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 ". Our logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service marks that are the property of others. Solely for convenience, trademarks, tradenames and service marks referred to in this Report may appear without the ®, ™ and SM symbols. References to our trademarks, tradenames and service marks are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies' trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. 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 2021 means the year endedDecember 31, 2021 , fiscal 2020 means the year endedDecember 31, 2020 , and 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);
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--------------------------------------------------------------------------------"Hydrotreating" means the process of reacting oil fractions with hydrogen in the presence of a catalyst to produce high-value clean products;
"IMO 2020" effective
"MDO" means marine diesel oil, which is a type of fuel oil and is a blend of gasoil and heavy fuel oil, with less gasoil than intermediate fuel oil used in the maritime field;
"Naphthas" means any of various volatile, highly flammable liquid hydrocarbon mixtures used chiefly as solvents and diluents and as raw materials for conversion to gasoline;
"Pygas" means pyrolysis gasoline, an aromatics-rich gasoline stream produced in sizeable quantities by an ethylene plant. These plants are designed to crack a number of feedstocks, including ethane, propane, naphtha, and gasoil. Pygas can serve as a high-octane blendstock for motor gasoline or as a feedstock for an aromatics extraction unit;
"SEC" or the "Commission" refers to the
"Securities Act" refers to the Securities Act of 1933, as amended; and
"VGO" refers to Vacuum Gas Oil (also known as cat feed) - a feedstock for a fluid catalytic cracker typically found in a crude oil refinery and used to make gasoline No. 2 oil and other byproducts.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with theSecurities and Exchange Commission ("SEC"). OurSEC filings (reports, proxy and information statements, and other information) are available to the public over the Internet at theSEC's website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to theSEC , on the "Investor Relations," "SEC Filings" page of our website at www.vertexenergy.com. Information on our website is not part of this Report, and we do not desire to incorporate by reference such information herein. Copies of documents filed by us with theSEC are also available from us without charge, upon oral or written request to our Secretary,who can be contacted at the address and telephone number set forth on the cover page of this Report.
Summary of The Information Contained in Management's Discussion and Analysis of Financial Condition and Results of Operations
Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying unaudited consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows: •Description of Business Activities. Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A, and including an update on the effect of the COVID-19 pandemic on us and a summary of certain recent events.
•Results of Operations. An analysis of our financial results comparing the three
and six months ended
•Liquidity and Capital Resources. An analysis of changes in our consolidated balance sheets and cash flows and discussion of our financial condition.
•Critical Accounting Policies and Use of Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
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Description of Business Activities
We are an environmental services company that recycles industrial waste streams
and off-specification commercial chemical products. Our primary focus is
recycling used motor oil and other petroleum by-products. We are engaged in
operations across the entire petroleum recycling value chain including
collection, aggregation, transportation, storage, re-refinement, and sales of
aggregated feedstock and re-refined products to end users. We operate in three
segments:
(1) Black Oil,
(2) Refining and Marketing, and
(3) Recovery.
We currently provide our services in 15 states, primarily in the Gulf Coast ,
Midwest and Mid-Atlantic regions of the United States . For the rolling
twelve-month period ending June 30, 2021 , we aggregated approximately 82.5
million gallons of used motor oil and other petroleum by-product feedstocks and
managed the re-refining of approximately 71.9 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 in Marrero, Louisiana .
We also acquired our Marrero, Louisiana facility, which facility re-refines used
motor oil and also produces VGO and the Myrtle Grove re-refining complex in
Belle Chasse, Louisiana (which is now owned by a special purpose entity which we
own an approximate 85% interest of) in May 2014 .
Our Refining and Marketing 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 the Gulf 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 suppliers who operate similar collection businesses to ours.
We manage the logistics of transport, storage and delivery of used oil to our
customers. We own a fleet of 30 transportation trucks and more than 80
aboveground storage tanks with over 8.6 million gallons of storage capacity.
These assets are used by both the Black Oil 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 in Marrero, Louisiana . In addition, at our Marrero, Louisiana
facility, we produce a Vacuum Gas Oil (VGO) product that is sold to refineries
as well as to the marine fuels market. At our Columbus, Ohio facility (Heartland
Petroleum), we produce a base oil product that is sold to lubricant packagers
and distributors.
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Refining and Marketing 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 customers who 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. Products and Services
We generate substantially all of our revenue from the providing of oil collection services and sale of seven 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.
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Industrial fuel is a distillate fuel oil which is typically a blend of lower quality fuel oils. It can include diesel fuels and fuel oils such as No. 1, No. 2 and No. 4 diesel fuels that are historically used for space heating and power generation. Industrial fuel is typically a fuel with low viscosity, as well as low sulfur, ash, and heavy metal content, making it an ideal blending agent.
Distillates
Distillates are finished fuel products such as gasoline and diesel fuels.
Oil Collection Services
Oil collection services include the collection, handling, treatment and sales of used motor oil and products which include used motor oil (such as oil filters) which are collected from our customers.
Metals
Metals consist of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes, barges, boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut-up and sent back to a steel mill for re-purposing.
Other re-refinery products
Other re-refinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.
VGO/Marine fuel sales
VGO/Marine fuel sales relate to the sale of low sulfur fuel meeting the criteria for IMO 2020 compliant marine fuels.
The way that the product categories above fit into our three operating segments
(1) Black Oil; (2) Refining and Marketing; and (3) Recovery, are indicated
below:
Black Oil(1) Refining and Marketing(2) Recovery(3)
Base oil X X
Pygas X
Industrial fuel X X
Distillates X
Oil collection services X
Metals X
Other re-refinery products X X
VGO/Marine fuel sales X
(1) As discussed in greater detail above under "Black Oil 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.
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(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.
