VERTEX ENERGY, INC. Introduction
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, 2020 , filed with theSecurities and Exchange Commission onMarch 9, 2021 (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. Our fiscal year ends onDecember 31st . Interim results are presented on a quarterly basis for the quarters endedMarch 31 ,June 30 , andSeptember 30th , the first quarter, second quarter and third quarter, respectively, with the quarter endingDecember 31st being referenced herein as our fourth quarter. Fiscal 2020 means the year endedDecember 31, 2020 , whereas fiscal 2019 means the year endedDecember 31, 2019 .
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;
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--------------------------------------------------------------------------------"Naphthas" means any of various volatile, highly flammable liquid hydrocarbon mixtures used chiefly as solvents and diluents and as raw materials for conversion to gasoline;
"Pygas" means pyrolysis gasoline, an aromatics-rich gasoline stream produced in sizeable quantities by an ethylene plant. These plants are designed to crack a number of feedstocks, including ethane, propane, naphtha, and gasoil. Pygas can serve as a high-octane blendstock for motor gasoline or as a feedstock for an aromatics extraction unit;
"SEC" or the "Commission" refers to the
"Securities Act" refers to the Securities Act of 1933, as amended; and
"VGO" refers to Vacuum Gas Oil (also known as cat feed) - a feedstock for a fluid catalytic cracker typically found in a crude oil refinery and used to make gasoline No. 2 oil and other byproducts.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with theSecurities and Exchange Commission ("SEC"). OurSEC filings (reports, proxy and information statements, and other information) are available to the public over the Internet at theSEC's website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to theSEC , on the "Investor Relations," "SEC Filings" page of our website at www.vertexenergy.com. Information on our website is not part of this Report, and we do not desire to incorporate by reference such information herein. Copies of documents filed by us with theSEC are also available from us without charge, upon oral or written request to our Secretary,who can be contacted at the address and telephone number set forth on the cover page of this Report. Novel Coronavirus (COVID-19) 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 2020 and the first quarter of 2021, we expect GDP to continue to be impacted globally 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 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 continued 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. 2 -------------------------------------------------------------------------------- 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, the efficacy of, ability to manufacture a sufficient amount of, and the willingness of the general public to obtain, vaccines. 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 the impact of vaccines and virus mutations and the potential seasonality of new outbreaks. Description of Business Activities: We are an environmental services company that recycles industrial waste streams and off-specification commercial chemical products. Our primary focus is recycling used motor oil and other petroleum by-products. We are engaged in operations across the entire petroleum recycling value chain including collection, aggregation, transportation, storage, re-refinement, and sales of aggregated feedstock and re-refined products to end users. We operate in three segments: (1) Black Oil, (2) Refining and Marketing, and (3) Recovery. We currently provide our services in 15 states, primarily in theGulf Coast , Midwest and Mid-Atlantic regions ofthe United States . For the rolling twelve-month period endingMarch 31, 2021 , we aggregated approximately 65.1 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 74.0 million gallons of used motor oil with our proprietary vacuum gas oil ("VGO") and Base Oil processes. Our Black Oil segment 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, between the third quarter of 2015 and the third quarter of 2019, and since the first quarter of 2020, the original purpose of TCEP has not been economically viable and we have instead been using TCEP to re-fine used oil into marine cutterstock; prior to shipping to our facility inMarrero, Louisiana . We also acquired ourMarrero, Louisiana facility, which facility re-refines used motor oil and also produces VGO and theMyrtle Grove re-refining complex inBelle Chasse, Louisiana (which is now owned by a special purpose entity which we own an approximate 85% interest of) inMay 2014 . Our Refining and Marketing segment 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 segment includes a generator solutions company for the proper recovery and management of hydrocarbon streams as well as metals which includes transportation and marine salvage services throughout theGulf Coast . Black Oil Segment Our Black Oil segment is engaged in operations across the entire used motor oil recycling value chain including collection, aggregation, transportation, storage, refinement, and sales of aggregated feedstock and re-refined products to end users. We collect and purchase used oil directly from generators such as oil change service stations, automotive repair shops, manufacturing facilities, petroleum refineries, and petrochemical manufacturing operations. We own a fleet of 41 collection vehicles, which routinely visit generators to collect and purchase used motor oil. We also aggregate used oil from a diverse network of approximately 50 supplierswho operate similar collection businesses to ours. 3 -------------------------------------------------------------------------------- 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 segment and the Refining and Marketing segment. 