finished
product which is then sold via truck or rail car to end users for blending,
packaging and marketing of lubricants.
REFINING AND MARKETING - The Refining and Marketing segment generates revenues
relating to the sales of finished products. The Refining and Marketing segment
gathers hydrocarbon streams in the form of petroleum distillates, transmix and
other chemical products that have become off-specification during the
transportation or refining process. These feedstock streams are purchased from
pipeline operators, refineries, chemical processing facilities and third-party
providers, and
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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. Additionally, this segment includes the wholesale
distribution of gasoline, blended gasoline, and diesel for use as engine fuel to
operate automobiles, trucks, locomotives, and construction equipment.
RECOVERY - 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.
Our revenues are affected by changes in various commodity prices including crude
oil, natural gas, #6 oil and metals.
Cost of Revenues
BLACK OIL - Cost of revenues for our Black Oil segment are comprised primarily
of feedstock purchases from a network of providers. Other cost of revenues
include processing costs, transportation costs, purchasing and receiving costs,
analytical assessments, brokerage fees and commissions, and surveying and
storage costs.
REFINING AND MARKETING - The Refining and Marketing segment incurs cost of
revenues relating to the purchase of gasoline, blended gasoline, diesel,
feedstock, purchasing and receiving costs, and inspection and processing of the
feedstock into gasoline blendstock, pygas and fuel oil cutter by a third party.
Cost of revenues also includes broker's fees, inspection and transportation
costs.
RECOVERY - The Recovery segment incurs cost of revenues relating to the purchase
of ferrous and non-ferrous recyclable Metal(s) products that are recovered from
manufacturing and consumption. 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.
Depreciation and Amortization Expenses
Our depreciation and amortization expenses are primarily related to the fixed
assets and intangible assets acquired in connection with the Vertex Holdings,
L.P. (formerly Vertex Energy, L.P. ), a Texas limited partnership ("Holdings"),
Omega Refining, LLC's ("Omega Refining") and Warren Ohio Holdings Co., LLC ,
f/k/a Heartland Group Holdings, LLC ("Heartland"), Acadiana Recovery, LLC
("Acadiana"), Nickco Recycling, Inc. ("Nickco"), Ygriega Environmental Services,
LLC ("Ygriega") and Specialty Environmental Services ("SES") and Crystal Energy,
LLC acquisitions.
Depreciation and amortization expense attributable to cost of revenues reflects
the depreciation and amortization of the fixed assets at our refineries along
with rolling stock at our collection branches.
Depreciation and amortization expense attributable to operating expenses
reflects depreciation and amortization related to our corporate and
administrative offices along with internet technology (IT) related items and
intangibles.
64-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDEDDECEMBER 31, 2020 COMPARED TO THE THREE MONTHS ENDEDDECEMBER 31, 2019 Set forth below are our results of operations for the three months endedDecember 31, 2020 , as compared to the same period in 2019. Three Months Ended December 31, 2020 2019 $ Change % Change Revenues$ 40,067,300 $ 42,588,302 $ (2,521,002) (6) % Cost of revenues (exclusive of depreciation and amortization shown separately below) 33,544,666 31,045,027 2,499,639 8 % Depreciation and amortization attributable to costs of revenues 1,359,032 1,390,651 (31,619) (2) % Gross profit * 5,163,602 10,152,624 (4,989,022) (49) % Selling, general and administrative expenses 7,171,616 6,652,623 518,993 8 % Depreciation and amortization attributable to operating expenses 482,869 455,953 26,916 6 % Total operating expenses 7,654,485 7,108,576 545,909 8 % Income (loss) from operations (2,490,883) 3,044,048 (5,534,931) (182) % Other Income - 126 (126) (100) % Loss on sale of assets (425) (105,554) 105,129 100 % Gain (loss) on change in derivative warrant liability (205,565) (819,239) 613,674 75 % Interest Expense (245,910) (747,291) 501,381 67 % Total other expense (451,900) (1,671,958) 1,220,058 73 % Income (loss) before income tax (2,942,783) 1,372,090 (4,314,873) (314) % Income tax provision - - - - % Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest 449,169 (62,112) 511,281 (823) % Net income (loss) attributable toVertex Energy , Inc.$ (3,391,952) $ 1,434,202 $ (4,826,154) (337) %
*The Company changed its presentation of gross profit, beginning in its Quarterly Report on Form 10-Q for the quarter ended
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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 three months ended December 31, 2020 , we had a loss of $1.0
million in our hedging instruments, which increased 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.
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 6% for the fourth quarter of 2020, compared to the same
period in 2019, due to decreased volumes of products sold during the period as
well as lower commodity prices which had an impact on product margins. Although
we did have a new division, Crystal, which added revenue to the quarter compared
to a year ago. Total volume decreased 5% and gross profit decreased 49% for the
three months ended December 31, 2020 , compared to the same period in 2019.
Additionally, our per barrel margin decreased 47% relative to the three months
ended December 31, 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 ($5,163,602 for the 2020 period versus $10,152,624 for the 2019 period).
The majority of this decrease was the result of the drop in commodity prices
during the year ended 2020, which resulted in reduced margins and decreased
product spreads during this period. Volumes were impacted as a result of
decreased availability of feedstocks, specifically used motor oil, in the
overall marketplace which forced us to have reduced production rates at each of
our facilities. This decrease in availability was largely due to continued
negative impacts relating to shelter in place orders in the locations in which
we collect used motor oil as a result of the COVID-19 pandemic, which directly
impacted the generation of used oil, and which in turn caused a reduction in
volumes of feedstock available for collections and for use in our refineries.
During the three months ended December 31, 2020 , total cost of revenues
(exclusive of depreciation and amortization) was $33,544,666 , compared to
$31,045,027 for the three months ended December 31, 2019 , an increase of
$2,499,639 or 8% from the prior period. The main reason for the increase was the
addition during the third quarter of Crystal, which accounted for approximately
35% of our total cost of goods sold during the period.