Novel Coronavirus (COVID-19)
In December 2019 , a novel strain of coronavirus, which causes the infectious
disease known as COVID-19, was reported in Wuhan, China . The World Health
Organization declared COVID-19 a "Public Health Emergency of International
Concern" on January 30, 2020 and a global pandemic on March 11, 2020 . In March
and April, many U.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 the U.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 of Organization 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 first quarter of 2020. While global gross domestic
product (GDP) growth was impacted by COVID-19 during 2020 and into the first and
second quarter of 2021, we expect GDP to continue to be impacted globally for
the remainder 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 the second half of 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, and/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 in U.S. travel caused by COVID-19, we
saw a significant decline in the volume of feedstocks (specifically used oil)
that we were able to collect during 2020, and therefore process through our
facilities. A prolonged economic slowdown, renewed periods of social quarantine
(imposed by the government or otherwise), or another prolonged period of
decreased travel due to COVID-19 or the responses thereto, similar to those
experienced during 2020, will likely have a material negative adverse impact on
our ability to produce products, and consequently our revenues and results of
operations.
The full extent of the impact of COVID-19 on our business and operations
currently cannot be estimated and will depend on a number of factors including
the scope and duration of the global pandemic, the efficacy of, and the
willingness of the general public to obtain, vaccines, as well as the rate of
transmission of new COVID-19 variants.
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 full extent to which COVID-19 will ultimately impact us depends on future
developments, including the duration and spread of the virus, as well as
potential seasonality of new outbreaks, including, but not limited to the recent
increase in infection rates, which may lead to further or extended stay-at-home
and similar orders in the markets in which we operate, and the recent global
roll out of vaccines, which may help slow the spread of the virus.
Recent Events
OnMay 26, 2021 , Vertex Operating, entered into a definitive Sale and Purchase Agreement (the "Refinery Purchase Agreement") withEquilon Enterprises LLC d/b/aShell Oil Products US and/orShell Chemical LP and/orShell Oil Company ("Seller"), to purchase the Seller'sMobile, Alabama refinery , certain real property associated therewith, and related assets, including all inventory at the refinery as of closing and certain equipment, rolling stock, and other personal property associated with theMobile refinery (collectively, the "Mobile Refinery " and the "Mobile Acquisition").The Mobile Refinery is located on an 800+ acre site in the city and county ofMobile, Alabama . The 91,000 barrel-per-day nameplate capacityMobile Refinery is capable of sourcing a flexible mix of cost-advantaged light-sweet domestic and international feedstocks. Approximately 70% of 6 -------------------------------------------------------------------------------- the refinery's current annual production is distillate, gasoline and jet fuel, with the remainder being vacuum gas oil, liquefied petroleum gas (LPG) and other products. The facility distributes its finished product across the southeasternUnited States through a high-capacity truck rack, together with deep and shallow water distribution points capable of supplying waterborne vessels. In addition to refining assets, the transaction will include the acquisition by the Company of approximately 3.2 million barrels of inventory and product storage, logistics and distribution assets, together with more than 800+ acres of developed and undeveloped land. The initial base purchase price for the assets is$75 million . In addition, Vertex Operating will also pay for the hydrocarbon inventory located at theMobile Refinery , as valued at closing, and the purchase price is subject to other customary purchase price adjustments and reimbursement for certain capital expenditures in the amount of approximately$225,000 and those relating to a turnaround at theMobile Refinery that is slated to occur in fourth quarter of 2021, in the approximate amount of$13 million . In connection with Vertex Operating's execution of the Refinery Purchase Agreement, and as a required term and condition thereof, Vertex Operating provided the Seller a promissory note in the amount of$10 million (the "Deposit Note"). Pursuant to the terms of the Refinery Purchase Agreement, the terms of such agreement (other than exclusivity throughDecember 31, 2021 , or such earlier date that the Refinery Purchase Agreement is terminated), were not legally binding on the Seller until such time as Vertex Operating funds the Deposit Note in cash (which note has been paid in full to date). The Deposit Note did not accrue interest unless or until an event of default occurs under such note, at which time interest accrues at 12% per annum until paid. The entire balance of the Deposit Note was due upon the earlier of (i) 45 calendar days following the date of the Deposit Note (i.e.,July 10, 2021 ); and (ii) five calendar days following the closing of any transaction between Vertex Operating and any third party, which Deposit Note was paid in full prior to such applicable due date. In the event of the closing of the transactions contemplated by the Refinery Purchase Agreement, the funded portion of the Deposit Note, and any interest thereon (the "Deposit") is credited against the purchase price due to the Seller. In the event the Refinery Purchase Agreement is terminated, the Deposit is non-refundable except as more particularly described in the Refinery Purchase Agreement, which provides that in some circumstances the Company may receive a complete refund of the Deposit or must pay a portion of (or in some cases all) the costs for the Swapkit (defined below) and/or the audit of the Seller's operations, to the extent requested by the Company. The Refinery Purchase Agreement is subject to termination prior to closing under certain circumstances, and may be terminated: at any time prior to the closing date by the mutual consent of the parties; by Vertex Operating or Seller in the event the closing has not occurred byMay 26, 2022 (the "Outside Date", subject to extensions as discussed in the Purchase and Sale Agreement), in the event such failure to close is not a result of Vertex Operating's or Seller's breach of the agreement, respectively, or the failure to obtain any government consent; by Vertex Operating or Seller, if the other party has breached any representation, warranty or covenant set forth in the agreement, subject to certain cases to the right to cure such breach, or required regulatory approvals have not been received as of the Outside Date; or by Seller if Vertex Operating fails to remit payment of the Deposit by the Deposit Note Due Date, at which time Seller also has the right to pursue collection under the terms of the Deposit Note, plus interest, if any, and to retain any amounts thereby collected. The Refinery Purchase Agreement provides that if all conditions to closing are satisfied other than government approvals and required permits and registrations, then the Outside Date is extended to such date as the parties mutually agree; provided, however, in the event the parties do not mutually agree, then the Outside Date is automatically extended toMay 26, 2023 .