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, provided that we are currently using such technology solely to pre-treat our used motor oil feedstock prior to shipping to our facility inMarrero, Louisiana . In addition, at ourMarrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product that is sold to refineries as well as to the marine fuels market. At ourColumbus, Ohio facility (Heartland Petroleum), we produce a base oil product that is sold to lubricant packagers and distributors. Refining and Marketing Segment Our Refining and Marketing segment 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 segment. We have a toll-based processing agreement in place with KMTEX to re-refine feedstock streams, under our direction, into various end products that we specify. KMTEX uses industry standard processing technologies to re-refine our feedstocks into pygas, gasoline blendstock and marine fuel cutterstock. We sell all of our re-refined products directly to end-customers or to processing facilities for further refinement. In addition, we are distributing refined motor fuels such as gasoline, blended gasoline products and diesel used as engine fuels, to third party customerswho typically resell these products to retailers and end consumers. Recovery Segment 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 decline in oil prices and challenges in obtaining feedstock in the early part of 2020, we have been using TCEP for the purposes of pre-treating our used motor oil feedstock prior to shipping to our facility inMarrero, Louisiana since the first quarter of 2020. We have no current plans to construct any other TCEP facilities at this time. 4 --------------------------------------------------------------------------------
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
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:
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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 Segment", 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 Segment", 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.
(3) As discussed in greater detail above under "Recovery Segment", 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.
6-------------------------------------------------------------------------------- RESULTS OF OPERATIONS Description of Material Financial Line Items: Revenues We generate revenues from three existing operating segments as follows: BLACK OIL - Revenues from 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 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 segment generates revenues relating to the sales of finished products. The Refining and Marketing segment gathers hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have become off-specification during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and then processed at a third-party facility under our direction. The end products are typically three distillate petroleum streams (gasoline blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large petroleum trading and blending companies. The end products are delivered by barge and truck to customers. RECOVERY - The Recovery segment is a generator solutions company for the proper recovery and management of hydrocarbon streams. We own and operate a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials. Our revenues are affected by changes in various commodity prices including crude oil, natural gas, #6 oil and metals. Cost of Revenues BLACK OIL - Cost of revenues for our Black Oil segment are comprised primarily of feedstock purchases from a network of providers. Other cost of revenues include processing costs, transportation costs, purchasing and receiving costs, analytical assessments, brokerage fees and commissions, and surveying and storage costs. REFINING AND MARKETING - The Refining and Marketing segment incurs cost of revenues relating to the purchase of feedstock, purchasing and receiving costs, and inspection and processing of the feedstock into gasoline blendstock, pygas and fuel oil cutter by a third party. Cost of revenues also includes broker's fees, inspection and transportation costs. RECOVERY - The Recovery segment incurs cost of revenues relating to the purchase of hydrocarbon products, purchasing and receiving costs, inspection, and transporting of metals and other salvage and materials. Cost of revenues also includes broker's fees, inspection and transportation costs. Our cost of revenues is affected by changes in various commodity indices, including crude oil, natural gas, #6 oil and metals. For example, if the price for crude oil increases, the cost of solvent additives used in the production of blended oil products, and fuel cost for transportation cost from third party providers will generally increase. Similarly, if the price of crude oil falls, these costs may also decline. General and Administrative Expenses Our general and administrative expenses consist primarily of salaries and other employee-related benefits for executive, administrative, legal, financial, and information technology personnel, as well as outsourced and professional services, rent, utilities, and related expenses at our headquarters, as well as certain taxes. 