For the three months ended December 31, 2020 , total depreciation and
amortization expense attributable to cost of revenues was $1,359,032 , compared
to $1,390,651 for the three months ended December 31, 2019 , a decrease of
$31,619 , mainly due to some of our assets becoming fully depreciated between
periods.
Commodity prices decreased approximately 35% for the three months ended December
31, 2020 , compared to the same period in 2019. The average posting (U.S.
Gulfcoast #2 Waterborne) for the three months ended December 31, 2020 decreased
$26.81 per barrel from a three-month average of $75.84 per barrel during the
three months ended December 31, 2019 to $49.03 per barrel during the three
months ended December 31, 2020 .
Overall gross profit decreased 49% and our margin per barrel decreased
approximately 47% for the three months ended December 31, 2020 , compared to the
same period in 2019. In our street collections and third party purchasing we
were focused on lowering the prices paid to generators and suppliers for used
motor oil during 2020.
Volumes in our street collections were up 9% for the three months ended December
31, 2020 as compared to the same period in 2019, the cost of the oil collected
per gallon was down 92% and revenue was up 49% as a result of increased charges
for our services from the prior period in our street collections. 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.
Overall, this provided an additional 4% of gross margin to the business or
approximately $0.7 million for the three-month period ended December 31, 2020 .
One of our key initiatives continues to be a focus on growing our own volumes of
collected material and displacing the third-party oil processed in our
facilities.
We had selling, general and administrative expenses of $7,171,616 for the
three months ended December 31, 2020 , compared to $6,652,623 from the prior
year's period, an increase of $518,993 or 8% from the prior period. This
increase is primarily due to the additional selling, general and administrative
expenses incurred during the period as a result of increased personnel costs,
legal expenses, and insurance expenses related to our expansion of trucks and
facilities through organic growth.
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We had depreciation and amortization attributable to operating expenses of
$482,869 for the three months ended December 31, 2020 , compared to $455,953 for
the three months ended December 31, 2019 , a decrease of $26,916 , mainly due to
some of our assets becoming fully depreciated.
We had total other expense of $451,900 for the three months ended December 31,
2020 , compared to total other expense of $1,671,958 for the three months ended
December 31, 2019 . The main reason for the decrease in other expenses for 2020
was the loss of $205,565 during 2020, compared to the loss of $819,239 during
2019, on change in value of derivative liability, in connection with certain
warrants granted in June 2015 and May 2016 , as described in greater detail in
" Note 14. Preferred Stock and Temporary Equity " to the consolidated
financial statements included herein under "Part II"-"Item 8- Financial
Statements and Supplementary Data". The Company also received a total of $21.0
million from the Tensile transaction during 2020, of which approximately $9.0
million was used to pay down our debt obligations. Due to this, we had a lower
balance owed under our line of credit and term loan, along with a lower interest
rate on the term debt outstanding for the three months ended December 31, 2020 ,
compared to 2019.
We had loss before income taxes of $2,942,783 for the three months ended
December 31, 2020 compared to income before income taxes of $1,372,090 for the
three months ended December 31, 2019 . The decrease in income was mainly due to
the decrease in gross profit and the increase in selling, general and
administrative expenses as discussed above, partially offset by a reduction in
interest expense and a reduction in change on derivative warrant liability
related to the non-cash adjustment relating to the value of the June 2015 and
May 2016 warrants, as discussed above. The June 2015 warrants have expired as of
December 31, 2020 .
We had a net loss attributable to Vertex Energy, Inc. of $3,391,952 for the
three months ended December 31, 2020 , compared to net income attributable to
Vertex Energy, Inc. of $1,434,202 for the three months ended December 31, 2019 .
The decrease in net income was primarily due to lower volumes and compressed
spreads in the business.
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Each of our segments' gross profit (deficit) during the three months ended
Three Months Ended December 31,
2020 2019 $ Change % Change
Black Oil
Revenues $ 21,165,739 $ 36,215,635 $ (15,049,896) (42) %
Cost of revenues (exclusive
of depreciation and
amortization shown separately
below) 15,955,589 24,822,137 (8,866,548) (36) %
Depreciation and amortization
attributable to costs of
revenues 1,072,575 1,102,062 (29,487) (3) %
Gross profit * $ 4,137,575 $ 10,291,436 $ (6,153,861) (60) %
Three Months Ended December 31,
2020 2019 $ Change % Change
Refining and Marketing
Revenues $ 13,494,715 $ 3,745,290 $ 9,749,425 260 %
Cost of revenues (exclusive
of depreciation and
amortization shown separately
below) 13,434,600 2,883,187 10,551,413 366 %
Depreciation and amortization
attributable to costs of
revenues 128,660 147,898 (19,238) (13) %
Gross profit (deficit) * $ (68,545) $ 714,205 $ (782,750) (110) %
Three Months Ended December 31,
2020 2019 $ Change % Change
Recovery
Revenues $ 5,406,846 $ 2,627,377 $ 2,779,469 106 %
Cost of revenues (exclusive
of depreciation and
amortization shown separately
below) 4,154,477 3,339,703 814,774 24 %
Depreciation and amortization
attributable to costs of
revenues 157,797 140,691 17,106 12 %
Gross profit (deficit) * $ 1,094,572 $ (853,017) $ 1,947,589 228 %
* The Company changed its presentation of gross profit, beginning in its Quarterly Report on Form 10-Q for the quarter
ended September 30, 2020 , to include depreciation and amortization of our refineries. This change in presentation had
no effect on the previously reported results of operations. The disclosures above have been retroactively adjusted
from the prior presentations to include depreciation and amortization of our refineries.