The Refinery Purchase Agreement contemplates the Company and the Seller entering into various supply and offtake agreements at closing.
The Mobile Acquisition is expected to close near the end of the third quarter of 2021, subject to satisfaction of customary closing conditions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the absence of legal impediments prohibiting the Mobile Acquisition, receipt of regulatory approvals and required consents, absence of a material adverse effect and the Company raising sufficient cash to pay such aggregate purchase price. The Company anticipates financing the transaction through the entry into a debt facility and funds generated through the sale of common equity. The Company has not entered into any agreements regarding such fundings to date, and such fundings may not be available on favorable terms, if at all. The Company may also generate cash through asset divestitures. The conditions to the closing of theMobile Acquisition may not be met, and such closing may not ultimately occur on the terms set forth in the Refinery Purchase Agreement, if at all. 7 --------------------------------------------------------------------------------
Upon completion of the transaction and provided that Vertex's fundraising
initiatives are successful, Vertex plans to launch an
In connection with the entry into the Refinery Purchase Agreement, Vertex Operating and the Seller entered into a Swapkit Purchase Agreement (the "Swapkit Agreement"). Pursuant to the agreement, Vertex Operating agreed to fund a technology solution comprising the ecosystem required for the Company to run theMobile Refinery after closing (the "Swapkit"), at a cost of$8.7 million , which is payable at closing (subject to certain adjustments), or in certain circumstances, upon termination of the Purchase and Sale Agreement.
Series B and B1 Preferred Stock Automatic Conversion
Pursuant to the terms of the Series B Preferred Stock and Series B1 Preferred Stock of the Company, in the event that the closing sales price of the Company's common stock was at least$6.20 (as to the Series B Preferred Stock) and$3.90 (as to the Series B1 Preferred Stock) per share for at least 20 consecutive trading days, such shares of Series B Preferred Stock and Series B1 Preferred Stock were to convert automatically into common stock of the Company on a one-for-one basis (the "Automatic Conversion Provisions"). Effective onJune 24, 2021 (as to the Series B1 Preferred Stock) andJune 25, 2021 (as to the Series B Preferred Stock), the Automatic Conversion Provisions of the Series B Preferred Stock and Series B1 Preferred Stock were triggered, and the outstanding shares of the Company's Series B Preferred Stock and Series B1 Preferred Stock automatically converted into common stock of the Company. Specifically, the 1,783,292 then outstanding shares of Series B Preferred Stock automatically converted into 1,783,292 shares of common stock and the 3,134,889 then outstanding shares of Series B1 Preferred Stock automatically converted into 3,134,889 shares of common stock (or 4,918,181 shares of common stock in total).
As a result, there are no outstanding shares of Series B or B1 Preferred Stock
as of
Safety-Kleen Sale Agreement
OnJune 29, 2021 , we entered into an Asset Purchase Agreement (the "Sale Agreement" and the transactions contemplated therein, the "Sale Transaction" or the "Sale") with Vertex Operating,Vertex Refining LA, LLC ("Vertex LA"),Vertex Refining OH, LLC ("Vertex OH"),Cedar Marine Terminals, L.P. ("CMT"),H & H Oil, L.P. ("H&H"), as sellers, andSafety-Kleen Systems, Inc. , as purchaser ("Safety-Kleen"), dated as ofJune 28, 2021 . Pursuant to the Sale Agreement, Safety-Kleen agreed to acquire the Company'sMarrero used oil refinery inLouisiana (currently owned by Vertex LA); our Heartland used oil refinery inOhio (currently owned by Vertex OH); our H&H and Heartland used motor oil ("UMO") collections business; our oil filters and absorbent materials recycling facility inEast Texas ; and the rights CMT holds to a lease on the Cedar Marine terminal inBaytown, Texas (the "UMO Business").