7 -------------------------------------------------------------------------------- Depreciation and Amortization Expenses Our depreciation and amortization expenses are primarily related to the property, plant and equipment and intangible assets acquired in connection with ourVertex Holdings, L.P. (formerlyVertex Energy, L.P. ), aTexas limited partnership ("Holdings"),Omega Refining, LLC ("Omega Refining"),Warren 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 our 2020 Annual Report on Form 10-K for the year endedDecember 31, 2020 . 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.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Set forth below are our results of operations for the three months ended
Three Months Ended March 31, $ Change -
Favorable % Change - Favorable
2021 2020 (Unfavorable) (Unfavorable)
Revenues $ 58,083,993 $ 36,203,429 $ 21,880,564 60 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 43,346,274 26,836,854 (16,509,420) (62) %
Depreciation and amortization attributable to
costs of revenues 1,347,820 1,178,594 (169,226) (14) %
Gross profit* 13,389,899 8,187,981 5,201,918 64 %
Operating expenses:
Selling, general and administrative expenses 7,926,580 6,700,518 (1,226,062) (18) %
Depreciation and amortization attributable to
operating expenses 482,869 455,953 (26,916) (6) %
Total operating expenses 8,409,449 7,156,471 (1,252,978) (18) %
Income from operations 4,980,450 1,031,510 3,948,940 383 %
Other income (expense):
Other income - 80 (80) (100) %
Gain (loss) on asset sales 1,424 - 1,424 100 %
Gain (loss) on change in value of derivative
liability (1,780,203) 1,698,747 (3,478,950) (205) %
Interest expense (236,333) (340,086) 103,753 31 %
Total other income (expense) (2,015,112) 1,358,741 (3,373,853) (248) %
Income before income tax 2,965,338 2,390,251 575,087 24 %
Income tax benefit (expense) - - - - %
Net income 2,965,338 2,390,251 575,087 24 %
Net income (loss) attributable to
non-controlling interest and redeemable
non-controlling interest 1,990,969 (398,609) 2,389,578 599 %
Net income attributable to Vertex Energy , Inc. $ 974,369 $ 2,788,860 $ (1,814,491) (65) %
* 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 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 March 31, 2021 , we
had a loss of $720,000 in our hedging instruments as compared to a gain of $4.4
million for the three months ended March 31, 2020 . We recognize our hedging
activities from commodity derivatives in our cost of goods sold. During the
three months ended March 31, 2021 , compared to the same period in 2020, we saw a
20% decrease in the discount we were paying for feedstock into our refineries.
In addition, we saw a 9% decrease in operating costs (inclusive of depreciation
and amortization) on a per barrel basis for the first quarter of 2021 as
compared to the same period in 2020.
Total revenues increased by 60% for the three months ended March 31, 2021 ,
compared to the same period in 2020, due primarily to higher commodity prices
(commodity prices reached were near historic lows at the end of the quarter
ended March 31 ,
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2020, as a result of the COVID-19 pandemic) and increased volumes at our
refineries; including $16 million of revenue generated from our wholesale
distribution of gasoline, blended gasoline, and diesel for use as engine fuel to
operate automobiles, trucks, locomotives, and construction equipment, which
operations were acquired in June 2020 , in connection with our acquisition of
Crystal Energy, LLC ("Crystal"), for the three months ended March 31, 2021 ,
compared to the same period in 2020. Total volume increased 18% during the three
months ended March 31, 2021 compared to the same period in 2020. Volumes were
impacted as a result of feedstock availability specifically used motor oil, in
the overall marketplace. This volume impact was largely due to lingering impacts
of the shelter in place orders in the locations in which we collect used motor
oil and other products as a result of the COVID-19 pandemic, which directly
impacted the generation of used oil and petroleum products.
During the three months ended March 31, 2021 , total cost of revenues (exclusive
of depreciation and amortization) was $43,346,274 compared to $26,836,854 for
the three months ended March 31, 2020 , an increase of $16,509,420 or 62% from
the prior period. The main reason for the increase was the result of the
increase in commodity prices, which impacted our feedstock pricing and the
additional cost of sales related to our Crystal 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.