Our Black Oil segment generated revenues of $21,165,739 for the three months
ended December 31, 2020 , with cost of revenues (exclusive of depreciation and
amortization) of $15,955,589 , and depreciation and amortization attributable to
cost of revenues of $1,072,575 . During the three months ended December 31, 2019 ,
these revenues were $36,215,635 with cost of revenues (exclusive of depreciation
and amortization) of $24,822,137 and depreciation and amortization attributable
to cost of revenues of $1,102,062 . Gross profit decreased for the three months
ended December 31, 2020 , compared to 2019, as a result of lower volumes of
processed products at our 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 throughout our various
facilities, along with decreased street collection and pricing as a result of
our continued efforts to cut costs.
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Our Black Oil segment's volume decreased approximately 23% during the three
months ended December 31, 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, in addition to
the downtime we experienced at our Marrero facility during October 2020 , as a
result of a fire. Volumes collected through our H&H Oil and Heartland collection
facilities increased 9% during the three months ended December 31, 2020 ,
compared to the same period in 2019. One of our key initiatives continues to be
a focus on growing our own volumes of collected material and displacing the
third-party oil processed in our facilities.
Our Refining segment includes the business operations of our Refining and
Marketing operations, as well as our newly acquired Crystal subsidiary. With the
acquisition of Crystal, we now operate as a wholesale distributor of motor fuels
which include gasoline, blended gasoline and diesel. During the three months
ended December 31, 2020 , our Refining and Marketing cost of revenues (exclusive
of depreciation and amortization) were $13,434,600 , of which the processing
costs for our Refining and Marketing business located at KMTEX were $420,687 ,
and depreciation and amortization attributable to cost of revenues was $128,660 .
Revenues for the same period were $13,494,715 while gross deficit from
operations was $68,545 . During the three months ended December 31, 2019 , our
Refining and Marketing cost of revenues (exclusive of depreciation and
amortization) were $2,883,187 , which included the processing costs at KMTEX of
$588,070 , and depreciation and amortization attributable to cost of revenues was
$147,898 . Revenues for the same period were $3,745,290 , while gross profit from
operations was $714,205 . We experienced a decrease in margins as a result of
less feedstock available for processing.
Overall volume for the Refining and Marketing segment decreased 28% during the
three months ended December 31, 2020 , as compared to the same period in 2019.
Our fuel oil cutter volumes decreased 52% for the three months ended December
31, 2020 , compared to the same period in 2019. Our pygas volumes decreased 22%
for the three months ended December 31, 2020 , as compared to the same period in
2019. We experienced a large decrease in volumes being received from third party
facilities as a result of COVID-19. 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. This has resulted in a reduction in gross profit
for this division.
Our Recovery segment generated revenues of $5,406,846 for the three months
ended December 31, 2020 , with cost of revenues (exclusive of depreciation and
amortization) of $4,154,477 , and depreciation and amortization attributable to
cost of revenues of $157,797 . During the three months ended December 31, 2019 ,
these revenues were $2,627,377 , with cost of revenues (exclusive of depreciation
and amortization) of $3,339,703 , and depreciation and amortization attributable
to cost of revenues of $140,691 . Gross profit increased for the three months
ended December 31, 2020 , compared to 2019, as a result of increased volumes of
Group III base oils attributable to our Recovery segment 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 acted as Penthol
C.V . of the Netherlands aka Penthol LLC's (a Penthol subsidiary in the United
States ) ("Penthol's") exclusive agent to provide marketing, sales, and
logistical duties of Group III base oil from the United Arab Emirates to the
United States from June 2016 to January 2021 . Revenues for this segment
increased 106% as a result of an increase in volumes during the three months
ended December 31, 2020 , compared to the same period in 2019. Volumes were also
up in our metals division during the three months ended December 31, 2020 ,
compared to the same period during 2019, due to certain one-time projects. This
segment periodically participates in project work that is not ongoing, thus we
expect to see fluctuations in revenue and gross profit from this segment from
period to period.
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RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020 COMPARED TO
THE FISCAL YEAR ENDED DECEMBER 31, 2019
Year Ended December 31,
2020 2019 $ Change % Change
Revenues $ 135,028,488 $ 163,365,565 $ (28,337,077) (17) %
Cost of revenues (exclusive of depreciation
and amortization shown separately below) 113,766,009 134,777,113 (21,011,104) (16) %
Depreciation and amortization attributable to
costs of revenues 5,090,352 5,356,277 (265,925) (5) %
Gross profit * 16,172,127 23,232,175 (7,060,048) (30) %
Selling, general and administrative expenses 26,144,264 24,182,407 1,961,857 8 %
Depreciation and amortization attributable to
operating expenses 1,895,588 1,823,812 71,776 4 %
Total operating expenses 28,039,852 26,006,219 2,033,633 8 %
Loss from operations (11,867,725) (2,774,044) (9,093,681) (328) %
Other income (expense)
Other income 101 920,197 (920,096) (100) % Loss on sale of assets (124,515) (74,111) (50,404) 68 % Gain (loss) on change in value of derivative warrant liability 1,638,804 (487,524) 2,126,328 436 % Interest expense (1,042,840) (3,070,071) 2,027,231 66 % Total other income (expense) 471,550 (2,711,509) 3,183,059 117 % Loss before income tax (11,396,175) (5,485,553) (5,910,622) (108) % Income tax benefit - - - - % Net loss (11,396,175) (5,485,553) (5,910,622) (108) % Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest 639,940 (436,974) 1,076,914 246 %
Net loss attributable to
(138) %
*The Company changed its presentation of gross profit, beginning in its Quarterly Report on Form 10-Q for the quarter ended
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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 year ended December 31, 2020 , we had a gain of $3.4 million
in our hedging instruments, which lowered our cost of goods sold, compared to a
loss of $2.3 million during the year ended December 31, 2019 . 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.