The initial base purchase price for the assets is
The Sale Agreement also requires us to place$7 million of shares of our common stock into escrow for a period of 18 months following the closing (the "Escrow Period"), in order to satisfy any indemnification claims made by Safety-Kleen pursuant to the terms of the Sale Agreement. Such shares are to be valued at the volume weighted average price of the Company's common stock for the ten consecutive trading days ending on and including the closing date (the "10-Day VWAP"). On the last day of each fiscal quarter during the Escrow Period, the value of the shares of common stock held in escrow is calculated (based on the 10-Day VWAP, using the last day of each quarter as the ending trading day in lieu of the closing date), and if such value is less than$7 million (less any value of shares released from escrow to satisfy indemnification claims under the Sale Agreement, based on the 10-Day VWAP ending on the trading day immediately prior to the date any such shares are released from escrow), we are required to deposit additional shares into escrow such that the value of shares held in the escrow account is at least$7 million at all times. Notwithstanding the above, in no event will the number of shares issued into the escrow account, or otherwise pursuant to the terms of the Sale Agreement, exceed 19.9% of the Company's outstanding common stock on the date the Sale Agreement was entered into. Upon termination of the Escrow Period, any shares remaining in escrow (subject to pending claims) are to be returned to the Company for cancellation. 8 -------------------------------------------------------------------------------- The Sale Agreement is subject to termination prior to closing under certain circumstances, and may be terminated: at any time prior to the closing date by the mutual consent of the parties; by Safety-Kleen in the event the closing has not occurred byDecember 31, 2021 (the "Outside Date", subject to certain extensions as discussed in the Sale Agreement), in the event such failure to close is not a result of Safety-Kleen's breach of the agreement, provided that if the failure to close is the result of the failure to obtain certain government consents or the failure of the Company to obtain the required shareholder approval for the transaction, either party may extend the Outside Date for up to an additional 90 days; by the Company or Safety-Kleen, if the other party has breached the agreement, subject to certain cases to the right to cure such breach; by the Company if it becomes apparent that the closing of the Sale Agreement will not occur due to certain reasons, including if any of Safety-Kleen's required conditions to closing conditions will not be fulfilled by the Outside Date, unless such failure is the result of the Company. In the event that the Sale Agreement is terminated as a result of the failure of the Company's shareholders to approve the transaction, we are required to reimburse all of Safety-Kleen's out-of-pocket expenses (including all fees and expenses of counsel, accountants, investment bankers, financing sources, experts and consultants) incurred in connection with the authorization, preparation, negotiation, execution and performance of the Sale Agreement and the transactions contemplated therein (the "Reimbursement"). If Safety-Kleen terminates the Sale Agreement for certain reasons, including in certain cases due to a breach of the agreement by the Company in the event the Company solicits other competing transactions or takes other similar actions; because the Company considers a competing transaction and the shareholders of the Company fail to approve the Sale Agreement; or the Company's board of directors refuses to complete the transaction due to a competing transaction, then we are required to pay Safety-Kleen a break-fee of$3,000,000 , less amounts paid as Reimbursement (the "Break-Fee"), which will be the sole remedy of Safety-Kleen in such situation. The Sale Agreement is expected to close in the fourth quarter of 2021, subject to satisfaction of customary closing conditions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the absence of legal impediments prohibiting the transaction, and receipt of regulatory approvals and required consents. The Sale Agreement also requires us to hold a shareholders meeting to seek shareholder approval for the Sale Agreement, and the closing is conditioned on the Company's shareholders approving such Sale Agreement. The conditions to the closing of the Sale Agreement may not be met, and such closing may not ultimately occur on the terms set forth in the Sale Agreement, if at all. Houlihan Lokey andH.C. Wainwright acted as financial advisors to the Company on the transaction.Vallum Advisors acted as financial communications counsel to the Company. Tensile Transactions OnJuly 1, 2021 , the Operating Agreement of MG SPV was amended to provide that from the date of such agreement untilDecember 31, 2021 , the Company (through Vertex Operating), is required to fund the working capital requirements of MG SPV, which advances are initially characterized as debt, but that Tensile MG may convert such debt into additional Class A Units of MG SPV (afterDecember 31, 2021 ), at$1,000 per unit (the "MG SPV Amendment"). OnJuly 1, 2021 , Heartland SPV loaned Vertex Operating$7,000,000 , which was evidenced by a Promissory Note (the "Heartland Note"). The Heartland Note accrues interest at the applicable federal rate of interest from time to time, increasing to 12% upon an event of default. Amounts borrowed under the Heartland Note are due ninety days after the date of the note or within five (5) days of the closing of the Sale Agreement (whichever is earlier), and may be prepaid at any time without penalty. In the event the Heartland Note is not paid on or before the applicable due date, we agreed to use our best efforts to raise the funds necessary to repay the note as soon as possible. The Heartland Note includes customary events of defaults. The Company used the funds borrowed under the Heartland Note, to paydown a portion of the Deposit Note, with the remaining funds coming from a loan from EBC as discussed below. OnJuly 25, 2019 , Tensile purchased 1,500,000 shares of common stock and warrants to purchase 1,500,000 shares of common stock with an exercise price of$2.25 per share, and we entered into a Registration Rights and Lock-Up Agreement with Tensile which required us to register the shares of common stock issued to Tensile, and the shares of common stock issuable upon exercise of the warrants issued to Tensile, and Tensile agreed to certain restrictions on the sale of the shares held by Tensile. OnJuly 1, 2021 , we entered into a First Amendment to Registration Rights and Lock-Up Agreement with Tensile (the "RRA Amendment") to adjust the restriction on Tensile's ability to sell shares of common stock under the lock-up to provide for Tensile to not sell more than 500,000 shares of common stock in any seven day period untilJuly 25, 2024 , without the prior written consent of the Company.
Encina Credit Agreement Term Loan
9
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On July 1, 2021 , the Company and Vertex Operating entered into an Eighth
Amendment to Credit Agreement with EBC as agent for the lenders party there, and
such lenders (the "8th Amendment"), which amendment amended the EBC Credit
Agreement between the Company and certain of its subsidiaries, including Vertex
Operating. Pursuant to the 8th Amendment, Encina Business Credit SPV, LLC agreed
to loan the Company $5 million under the terms of the EBC Credit Agreement (the
"Term Loan"), under the stipulation that the Company use such loaned funds
solely to paydown amounts owed under the Deposit Note. The $5 million Term Loan
bears interest at the variable-rate of LIBOR (0.16% at June 30, 2021 ) plus 6.5%
per year, or to the extent that LIBOR is not available, the highest of the prime
rate and the Federal Funds Rate plus 0.50%, in each case, plus 6%. We are
required to repay the Term Loan in monthly installments of 1/48th of the amount
borrowed, each month that the Term Loan is outstanding, with a final balloon
payment due at maturity. The Term Loan is subject to customary events of
defaults and other covenants set forth in the EBC Credit Agreement. The Term
Loan is secured by Encina's security interests over substantially all of our
assets.
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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 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.
Through the operations at our Columbus, 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. In addition, we are distributing
refined motor fuels such as gasoline, blended gasoline products and diesel used
as engine fuels, to third party customers who typically resell these products to
retailers and end consumers.
RECOVERY - 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.