We had selling, general and administrative expenses of $7,926,580 for the three
months ended March 31, 2021 , compared to $6,700,518 from the prior year's
period, an increase of $1,226,062 or 18% from the prior year's 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 acquisitions and organic growth.
For the three months ended March 31, 2021 , total depreciation and amortization
expense attributable to cost of revenues was $1,347,820 , compared to $1,178,594
for the three months ended March 31, 2020 , an increase of $169,226 mainly due to
additional investments in rolling stock and facility assets during the fourth
quarter of 2020, which increased depreciation and amortization in the first
quarter of 2021.
We had gross profit as a percentage of revenue of 23.1% for the three months
ended March 31, 2021 , compared to gross profit as a percentage of revenues of
22.6% for the three months ended March 31, 2020 . The main reason for the
improvement was the slight increase in volumes at our refineries, along with
increases in commodity prices during the period.
Additionally, our per barrel margin increased 38% for the three months ended
March 31, 2021 , relative to the three months ended March 31, 2020 . Our per
barrel margin is calculated by dividing the total volume of product sold (in
bbls) by total gross profit for the applicable period ($13,389,899 for the 2021
period versus $8,187,981 for the 2020 period). This increase was a result of the
improvements in our product spreads related to increases in feedstock product
prices and decreases in operating costs at our refining facilities, during the
three months ended March 31, 2021 , compared to the same period during 2020.
Overall, commodity prices were up for the three months ended March 31, 2021 ,
compared to the same period in 2020. For example, the average posting (U.S.
Gulfcoast Residual Fuel No. 6 3%) for the three months ended March 31, 2021,
increased $14.91 per barrel from a three-month average of $37.64 for the three
months ended March 31, 2020 to $52.55 per barrel for the three months ended
March 31, 2021 . The average posting (U.S. Gulfcoast Unleaded 87 Waterborne) for
the three months ended March 31, 2021 increased $6.39 per barrel from a
three-month average of $59.61 for the three months ended March 31, 2020 to
$66.00 per barrel for the three months ended March 31, 2021 .
We had income from operations of $4,980,450 for the three months ended March 31,
2021 , compared to income from operations of $1,031,510 for the three months
ended March 31, 2020 , an increase of $3,948,940 or 383% from the prior year's
three-month period. The increase in income from operations was mostly due to the
improvements seen in commodity prices and overall margin improvement in our
finished products along with overall reductions 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 $236,333 for the three months ended March 31, 2021 ,
compared to interest expense of $340,086 for the three months ended March 31,
2020 , a decrease in interest expense of $103,753 or 31% 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
ended March 31, 2021 , compared to the prior year's period. The Company received
a total of $21.0 million from the June 2019 and January 2020 , Tensile
transactions, described in greater detail above under " Part I " -
" Item 1. Financial Statements " - " Note 14. Share Purchase and
Subscription Agreements " , of which approximately $9.0 million was used to
pay down our debt obligations.
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We had a $1,780,203 loss on change in value of derivative liability for the
three months ended March 31, 2021 , in connection with certain warrants granted
in May 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 $1,698,747 in the prior
year's period (which also included warrants granted in June 2015 , which had
expired as of December 31, 2020 ). This change was mainly due to the fluctuation
in the market price of our common stock, warrant exercises, and non-cash
accounting adjustments in connection therewith. This resulted in a significant
change in non-cash expense for the period, compared to the prior year's period.
We had a gain on asset sales of
We had net income of$2,965,338 for the three months endedMarch 31, 2021 , compared to net income of$2,390,251 for the three months endedMarch 31, 2020 , an increase in net income of$575,087 or 24% from the prior period. The main reason for the increase in net income for the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 , was attributable to the increase in gross profit as discussed above, offset by the decrease in gain in derivative liability for the three months endedMarch 31, 2021 described above, which is a non-cash adjustment.