Our cost of revenues is a function of the ultimate price we are required to pay
to acquire feedstocks, how efficient we are in acquiring such feedstocks (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 17% for the year ended December 31, 2020 compared to
the same period in 2019, due primarily to lower commodity prices and decreased
volumes at our refineries, during the year ended December 31, 2020 , compared to
the prior year's period. Total volume was down 5% during the year ended December
31, 2020 , compared to the same period in 2019.
During the year ended December 31, 2020 , total cost of revenues (exclusive of
depreciation and amortization) was $113,766,009 , compared to $134,777,113 for
the year ended December 31, 2019 , a decrease of $21,011,104 or 16% from the
prior period. The main reason for the decrease was the result of a decline in
commodity prices, which impacted our feedstock pricing, 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 24% for the year ended December
31, 2020 , relative to the year ended December 31, 2019 , due to lower volumes,
along with decreases in commodity prices for the finished products we sell. Our
per barrel margin is calculated by dividing the total volume of product sold (in
bbls) by total gross profit for the applicable period ($16,172,127 for the 2020
period versus $23,232,175 for the 2019 period).
Volumes in our street collections were up 1% for the year ended December 31,
2020 , as compared to the same period in 2019, and we saw a 28% decrease in the
discount we were paying for feedstock into our refineries during the period. In
addition, we saw a 33% decrease in operating costs (inclusive of depreciation
and amortization) on a per barrel basis for the year ended December 31, 2020 , as
compared to the same period in 2019. The cost of the oil collected on the street
was down 28% and revenue was up 38% 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 13% of gross margin to the business or approximately $2 million , for
the year ended December 31, 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 twelve months ended December 31, 2020 , total depreciation and
amortization expense attributable to cost of revenues was $5,090,352 , compared
to $5,356,277 for the twelve months ended December 31, 2019 , a decrease of
$265,925 , mainly due to some of our assets becoming fully depreciated.
We had gross profit as a percentage of revenue of 12.0% for the year ended
December 31, 2020 , compared to gross profit as a percentage of revenues of 14.3%
for the year ended December 31, 2019 . The main reason for the change was the
decrease in commodity prices and lower volumes at our refining facilities 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
$5.8 million positive impact on gross margins when compared to the same period a
year ago.
Commodity prices decreased approximately 39% for the year ended December 31,
2020 , compared to the same period in 2019. For example, the average posting
(U.S. Gulfcoast No. 2 Waterbone) for the year ended December 31, 2020 , decreased
$29.77 per barrel from a yearly average of $76.50 for the year ended December
31, 2019 , to $46.73 per barrel for the year ended December 31, 2020 .
We had selling, general and administrative expenses of $26,144,264 for the year
ended December 31, 2020 , compared to $24,182,407 for the prior year period, an
increase of $1,961,857 or 8% from the prior period, due to the additional
selling, general and administrative expenses incurred during the period as a
result of increased personnel costs, legal expenses, and
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insurance expenses related to expansion of trucks and facilities through organic
growth, as well as increased accounting, legal and consulting expenses related
to our January 2020 Tensile transaction.
We had depreciation and amortization expense attributable to operating expenses
of $1,895,588 for the year ended December 31, 2020 , compared to $1,823,812 for
the year ended December 31, 2019 , a decrease of $71,776 , mainly due to some of
our assets becoming fully depreciated.
We had total other income of $471,550 for the year ended December 31, 2020 ,
compared to total other expense of $2,711,509 for the year ended December 31,
2019 . The main reasons for the change in other expense during 2020 was the
receipt of a payment in 2019 of $907,500 related to the proceeds of an insurance
settlement for a fire that had occurred at the used oil re-refining plant
located in Churchill County, Nevada , which we previously rented during the year
ended December 31, 2019 . We also recognized a gain of $1,638,804 during 2020,
compared to a loss of $487,524 during 2019, on change in value of derivative
liability, in connection with certain warrants granted in June 2015 and May
2016 , as described in greater detail in " Note 14. Preferred Stock and
Temporary Equity " to the consolidated financial statements included herein
under "Part II"-"Item 8- Financial Statements and Supplementary Data". The
Company also received a total of $21.0 million from the Tensile transaction
during 2020, of which approximately $9.0 million was used to pay down our debt
obligations. Due to this, we had a significantly lower balance owed under our
line of credit and term loan along with a lower interest rate on the term debt
outstanding during the year ended December 31, 2020 , compared to 2019, which
decreased total interest expense to $1,042,840 for the year ended December 31,
2020 , compared to $3,070,071 for the year ended December 31, 2019 .
We had a loss before income taxes of $11,396,175 for the year ended December 31,
2020 , compared to a loss before income taxes of $5,485,553 , for the year ended
December 31, 2019 , a 108% increase. The increase in net loss before taxes was
attributable to the decline in market and commodity prices, which reduced
revenues during the period, as well as the increase in selling, general and
administrative expenses.
We had a net loss attributable to Vertex Energy, Inc. of $12,036,115 for the
year ended December 31, 2020 , compared to a net loss of $5,048,579 for the year
ended December 31, 2019 , an increase in net loss of $6,987,536 or 138% from the
prior period for the reasons described above.