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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
our Vertex Holdings, L.P. (formerly Vertex Energy, L.P. ), a Texas limited
partnership ("Holdings"), Omega Refining, LLC ("Omega Refining"), Warren Ohio
Holdings Co., LLC , f/k/a Heartland 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 ended
December 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 June 30, $ Change -
Favorable % Change - Favorable
2021 2020 (Unfavorable) (Unfavorable)
Revenues $ 65,194,911 $ 21,374,127 $ 43,820,784 205 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 52,904,991 22,197,805 (30,707,186) (138) %
Depreciation and amortization attributable to
costs of revenues 1,393,350 1,239,564 (153,786) (12) %
Gross profit (loss)* 10,896,570 (2,063,242) 12,959,812 628 %
Operating expenses:
Selling, general and administrative expenses 8,825,940 6,030,560 (2,795,380) (46) %
Depreciation and amortization attributable to
operating expenses 482,869 473,897 (8,972) (2) %
Total operating expenses 9,308,809 6,504,457 (2,804,352) (43) %
Income (loss) from operations 1,587,761 (8,567,699) 10,155,460 119 %
Other income (expense):
Other income 4,222,000 20 4,221,980 21,109,900 % Gain on asset sales - 12,344 (12,344) (100) % Loss on change in value of derivative liability (21,507,332) (110,965) (21,396,367) (19,282) % Interest expense (259,091) (222,173) (36,918) (17) % Total other expense (17,544,423) (320,774) (17,223,649) (5,369) % Loss before income tax (15,956,662) (8,888,473) (7,068,189) (80) % Income tax benefit (expense) - - - - % Net loss (15,956,662) (8,888,473) (7,068,189) (80) % Net income attributable to non-controlling interest and redeemable non-controlling interest 3,417,907 109,165 3,308,742 3,031 %
Net loss attributable to
(115) %
* 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 June 30, 2021 , we had
a loss of $1,203,628 in our hedging instruments as compared to a gain of $57,016
for the three months ended June 30, 2020 . We recognize our hedging activities
from commodity derivatives in our cost of goods sold. During the three months
ended June 30, 2021 , compared to the same period in 2020, we saw a 13% decrease
in the discount we were paying for feedstock into our refineries. In addition,
we saw a 33% decrease in operating costs (inclusive of depreciation and
amortization) on a per barrel basis for the second quarter of 2021 as compared
to the same period in 2020.
Total revenues increased by 205% for the three months ended June 30, 2021 ,
compared to the same period in 2020, due primarily to higher commodity prices
(commodity prices reached near historic lows during the quarter ended June 30,
2020 , as a
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result of the COVID-19 pandemic) and increased volumes at our refineries;
including $36 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 June 30, 2021 , compared to
the same period in 2020. Total volume increased 21% during the three months
ended June 30, 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 period ended 2020.
During the three months ended June 30, 2021 , total cost of revenues (exclusive
of depreciation and amortization) was $52,904,991 compared to $22,197,805 for
the three months ended June 30, 2020 , an increase of $30,707,186 or 138% 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
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.
We had selling, general and administrative expenses of $8,825,940 for the three
months ended June 30, 2021 , compared to $6,030,560 from the prior year's period,
an increase of $2,795,380 or 46% 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. In addition, we had
significant business development expenses related to the transactions
contemplated by the Sale Agreement and the Purchase Agreement and related
transactions.
For the three months ended June 30, 2021 , total depreciation and amortization
expense attributable to cost of revenues was $1,393,350 , compared to $1,239,564
for the three months ended June 30, 2020 , an increase of $153,786 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 and
second quarters of 2021.
We had gross profit as a percentage of revenue of 16.7% for the three months
ended June 30, 2021 , compared to gross loss as a percentage of revenues of 9.7%
for the three months ended June 30, 2020 . The main reason for the improvement
was the increase in volumes at our refineries, along with increases in commodity
prices during the period.
Additionally, our per barrel margin increased 667% for the three months ended
June 30, 2021 , relative to the three months ended June 30, 2020 . Our per barrel
margin is calculated by dividing the total volume of product sold (in bbls) by
total gross profit (loss) for the applicable period ($10,896,570 for the 2021
period versus ($2,063,242 ) 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 June 30, 2021 , compared to the same period during
2020. During the current period our operating expenses were reduced by
approximately 33%.
Overall, commodity prices were up for the three months ended June 30, 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 June 30, 2021 ,
increased $33.89 per barrel from a three-month average of $24.70 for the three
months ended June 30, 2020 to $58.59 per barrel for the three months ended June
30, 2021 . The average posting (U.S. Gulfcoast Unleaded 87 Waterborne) for the
three months ended June 30, 2021 increased $50.88 per barrel from a three-month
average of $35.67 for the three months ended June 30, 2020 to $86.55 per barrel
for the three months ended June 30, 2021 .
We had income from operations of $1,587,761 for the three months ended June 30,
2021 , compared to loss from operations of $8,567,699 for the three months ended
June 30, 2020 , an increase of $10,155,460 or 119% 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 other income of $4,222,000 for the three months ended June 30, 2021 ,
compared to $100 for the three months ended June 30, 2020 . This is due to the
debt forgiveness of the PPP Loan during the second quarter of 2021 (see " Note
6. Line of Credit and Long-Term Debt" - "Loan Agreements " for more
information).
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We had interest expense of $259,091 for the three months ended June 30, 2021 ,
compared to interest expense of $222,173 for the three months ended June 30,
2020 , an increase in interest expense of $36,918 or 17% from the prior period,
due to having a higher interest rate on the term debt outstanding during the
three months ended June 30, 2021 , compared to the prior year's period.