Each of our segments' income (loss) from operations during the three months
ended
11
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Three Months Ended $ Change -
March 31, Favorable % Change - Favorable
Black Oil Segment 2021 2020 (Unfavorable) (Unfavorable)
Revenues $ 32,158,248 $ 29,531,370 $ 2,626,878 9 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 19,836,446 20,066,240 229,794 1 %
Depreciation and amortization attributable
to costs of revenues 1,074,260 936,895 (137,365) (15) %
Gross profit* 11,247,542 8,528,235 2,719,307 32 %
Selling general and administrative expense 6,421,696 5,411,222 (1,010,474) (19) %
Depreciation and amortization attributable
to operating expenses 353,948 335,105 (18,843) (6) %
Income from operations $ 4,471,898 $ 2,781,908 $ 1,689,990 61 %
Refining and Marketing Segment
Revenues $ 19,273,952 $ 2,510,593 $ 16,763,359 668 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 18,150,770 2,596,052 (15,554,718) (599) %
Depreciation and amortization attributable
to costs of revenues 125,634 105,768 (19,866) (19) %
Gross profit* 997,548 (191,227) 1,188,775 622 %
Selling general and administrative expense 759,410 592,389 (167,021) (28) %
Depreciation and amortization attributable
to operating expenses 108,471 100,398 (8,073) (8) %
Income (loss) from operations $ 129,667 $ (884,014) $ 1,013,681 115 %
Recovery Segment
Revenues $ 6,651,793 $ 4,161,466 $ 2,490,327 60 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 5,359,058 4,174,562 (1,184,496) (28) %
Depreciation and amortization attributable
to costs of revenues 147,926 135,931 (11,995) (9) %
Gross profit* 1,144,809 (149,027) 1,293,836 868 %
Selling general and administrative expense 745,474 696,907 (48,567) (7) %
Depreciation and amortization attributable
to operating expenses 20,450 20,450 - - %
Income (loss) from operations $ 378,885 $ (866,384) $ 1,245,269 144 %
* 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 $32,158,248 for the three months
ended March 31, 2021 , with cost of revenues (exclusive of depreciation and
amortization) of $19,836,446 , and depreciation and amortization attributable to
cost of revenues of $1,074,260 . During the three months ended March 31, 2020 ,
these revenues were $29,531,370 with cost of revenues (exclusive of depreciation
and amortization) of $20,066,240 and depreciation and amortization attributable
to cost of revenues of $936,895 . Income from operations improved for the three
months ended March 31, 2021 , compared to 2020, as a result of improvements in
commodity prices which resulted in improved margins as well as reductions 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 7% during the three
months ended March 31, 2021 , compared to the same period in 2020. 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. The Heartland facility experienced lower demands for
finished products during the three months ended March
12
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31, 2021 compared to the same period in 2020. Volumes collected through our H&H
Oil, L.P. ("H&H Oil") (based in Houston , Austin and Corpus Christi, Texas ) and
Heartland (based in Ohio and West Virginia ) collection facilities increased 17%
during the three months ended March 31, 2021 , compared to the same period in
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 started to see improvements in our collection volumes at the
end of the period.
During the three months ended March 31, 2021 , our Refining and Marketing cost
of revenues (exclusive of depreciation and amortization) were $18,150,770 , of
which the processing costs for our Refining and Marketing business located at
KMTEX were $420,420 , and depreciation and amortization attributable to cost of
revenues was $125,634 . Revenues for the same period were $19,273,952 . During the
three months ended March 31, 2020 , our Refining and Marketing cost of revenues
(exclusive of depreciation and amortization) were $2,596,052 , which included the
processing costs at KMTEX of $454,007 , and depreciation and amortization
attributable to cost of revenues was $105,768 . Revenues for the same period were
$2,510,593 .