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Each of our segment's gross profit (deficit) during these periods was as
follows:
Year Ended December 31,
2020 2019 $ Change % Change
Black Oil
Revenues $ 82,228,367 $ 139,269,164 $ (57,040,797) (41) %
Cost of revenues (exclusive of depreciation
and amortization shown separately below) 62,557,304 113,196,583 (50,639,279) (45) %
Depreciation and amortization attributable
to costs of revenues 4,033,274 4,224,726 (191,452) (5) %
Gross profit * $ 15,637,789 $ 21,847,855 $ (6,210,066) (28) %
Refining and Marketing
Revenues $ 35,804,385 $ 12,957,767 $ 22,846,618 176 %
Cost of revenues (exclusive of depreciation
and amortization shown separately below) 35,207,188 10,651,069 24,556,119 231 %
Depreciation and amortization attributable
to costs of revenues 470,158 579,846 (109,688) (19) %
Gross profit * $ 127,039 $ 1,726,852 $ (1,599,813) (93) %
Recovery
Revenues $ 16,995,736 $ 11,138,634 $ 5,857,102 53 %
Cost of revenues (exclusive of depreciation
and amortization shown separately below) 16,001,517 10,929,461 5,072,056 46 %
Depreciation and amortization attributable
to costs of revenues 586,920 551,705 35,215 6 %
Gross profit (deficit) * $ 407,299 $ (342,532) $ 749,831 (219) %
*The Company changed its presentation of gross profit, beginning in its Quarterly Report on Form 10-Q for the quarter ended
Our Black Oil segment generated revenues of$82,228,367 for the year endedDecember 31, 2020 , with cost of revenues (exclusive of depreciation and amortization) of$62,557,304 , and depreciation and amortization attributable to cost of revenues of$4,033,274 . During the year endedDecember 31, 2019 , these revenues were$139,269,164 with cost of revenues (exclusive of depreciation and amortization) of$113,196,583 , and depreciation and amortization attributable to cost of revenues of$4,224,726 . Gross profit decreased for the year endedDecember 31, 2020 , compared to 2019, as a result of lower volumes of processed products at our 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 19% during the year endedDecember 31, 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 increased 1% during the year endedDecember 31, 2020 , compared to the same period in 2019. One of our key initiatives continues to be a focus on growing our own volumes of collected material and displacing the third-party oil processed in our facilities. Our Refining segment includes the business operations of our Refining and Marketing operations, as well as our newly acquired Crystal acquisition. With the acquisition of Crystal, we now operate as a wholesale distributor of motor fuels which include gasoline, blended gasoline and diesel. During the year endedDecember 31, 2020 , our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were$35,207,188 , of which the processing costs for our Refining and Marketing business located at KMTEX were$1,622,737 , and depreciation and amortization attributable to costs of revenues was$470,158 . Revenues for the same period were$35,804,385 , while gross profit from operations was$127,039 . During the 73 -------------------------------------------------------------------------------- Table of Contents year endedDecember 31, 2019 , our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were$10,651,069 , which included the processing costs at KMTEX of$2,007,295 . and depreciation and amortization attributable to costs of revenues was$579,846 . Revenues for the same period were$12,957,767 , while gross profit was$1,726,852 . Overall volume for the Refining and Marketing segment decreased 19% during the year endedDecember 31, 2020 , as compared to the same period in 2019. Our fuel oil cutter volumes decreased 48% for the year endedDecember 31, 2020 , compared to the same period in 2019. Our pygas volumes decreased 11% for the year endedDecember 31, 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 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. For example, during August and September, two Hurricanes brought severe flooding and high winds that adversely impacted operations in theGulf Coast and, specifically at the Company'sMarrero, Louisiana refinery , while also limiting outbound shipments of finished product along adjacent waterways betweenHouston andNew Orleans for approximately two weeks. 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$16,995,736 for the year endedDecember 31, 2020 , with cost of revenues (exclusive of depreciation and amortization) of$16,001,517 , and depreciation and amortization attributable to cost of revenues of$586,920 . During the year endedDecember 31, 2019 , these revenues were$11,138,634 with cost of revenues (exclusive of depreciation and amortization) of$10,929,461 , and depreciation and amortization attributable to cost of revenues of$551,705 . Revenues were up substantially as a result of increased volumes of steel processed in addition to a large increase in steel values during the period. Gross profit increased for the year endedDecember 31, 2020 , compared to 2019, as a result of increased volumes attributable to our Recovery segment 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 acted asPenthol's exclusive agent to provide marketing, sales, and logistical duties of Group III base oil from theUnited Arab Emirates tothe United States June 2016 toJanuary 2021 . Revenues for this segment increased 53% as a result of increased volumes compared to the same period in 2019. Volumes of petroleum products acquired in our Recovery business were up 25% during the year endedDecember 31, 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. 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 selling, general and administrative expenses. Specifically, a higher amount 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. The following table sets forth the high and low spot prices during 2020 for our key benchmarks. 2020 Benchmark High Date Low DateU.S. Gulfcoast No. 2 Waterborne (dollars per gallon)$ 1.95 January 3$ 0.42 April 27U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)$ 1.75 January 3$ 0.40 March 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 (
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The following table sets forth the high and low spot prices during 2019 for our
key benchmarks.