We had a $21,507,332 loss on change in value of derivative liability for the
three months ended June 30, 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 loss
on change in the value of our derivative liability of $110,965 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 (and more specifically the significant
increase in the market price of our common stock during the current period),
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 net loss of $15,956,662 for the three months ended June 30, 2021 ,
compared to net loss of $8,888,473 for the three months ended June 30, 2020 , an
increase in net loss of $7,068,189 or 80% from the prior period. The main reason
for the increase in net loss for the three months ended June 30, 2021 , compared
to the three months ended June 30, 2020 , was attributable to the increase in
loss on change in value of derivative liability as discussed above, which is a
non-cash adjustment, offset by the increase in gross profit and other income for
the three months ended June 30, 2021 , each as described above.
Each of our segments' income (loss) from operations during the three months
ended
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Three Months Ended $ Change -
June 30, Favorable % Change - Favorable
Black Oil Segment 2021 2020 (Unfavorable) (Unfavorable)
Revenues $ 34,356,396 $ 11,543,136 $ 22,813,260 198 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 24,165,394 11,848,334 (12,317,060) (104) %
Depreciation and amortization attributable
to costs of revenues 1,089,417 982,085 (107,332) (11) %
Gross profit (loss)* 9,101,585 (1,287,283) 10,388,868 807 %
Selling general and administrative expense 7,516,867 4,869,390 (2,647,477) (54) %
Depreciation and amortization attributable
to operating expenses 353,947 347,667 (6,280) (2) %
Income (loss) from operations $ 1,230,771 $ (6,504,340) $ 7,735,111 119 %
Refining and Marketing Segment
Revenues $ 23,836,691 $ 6,297,328 $ 17,539,363 279 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 22,467,363 5,958,778 (16,508,585) (277) %
Depreciation and amortization attributable
to costs of revenues 126,429 113,986 (12,443) (11) %
Gross profit* 1,242,899 224,564 1,018,335 453 %
Selling general and administrative expense 688,108 578,027 (110,081) (19) %
Depreciation and amortization attributable
to operating expenses 108,472 105,780 (2,692) (3) %
Income (loss) from operations $ 446,319 $ (459,243) $ 905,562 197 %
Recovery Segment
Revenues $ 7,001,824 $ 3,533,663 $ 3,468,161 98 %
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 6,272,234 4,390,693 (1,881,541) (43) %
Depreciation and amortization attributable
to costs of revenues 177,504 143,493 (34,011) (24) %
Gross profit (loss)* 552,086 (1,000,523) 1,552,609 155 %
Selling general and administrative expense 620,965 583,143 (37,822) (6) %
Depreciation and amortization attributable
to operating expenses 20,450 20,450 - - %
Loss from operations $ (89,329) $ (1,604,116) $ 1,514,787 94 %
* 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 $34,356,396 for the three months
ended June 30, 2021 , with cost of revenues (exclusive of depreciation and
amortization) of $24,165,394 , and depreciation and amortization attributable to
cost of revenues of $1,089,417 . During the three months ended June 30, 2020 ,
these revenues were $11,543,136 with cost of revenues (exclusive of depreciation
and amortization) of $11,848,334 and depreciation and amortization attributable
to cost of revenues of $982,085 . Income from operations improved for the three
months ended June 30, 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 increased approximately 50% during the three
months ended June 30, 2021 , compared to the same period in 2020. This increase
was largely due to continued impacts of the change in shelter in place orders in
the locations in which we collect used motor oil as a result of the COVID-19
pandemic compared to 2020, which directly impacted the generation of used oil,
which caused a reduction in volumes during the prior period. The Heartland
facility experienced increased demand for
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finished products during the three months ended June 30, 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 50% during the three
months ended June 30, 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 June 30, 2021 , our Refining and Marketing cost
of revenues (exclusive of depreciation and amortization) were $22,467,363 , of
which the processing costs for our Refining and Marketing business located at
KMTEX were $435,605 , and depreciation and amortization attributable to cost of
revenues was $126,429 . Revenues for the same period were $23,836,691 . During the
three months ended June 30, 2020 , our Refining and Marketing cost of revenues
(exclusive of depreciation and amortization) were $5,958,778 , which included the
processing costs at KMTEX of $419,818 , and depreciation and amortization
attributable to cost of revenues was $113,986 . Revenues for the same period were
$6,297,328 .
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 Crystal, we began operating as a wholesale distributer of motor
fuels which include gasoline, blended gasoline and diesel. Revenues in the
Refining segment were up 279% during the three months ended June 30, 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 588%
during the three months ended June 30, 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 ended June 30, 2020 . Our pygas volumes decreased 2% for the
three months ended June 30, 2021 , as compared to the same period in 2020. Our
fuel oil cutter volumes increased 100% for the three months ended June 30, 2021 ,
as compared to the same period in 2020, due to improvements in the volume of
feedstock available from third party facilities in the Gulf coast region. 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 $7,001,824 for the three months
ended June 30, 2021 , with cost of revenues (exclusive of depreciation and
amortization) of $6,272,234 , and depreciation and amortization attributable to
cost of revenues of $177,504 . During the three months ended June 30, 2020 , these
revenues were $3,533,663 with cost of revenues (exclusive of depreciation and
amortization) of $4,390,693 , and depreciation and amortization attributable to
cost of revenues of $143,493 . Loss from operations decreased for the three
months ended June 30, 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 . Vertex and Penthol are currently
involved in ongoing litigation described in greater detail above under " Part
I " - " Item 1. Financial Statements " in the Notes to Consolidated
Financial Statements in " Note 3. Concentrations, Significant Customers,
Commitments and Contingencies ", under the heading "Litigation". Revenues for
this segment increased 98% as a result of an increase in volumes during the
three months ended June 30, 2021 , compared to the same period in 2020. Volumes
were down in our metals segment during the three months ended June 30, 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.