Our Refining segment includes the business operations of our Refining and
Marketing operations, as well as our assets from Crystal in June 2020 . 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 segment were up 668% during the three months ended March 31, 2021 , as
compared to the same period in 2020 mostly as a result of the added business
line. Overall volume for the Refining and Marketing segment increased 267%
during the three months ended March 31, 2021 , as compared to the same period in
2020. This is a result of a focus on the production of higher quality finished
products, which in turn has decreased the amount of volume being produced. In
addition, volumes were slightly impacted as a result of 'stay-at-home' orders
during the period. Our pygas volumes increased 1% for the three months ended
March 31, 2021 , as compared to the same period in 2020. Our fuel oil cutter
volumes decreased 19% for the three months ended March 31, 2021 , as compared to
the same period in 2020, due to lower volumes of feedstock available from third
party facilities in the Gulf 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 $6,651,793 for the three months
ended March 31, 2021 , with cost of revenues (exclusive of depreciation and
amortization) of $5,359,058 , and depreciation and amortization attributable to
cost of revenues of $147,926 . During the three months ended March 31, 2020 ,
these revenues were $4,161,466 with cost of revenues (exclusive of depreciation
and amortization) of $4,174,562 , and depreciation and amortization attributable
to cost of revenues of $135,931 . Income from operations increased for the three
months ended March 31, 2021 , compared to 2020, 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 previously 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 60% as a result of an increase in volumes during the three months
ended March 31, 2021 , compared to the same period in 2020. Volumes were up in
our metals segment during the three months ended March 31, 2021 , compared to the
same period during 2020, 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.
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.
13
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The following table sets forth the high and low spot prices during the three
months ended March 31, 2021 , for our key benchmarks.
2021
Benchmark High Date Low Date
U.S. Gulfcoast No. 2 Waterborne
(dollars per gallon) $ 1.79 March 12 $ 1.32 January 4
U.S. Gulfcoast Unleaded 87 Waterborne
(dollars per gallon) $ 2.13 March 11 $ 1.36 January 4
U.S. Gulfcoast Residual Fuel No. 6 3%
(dollars per barrel) $ 59.54 March 5 $ 45.08 January 4
NYMEX Crude oil (dollars per barrel) $ 66.09 March 5 $ 47.62 January 4
Reported in Platt's US Marketscan (
The following table sets forth the high and low spot prices during the three months endedMarch 31, 2020 , for our key benchmarks. 2020 Benchmark High Date Low DateU.S. Gulfcoast No. 2 Waterborne (dollars per gallon)$ 1.95 January 3$ 0.74 March 18U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)$ 1.75 January 3$ 0.40 March 23 U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)$ 47.34 January 29$ 15.64 March 31 NYMEX Crude oil (dollars per barrel)$ 63.27 January 6$ 20.09 March 30
Reported in Platt's US Marketscan (
We saw an increase in February and March of 2021, in each of the benchmark commodities we track compared to the same period in 2020. The increase in market prices was a result of the gradual opening up of states and marketplaces which were shut-down a year ago as 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 into the second, third and fourth quarters of 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. 14 --------------------------------------------------------------------------------
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$126,646,553 as ofMarch 31, 2021 , compared to$122,099,958 atDecember 31, 2020 . The increase was mainly due to exercises of warrants that provided cash, along with increases in accounts receivable and inventory levels, during the three months endedMarch 31, 2021 , compared to the prior year's period. We had total current liabilities of$27,459,290 as ofMarch 31, 2021 , compared to$23,850,412 atDecember 31, 2020 . We had total liabilities of$59,247,427 as ofMarch 31, 2021 , compared to total liabilities of$60,809,023 as ofDecember 31, 2020 . The decrease in current liabilities and total liabilities was mainly due to the decrease in outstanding debt during the three months endedMarch 31, 2021 , compared to the prior year's period. We had working capital of$7,944,465 as ofMarch 31, 2021 , compared to working capital of$5,934,977 as ofDecember 31, 2020 . The increase in working capital fromDecember 31, 2020 toMarch 31, 2021 is mainly due to the generation of additional liquidity as a result of warrant exercises and the reduction in debt during the three months endedMarch 31, 2021 as described above. 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's outstanding debt facilities as of