2019
Benchmark High Date Low Date
U.S. Gulfcoast No. 2 Waterborne
(dollars per gallon) $ 2.01 September 16 $ 1.53 January 2
U.S. Gulfcoast Unleaded 87 Waterborne
(dollars per gallon) $ 2.08 April 10 $ 1.31 January 2
U.S. Gulfcoast Residual Fuel No. 6 3%
(dollars per barrel) $ 68.54 April 25 $ 32.05 November 19
NYMEX Crude Oil (dollars per barrel) $ 66.30 April 23 $ 46.54 January 2
Reported in Platt's US Marketscan (
We saw a steady decline in each of the benchmark commodities we track during 2020 and 2019. During 2019 and specifically the first half of 2020, the commodity markets experienced a steady decline due to overall global economic conditions mostly related to supply and demand for the products we track. Our margins are a function of the difference between what we are able to pay for raw materials and the market prices for the range of products produced. The various petroleum products produced are typically a function of Crude Oil indices and are quoted on multiple exchanges such as 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. Liquidity and Capital Resources The success of our current business operations has become more dependent on repairs, and maintenance to our facilities and our ability to make routine capital expenditures. We also must maintain relationships with feedstock suppliers and end product customers, and operate with efficient management of overhead costs. Through these relationships, we have historically been able to achieve volume discounts in the procurement of our feedstock, thereby increasing the margins of our segments' operations. The resulting operating cash flow is crucial to the viability and growth of our existing business lines. We had total assets of$122,099,958 as ofDecember 31, 2020 , compared to$120,759,919 atDecember 31, 2019 . The increase was mainly due to the generation of additional liquidity from the closing of theJanuary 2020 Tensile transaction relating to Heartland SPV transaction (discussed above under "Part I" - "Item 1. Business" - "Prior Material Acquisitions and Transactions" - " Heartland Share Purchase and Subscription Agreement "), during the year endedDecember 31, 2020 . We had total liabilities of$60,809,023 as ofDecember 31, 2020 , compared to total liabilities of$69,511,546 as ofDecember 31, 2019 . The decrease in total liabilities was mainly in connection with the pay down of debt obligations from the closing of the Heartland SPV transaction (discussed above under "Part I" - "Item 1. Business" - "Prior Material Acquisitions and Transactions" - " Heartland Share Purchase and Subscription Agreement ") and reductions of opening lease obligations due to the passage of time. We had working capital of$5,934,977 as ofDecember 31, 2020 , compared to working capital of$2,609,609 as ofDecember 31, 2019 . The increase in working capital is mainly due to the pay down of debt obligations from the closing of the Heartland SPV transaction (discussed above under "Part I" - "Item 1. Business" - "Prior Material Acquisitions and 75 -------------------------------------------------------------------------------- Table of Contents Transactions" - " Heartland Share Purchase and Subscription Agreement "), which increased cash and decreased liabilities, as discussed below. The Company received a total of$21.0 million from theJanuary 2020 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 ofDecember 31, 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 Agreement 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 financed insurance premiums through various financial institutions bearing interest rates from 4.00% to 4.90%. All such premium finance agreements have maturities of less than one year and have a balance of$1,183,543 atDecember 31, 2020 . Credit and Guaranty Agreement and Revolving Credit Facility withEncina Business Credit, LLC and Credit Agreement Amendments Our outstanding EBC Credit Agreement, the Revolving Credit Agreement, and our CapEx Loan are defined and described in greater detail under "Part II" - "Item 8. Financial Statements and Supplementary Data" - " Note 9. Line of Credit and Long-Term Debt " - "Credit and Guaranty Agreement and Revolving Credit Facility withEncina Business Credit, LLC " and "Credit Agreement Amendments". The principal balances of the EBC Credit Agreement and the Revolving Credit Agreement as ofDecember 31, 2020 , are$5,433,000 and$133,446 , respectively. Need for additional funding Our re-refining business will require significant capital to design and construct any new facilities. The facility infrastructure would be an additional capitalized expenditure to these process costs and would depend on the location and site specifics of the facility. Additionally, as part of our ongoing efforts to maintain a capital structure that is closely aligned with what we believe to be the potential of our business and goals for future growth, which is subject to cyclical changes in commodity prices, we will be exploring additional sources of external liquidity. The receptiveness of the capital markets to an offering of debt or equities cannot be assured and may be negatively impacted by, among other things, debt maturities, current market conditions, and potential stockholder dilution. The sale of additional securities, if undertaken by us and if accomplished, may result in dilution to our shareholders. However, such future financing may not be available in amounts or on terms acceptable to us, or at all. In addition to the above, we may also seek to acquire additional businesses or assets. In addition, the Company could consider selling assets if a more strategic acquisition presents itself. Finally, in the event we deem such transaction in our best interest, we may enter into a business combination or similar transaction in the future. We will also need additional capital in the future to redeem our Series B Preferred Stock and Series B1 Preferred Stock, which had a required redemption date ofJune 24, 2020 , provided that, as discussed above 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 76 -------------------------------------------------------------------------------- Table of Contents 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. Consistent with our commitment to maximize value for all investors, we have previously launched an internal review of strategic alternatives for our business. These alternatives may include continuing as a public standalone organization, going private or selling certain assets to a strategic partner, subject to the review and approval of our Board of Directors. There is no formal timeline for this process, nor have we chosen any one specific alternative at this time. We will provide further updates on the matter at such time that our Board determines appropriate. There is currently only a limited market for our common stock, and as such, we anticipate that such market will be illiquid, sporadic and subject to wide fluctuations in response to several factors moving forward, including, but not limited to: (1) actual or anticipated variations in our results of operations; (2) the market for, and volatility in, the market for oil and gas; (3) our ability or inability to generate new revenues; and (4) the number of shares in our public float. Furthermore, because our common stock is traded on The NASDAQ Capital Market, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, at present, we have a limited number of shares in our public float, and as a result, there could be extreme fluctuations in the price of our common stock. We believe that our stock prices (bid, ask and closing prices) may not relate to the actual value of our company, and may not reflect the actual value of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in our common stock, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in our public reports, industry information, and those business valuation methods commonly used to value private companies. Cash flows for the fiscal year endedDecember 31, 2020 compared to the fiscal year endedDecember 31, 2019 were as follows: Twelve