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
Set forth below are our results of operations for the six months ended
Six Months Ended June 30, $ Change -
Favorable % Change - Favorable
2021 2020 (Unfavorable) (Unfavorable)
Revenues $ 123,278,904 $ 57,577,556 $ 65,701,348 114 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 96,251,265 49,034,659 (47,216,606) (96) %
Depreciation and amortization attributable to
costs of revenues 2,741,170 2,415,986 (325,184) (13) %
Gross Profit* 24,286,469 6,126,911 18,159,558 296 %
Operating expenses:
Selling, general and administrative expenses 16,752,520 12,731,078 (4,021,442) (32) %
Depreciation and amortization attributable to
operating expenses 965,738 932,033 (33,705) (4) %
Total operating expenses 17,718,258 13,663,111 (4,055,147) (30) %
Income (loss) from operations 6,568,211 (7,536,200) 14,104,411 187 %
Other income (expense):
Other Income 4,222,000 100 4,221,900 4,221,900 %
Gain on sale of assets 1,424 12,344 (10,920) (88) %
Gain (loss) on change in value of derivative
liability (23,287,535) 1,587,782 (24,875,317) (1,567) %
Interest expense (495,424) (562,259) 66,835 12 %
Total other income (expense) (19,559,535) 1,037,967 (20,597,502) (1,984) %
Loss before income taxes (12,991,324) (6,498,233) (6,493,091) (100) %
Income tax (expense) benefit - - - - %
Net loss (12,991,324) (6,498,233) (6,493,091) (100) %
Net income (loss) attributable to
non-controlling interest and redeemable
non-controlling interest 5,408,876 (289,444) 5,698,320 1,969 %
Net loss attributable to
$ (6,208,789) $ (12,191,411) (196) % * The Company changed its presentation of gross profit, beginning in its Quarterly Report on Form 10-Q for the quarter endedSeptember 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). Additionally, we use hedging instruments to manage our exposure to underlying commodity prices. During the six months endedJune 30, 2021 , we had a loss of$1,925,158 in our hedging instruments as compared to a gain of$4,484,798 for the six months endedJune 30, 2020 . We recognize our hedging activities from commodity derivatives in our cost of goods sold. As demand for used oil feedstock increases, the prices we are required to pay for such feedstock typically increases as well - i.e., the discount pricing to non-used oil shrinks, which increases our acquisition costs. Our gross profit is to a large extent a function of the market discount we are able to obtain in purchasing feedstock, as well as how efficiently management conducts operations. As demand for used oil feedstock increases, the prices we are required to pay for such feedstock typically increases as well - i.e., the discount pricing to non-used oil shrinks, which increases our acquisition costs. 18 -------------------------------------------------------------------------------- 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 increased by 114% for the six months endedJune 30, 2021 compared to the same period in 2020, due primarily to higher commodity prices and increased volumes at our refineries, during the six months endedJune 30, 2021 , compared to the prior year's period. Total volume was up 6% during the six months endedJune 30, 2021 , compared to the same period in 2020. During the six months endedJune 30, 2021 , total cost of revenues (exclusive of depreciation and amortization) was$96,251,265 , compared to$49,034,659 for the six months endedJune 30, 2020 , an increase of$47,216,606 or 96% from the prior period. The main reason for the increase was the result of higher commodity prices, which impacted our feedstock pricing, an increase in volumes throughout the business. Additionally, our per barrel margin increased 322% for the six months endedJune 30, 2021 , relative to the six months endedJune 30, 2020 , due to increased volumes, along with increases in commodity prices for the finished products we sell during the six months endedJune 30, 2021 , compared to the same period during 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 ($24,286,469 for the 2021 period versus$6,126,911 for the 2020 period). The 96% increase in cost of revenues (exclusive of depreciation and amortization) for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 , is mainly a result of the increase in commodity prices, and increased volumes at our refining facilities during the period, offset by relative increases in operating expenses at our facilities. Volumes in our street collections were up 33% for the six months endedJune 30, 2021 , as compared to the same period in 2019, and we saw an 8% increase in what we were paying for feedstock into our refineries during the period. In addition, we saw no material change in operating costs (inclusive of depreciation and amortization) on a per barrel basis for the six months endedJune 30, 2021 , as compared to the same period in 2020. The cost of the oil collected was up 31% and revenue was up 8% from the prior period. The maintaining of collection costs on a per barrel basis 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 10% of gross margin to the business or approximately$2 million , for the six-month period endedJune 30, 2021 . 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 six months endedJune 30, 2021 , total depreciation and amortization expense attributable to cost of revenues was$2,741,170 , compared to$2,415,986 for the six months endedJune 30, 2020 , an increase of$325,184 , 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 half of 2021. We had gross profit as a percentage of revenue of 19.7% for the six months endedJune 30, 2021 , compared to gross profit as a percentage of revenues of 10.6% for the six months endedJune 30, 2020 . The main reason for the improvement was the increase in volumes at our refineries, along with increases in commodity prices during the period. In addition, commodity prices increased approximately 68% for the six months endedJune 30, 2021 , compared to the same period in 2020. For example, the average posting (U.S. Gulfcoast No. 2 Waterbone) for the six months endedJune 30, 2021 , increased$22.89 per barrel from a six-month average of$46.53 for the six months endedJune 30, 2020 , to$69.42 per barrel for the six months endedJune 30, 2021 . We had selling, general, and administrative expenses of$16,752,520 for the six months endedJune 30, 2021 , compared to$12,731,078 of selling, general, and administrative expenses for the prior year's period, an increase of$4,021,442 or 32%. This increase is primarily due to the additional selling, general and administrative expenses incurred during the period as a result of increased personnel costs, legal expenses, and insurance expenses related to expansion through organic growth. We had income from operations of$6,568,211 for the six months endedJune 30, 2021 , compared to a loss from operations of$7,536,200 for the six months endedJune 30, 2020 , an increase of$14,104,411 or 187% from the prior year's six-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. 