15
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Balance on March Balance on
Creditor Loan Type Origination Date Maturity Date Loan Amount 31, 2021 December 31, 2020
Encina Business
Credit, LLC Term Loan February 1, 2017 February 1, 2022 $ 20,000,000 $ 5,208,000 $ 5,433,000
Encina Business Credit SPV, LLC Revolving Note February 1, 2017 February 1, 2022$ 10,000,000 -
133,446
Encina Business Credit, LLC Capex Loan August 7, 2020 February 1, 2022$ 2,000,000 1,286,603
1,378,819
Wells Fargo Equipment Lease-Ohio Finance Lease April-May, 2019 April-May, 2024$ 621,000 406,765 436,411 AVT Equipment Lease-Ohio Finance Lease April 2, 2020 April 2, 2023$ 466,030 350,086 380,829 AVT Equipment Lease-HH Finance Lease May 22, 2020 May 22, 2023$ 551,609 414,632 450,564 John Deere Note Note May 27, 2020 June 24, 2024$ 152,643 122,063 131,303 Tetra Capital Lease Finance Lease May, 2018 May, 2022$ 419,690 148,309
172,235
Well Fargo Equipment Lease-VRM LA Finance Lease March, 2018 March, 2021$ 30,408 -
1,804
Texas Citizens Bank PPP Loan May 5, 2020 April 28, 2022$ 4,222,000 4,222,000
4,222,000
Insurance premiums
Various institutions financed Various < 1 year $ 2,902,428 473,417 1,183,543
Total $ 12,631,875 $ 13,923,954 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 $ 5,208,000 $ - $ - $ - $ - $ -
Encina Business Credit, LLC 1,286,603 - - - - -
John Deere Note 37,528 38,459 39,413 6,663 - -
Well Fargo Equipment Lease-
Ohio 122,458 128,908 135,698 19,701 - -
AVT Equipment Lease-Ohio 129,676 141,111 79,299 - - -
AVT Equipment Lease-HH 151,568 164,934 98,130 - - -
Tetra Capital Lease 99,832 48,477 - - - -
Texas Citizens Bank 1,877,461 2,344,539 - - - -
Various institutions 473,417 - - - - -
Totals $ 9,386,543 $ 2,866,428 $ 352,540 $ 26,364 $ - $ -
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
16
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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,
facilities, operations or assets and/or 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 of June 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 on
June 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 three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 : Three Months Ended March 31, 2021 2020 Beginning cash, cash equivalents and restricted cash$ 10,995,169 $ 4,199,825 Net cash provided by (used in): Operating activities 2,189,096 3,115,008 Investing activities (1,017,379) (491,409) Financing activities 359,943 9,571,772
Net increase (decrease) in cash, cash equivalents and restricted cash
1,531,660 12,195,371
Ending cash, cash equivalents and restricted cash $ 12,526,829 $ 16,395,196
17-------------------------------------------------------------------------------- Net cash provided by operating activities was$2,189,096 for the three months endedMarch 31, 2021 , as compared to net cash used in operating activities of$3,115,008 during the corresponding period in 2020. 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 decrease in cash provided by operating activities for the three month period endedMarch 31, 2021 , compared to the same period in 2020, was the fluctuation in market and commodity prices during the three months endedMarch 31, 2021 , an increase of$1,873,520 in accounts receivable and$2,540,005 in inventory, and$1,306,344 of net cash settlements on commodity derivatives. Investing activities used cash of$1,017,379 for the three months endedMarch 31, 2021 , as compared to having used$491,409 of cash during the corresponding period in 2020, due mainly to the purchase of fixed assets. Financing activities provided cash of$359,943 for the three months endedMarch 31, 2021 , as compared to providing cash of$9,571,772 during the corresponding period in 2020. Financing activities for the three months endedMarch 31, 2021 were comprised of proceeds from the exercise of warrants of$1,652,022 , offset by approximately$1.0 million used to pay down our long-term debt, and payments on our line of credit. Financing activities for the three months endedMarch 31, 2020 were comprised of contributions from the Tensile transactions of$21.0 million , offset by approximately$8.1 million used to pay down our long-term debt, and$3.3 million of payments on our line of credit.
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 atMarch 31, 2021 . 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 ". 18 -------------------------------------------------------------------------------- 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 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 income or loss 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 impact 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
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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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