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 (76,397) 2,473,167
Investing activities (8,433,409) (3,626,440)
Financing activities 15,305,150 2,503,267
Net increase in cash, cash equivalents, and restricted cash
6,795,344 1,349,994
Ending cash, cash equivalents, and restricted cash
Operating activities used cash of$76,397 for the year endedDecember 31, 2020 , as compared to providing cash of$2,473,167 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 reasons for the decrease in cash provided by operating activities for the year endedDecember 31, 2020 , compared to the same period in 2019, were the fluctuation in market and commodity prices due to the pandemic that generated the increase in net loss, decrease in accounts receivable and increase in accounts payable, the gain on commodity derivative contracts, decrease in inventory, and decrease in accrued expenses. Investing activities used cash of$8,433,409 for the year endedDecember 31, 2020 as compared to using cash of$3,626,440 in 2019, due mainly to the purchase of fixed assets and the acquisition of Crystal in 2020. 77 -------------------------------------------------------------------------------- Table of Contents Financing activities provided cash of$15,305,150 during the year endedDecember 31, 2020 , as compared to providing cash of$2,503,267 in 2019. Financing activities were comprised of note proceeds of approximately$8.2 million ($4.2 million of proceeds from our PPP loan) and contributions from the noncontrolling interest of Tensile of 21.0 million, offset by approximately$10.4 million used to pay down our long-term debt, and$3.1 million of payments on our line of credit. Financing activities for 2019 were comprised of note proceeds of approximately$2.8 million and contributions from the noncontrolling interest of Tensile of$3.2 million and proceeds from issuance of common stock and warrants to Tensile of$2.2 million , offset by approximately$4.6 million used to pay down our long-term debt, and$0.6 million of payments on our line of credit. Contractual Obligations Future maturities of long term-debt as ofDecember 31, 2020 andDecember 31, 2019 were as follows: Creditor Loan Type Origination Date Maturity Date Loan Amount December 31, 2020 December 31, 2019 Encina Business Credit, LLC Term Loan February 1, 2017 February 1, 2022$ 20,000,000 $ 5,433,000 $ 13,333,000 Encina Business Credit SPV, LLC Revolving Note February 1, 2017 February 1, 2022$ 10,000,000 133,446 3,276,230 Encina Business Credit, LLC Capex Loan August 7, 2020 February 1, 2022 2,000,000
1,378,819 - AVT Equipment Lease-Ohio Finance Lease April 2, 2020 April 2, 2023 337,155 380,829 - AVT Equipment Lease-HH Finance Lease May 22, 2020 May 22, 2023 551,609 450,564 - John Deere Note Note May 27, 2020 June 27, 2024 152,643 131,303 - Texas Citizens Bank PPP Loan May 5, 2020 April 28, 2022 4,222,000 4,222,000 - Tetra Capital Lease Finance Lease May, 2018 May, 2022$ 419,690 172,235 264,014 Wells Fargo Equipment Lease-VRM LA Finance Lease March, 2018 March, 2021$ 30,408 1,804 12,341 Wells Fargo Equipment Lease-Ohio Finance Lease April-May, 2019 April-May, 2024$ 621,000
436,411 551,260
Insurance premiums
Various institutions financed Various < 1 year $ 2,902,428 1,183,543 1,165,172
Total 13,923,954 18,602,017Deferred finance costs - (47,826) Total, net of deferred finance costs$ 13,923,954 $ 18,554,191
Future contractual maturities on notes payable are summarized as follows:
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Creditor 2021 2022 2023 2024 2025 Thereafter
Encina Business Credit, LLC $ 900,000 $ 4,533,000 $ - $ - $ - $ -
Encina Business Credit SPV,
LLC 133,446 - - - - -
Encina Business Credit, LLC 368,867 1,009,952 - - - -
AVT Equipment Lease-Ohio 126,965 138,162 115,702 - - -
AVT Equipment Lease-HH 148,398 161,487 140,679 - - -
John Deere Note 37,299 37,225 39,173 17,606 - -
Texas Citizens Bank 1,877,461 2,344,539 - - - -
Tetra Capital Lease 98,167 74,068 - - - -
Wells Fargo Equipment
Lease-VRM LA 1,804 - - - - -
Wells Fargo Equipment
Lease-Ohio 120,896 127,265 133,968 54,282 - -
Various institutions 1,183,543 - - - - -
Totals $ 4,996,846 $ 8,425,698 $ 429,522 $ 71,888 $ - $ -
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (U.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, leases, variable interest entities,
intangible assets, long-lived assets valuation, and legal matters. Actual
results may differ from these estimates. (See Note 2 to the financial statements
included herein).
Revenue Recognition.
We account for a contract when it has approval and commitment from both
parties, the rights of the parties are identified, payment terms are identified,
the contract has commercial substance and collectability of consideration is
probable. Revenue is recognized when our performance obligations under the terms
of a contract with our customers are satisfied. Recognition occurs when the
Company transfers control by completing the specified services at the point in
time the customer benefits from the services performed or once our products are
delivered. Revenue is measured as the amount of consideration we expect to
receive in exchange for completing our performance obligations. Sales tax and
other taxes we collect with revenue-producing activities are excluded from
revenue. In the case of contracts with multiple performance obligations, the
Company allocates the transaction price to each performance obligation based on
the relative stand-alone selling prices of the various goods and/or services
encompassed by the contract. We do not have any material significant payment
terms, as payment is generally due within 30 days after the performance
obligation has been satisfactorily completed. The Company has elected the
practical expedient to recognize the incremental costs of obtaining a contract
as an expense when incurred if the amortization period of the asset that we
otherwise would have recognized is one year or less. In applying the guidance in
Topic 606, there were no judgments or estimates made that the Company deems
significant.
The nature of the Company's contracts give rise to certain types of variable
consideration. The Company estimates the amount of variable consideration to
include in the estimated transaction price based on historical experience,
anticipated performance and its best judgment at the time and to the extent it
is probable that a significant reversal of cumulative revenue recognized will
not occur when the uncertainty associated with the variable consideration is
resolved.
From time to time, our fuel oil customers in our black oil segment may request
that we store product at our facilities which they purchase from us. We
recognize revenues for these "bill and hold" sales once the following criteria
have been met: (1) there is a substantive reason for the arrangement, (2) the
product is segregated and identified as the customer's asset, (3) the product is
ready for delivery to the customer, and (4) we cannot use the product or direct
it to another customer.
Fair value of financial instruments
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Under the Financial Accounting Standards Board Accounting Standards Codification
("FASB ASC"), we are permitted to elect to measure financial instruments and
certain other items at fair value, with the change in fair value recorded in
earnings. We elected not to measure any eligible items using the fair value
option. Consistent with the Fair Value Measurement Topic of the FASB ASC, we
implemented guidelines relating to the disclosure of our methodology for
periodic measurement of our assets and liabilities recorded at fair market
value.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. A three-tier fair value hierarchy
prioritizes the inputs used in measuring fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). These tiers include:
•Level 1, defined as observable inputs such as quoted prices for identical
instruments in active markets;
•Level 2, defined as inputs other than quoted prices in active markets that are
either directly or indirectly observable such as quoted prices for similar
instruments in active markets or quoted prices for identical or similar
instruments in markets that are not active; and
•Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own assumptions, such as
valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable.
Our Level 1 assets primarily include our cash and cash equivalents. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the immediate or short-term maturities of these financial instruments.
Our Level 2 liabilities include our marked to market changes in the estimated value of our open derivative contracts held at the balance sheet date.
Our Level 3 liabilities include our marked to market changes in the estimated value of our derivative warrants issued in connection with our Series B Preferred Stock and Series B1 Preferred Stock.
The Company estimates the fair values of the crude oil swaps and collars based on published forward commodity price curves for the underlying commodity as of the date of the estimate for which published forward pricing is readily available. The determination of the fair values above incorporates various factors including the impact of the Company's non-performance risk and the credit standing of the counterparty involved in the Company's derivative contracts. In addition, the Company routinely monitors the creditworthiness of its counterparty. Nonfinancial assets and liabilities measured at fair value on a nonrecurring basis include certain nonfinancial assets and liabilities as may be acquired in a business combination and thereby measured at fair value. Impairment of long-lived assets The Company evaluates the carrying value and recoverability of its long-lived assets when circumstances warrant such evaluation by applying the provisions of the FASB ASC regarding long-lived assets. It requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. The Company determined that no long-lived asset impairment existed atDecember 31, 2020 . Derivative transactions. All derivative instruments are recorded on the accompanying balance sheets at fair value. Derivative transactions are not designated as cash flow hedges under FASB ASC 815, Derivatives and Hedges. Accordingly, these commodity derivative contracts are marked-to-market and any changes in the estimated value of commodity derivative contracts held at the balance sheet date are recognized in the accompanying statements of operations increases (losses) or decreases (gains) to cost of goods sold. The derivative assets or liabilities are classified as either current or noncurrent assets or liabilities based on their anticipated settlement date. The Company nets derivative assets and liabilities for counterparties where it has a legal right of offset. 80 -------------------------------------------------------------------------------- Table of Contents The Company, in accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing from Equity, convertible preferred shares are accounted for net, outside of shareholders' equity and warrants are accounted for as liabilities at their fair value during periods where they can be net cash settled in case of a change in control transaction. The warrants are accounted for as a liability at their fair value at each reporting period. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded as earnings. To derive an estimate of the fair value of these warrants, a Dynamic Black Scholes model is utilized that computes the impact of a possible change in control transaction upon the exercise of the warrant shares. This process relies upon inputs such as shares outstanding, estimated stock prices, strike price and volatility assumptions to dynamically adjust the payoff of the warrants in the presence of the dilution effect. Preferred Stock Classification. A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity. A financial instrument issued in the form of shares is mandatorily redeemable if it embodies an unconditional obligation requiring the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event certain to occur. A financial instrument that embodies a conditional obligation to redeem the instrument by transferring assets upon an event not certain to occur becomes mandatorily redeemable-and, therefore, becomes a liability-if that event occurs, the condition is resolved, or the event becomes certain to occur. The Series B Preferred Stock and Series B1 Preferred Stock require the Company to redeem such preferred stock on the fifth anniversary of the issuance of the Series B Preferred Stock and Series B1 Preferred Stock, subject to certain contractual and legal requirements.SEC reporting requirements provide that any possible redemption outside of the control of the Company requires the preferred stock to be classified outside of permanent equity.
Redeemable Noncontrolling Interest
As more fully described in "Part II" - "Item 8. Financial Statements and Supplementary Data" - " Note 6. Share Purchase and Subscription Agreements and Acquisition ", 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 accompanying consolidated balance sheets. If an equity instrument subject to the guidance is currently redeemable, the instrument is adjusted to its maximum redemption amount at the balance sheet date. If the equity instrument subject to the guidance is not currently redeemable but it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the guidance permits either of the following measurement methods: (a) accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, or (b) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument. Because the MG SPV and Heartland SPV equity instruments will become redeemable solely based on the passage of time, the Company determined that it is probable that the MG SPV and Heartland SPV equity instruments will become redeemable. The Company has elected to apply the second of the two measurement options described above. An adjustment to the carrying amount of a non-controlling interest from the application of the above guidance does not impact net loss in the consolidated financial statements. Rather, such adjustments are treated as equity transactions.
Leases
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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 " Note 18. Leases ".
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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk
We are exposed to interest rate risks primarily through borrowings under various bank facilities. Interest on these facilities is based upon variable interest rates using LIBOR or Prime as the base rate.
AtDecember 31, 2020 , the Company had about$6.9 million of variable-rate term debt outstanding. At this borrowing level, a hypothetical relative increase of 10% in interest rates would have an unfavorable but insignificant impact on the Company's pre-tax earnings and cash flows. The primary interest rate exposure on variable-rate debt is based on the LIBOR rate (0.15% atDecember 31, 2020 ) plus 6.50% per year.
Commodity Price Risk
We are exposed to market risks related to the volatility of crude oil and
refined oil products. Our financial results can be significantly affected by
changes in these prices which are driven by global economic and market
conditions. We attempt to mitigate much of the risk associated with the
volatility of relevant commodity prices by using our knowledge of the market to
obtain feedstock at attractive costs, by efficiently managing the logistics
associated with our products, by turning our inventory over quickly, and by
selling our products into markets where we believe we can achieve the greatest
value.
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