19 -------------------------------------------------------------------------------- We had interest expense of$495,424 for the six months endedJune 30, 2021 , compared to interest expense of$562,259 for the six months endedJune 30, 2020 , a decrease in interest expense of$66,835 or 12%, due to a lower amount of term debt outstanding during the six months endedJune 30, 2021 , compared to the prior period. The Company received a total of$21.0 million from certain transactions undertaken with Tensile duringJanuary 2020 , of which approximately$9.0 million was used to pay down our debt obligations. We had other income of$4,222,000 for the six months endedJune 30, 2021 , compared to$100 for the six months endedJune 30, 2020 . This is due to the debt forgiveness of the PPP loan during the second quarter of 2021 (see " Note 6. Line of Credit and Long-Term Debt" - "Loan Agreements " for more information). We had a gain on the sale of assets of$1,424 for the six months endedJune 30, 2021 , compared to a gain on the sale of assets of$12,344 for the six months endedJune 30, 2020 . We had a$23,287,535 loss on change in value of derivative liability for the six months endedJune 30, 2021 , in connection with certain warrants granted inJune 2015 andMay 2016 , as described in greater detail in " Note 9. Preferred Stock and Detachable Warrants " to the unaudited consolidated financial statements included herein under "Part I"-"Item 1 Financial Statements", compared to a gain on change in the value of our derivative liability of$1,587,782 in the prior year's period. This change was mainly due to the fluctuation in the market price of our common stock (and more specifically the significant increase in the market price of our common stock during the current period), 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 net loss of$12,991,324 for the six months endedJune 30, 2021 , compared to a net loss of$6,498,233 for the six months endedJune 30, 2020 , an increase in net loss of$6,493,091 or 100% from the prior period due to the reasons described above. The majority of our net loss for the six months endedJune 30, 2021 , was attributable to the loss on change in value of derivative liability due to change in market conditions, which is a non-cash expense. 20 --------------------------------------------------------------------------------
Each of our segments' income (loss) from operations during the six months ended
Six Months Ended June 30, $ Change -
Favorable % Change - Favorable
Black Oil Segment 2021 2020 (Unfavorable) (Unfavorable)
Revenues $ 66,514,644 $ 41,074,506 $ 25,440,138 62 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 44,001,840 31,914,575 (12,087,265) (38) %
Depreciation and amortization attributable to
costs of revenues 2,163,678 1,918,980 (244,698) (13) %
Gross profit* 20,349,126 7,240,951 13,108,175 181 %
Selling, general and administrative expense 13,938,563 10,280,613 (3,657,950) (36) %
Depreciation and amortization attributable to
operating expenses 707,895 682,783 (25,112) (4) %
Income (loss) from operations $ 5,702,668 $ (3,722,445) $ 9,425,113 253 %
Refining Segment
Revenues $ 43,110,644 $ 8,807,920 $ 34,302,724 389 %
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 40,618,133 8,554,830 (32,063,303) (375) %
Depreciation and amortization attributable to
costs of revenues 252,062 219,754 (32,308) (15) %
Gross profit* 2,240,449 33,336 2,207,113 6,621 %
Selling, general and administrative expense 1,447,518 1,170,416 (277,102) (24)%
Depreciation and amortization attributable to
operating expenses 216,943 206,178 (10,765) (5)%
Income (loss) from operations $ 575,988 $ (1,343,258) $ 1,919,246 143%
Recovery Segment
Revenues $ 13,653,616 $ 7,695,130 $ 5,958,486 77%
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 11,631,292 8,565,254 (3,066,038) (36)%
Depreciation and amortization attributable to
costs of revenues 325,430 277,252 (48,178) (17)%
Gross profit (loss)* 1,696,894 (1,147,376) 2,844,270 248%
Selling, general and administrative expense 1,366,439 1,280,049 (86,390) (7)%
Depreciation and amortization attributable to
operating expenses 40,900 43,072 2,172 5%
Income (loss) from operations $ 289,555 $ (2,470,497) $ 2,760,052 112%
* 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 $66,514,644 for the six months
ended June 30, 2021 , with cost of revenues (exclusive of depreciation and
amortization) of $44,001,840 , and depreciation and amortization attributable to
cost of revenues of $2,163,678 . During the six months ended June 30, 2020 , these
revenues were $41,074,506 with cost of revenues (exclusive of depreciation and
amortization) of $31,914,575 , and depreciation and amortization attributable to
cost of revenues of $1,918,980 Income from operations improved for the six
months ended June 30, 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 increased approximately 12% during the six months
ended June 30, 2021 , compared to the same period in 2020. This increase was
largely due to the overall improvement from the change in the 'stay-at-home'
orders that were imposed as a result of the COVID-19 pandemic during 2020.
Volumes collected through our H&H Oil and Heartland
21
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collection facilities increased 33% during the six months ended June 30, 2021 ,
compared to the same period in 2020. This increase was a result of the increase
in pay for oil on the street experienced as a result of increased demand for
UMO. 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 Crystal. Since the acquisition of Crystal in
June 2020 , we have operated as a wholesale distributer of motor fuels which
include gasoline, blended gasoline and diesel. During the six months ended June
30, 2021 , our Refining and Marketing cost of revenues (exclusive of depreciation
and amortization) were $40,618,133 , of which the processing costs for our
Refining and Marketing business located at KMTEX were $856,025 , and depreciation
and amortization attributable to cost of revenues of $252,062 . Revenues for the
same period were $43,110,644 . During the six months ended June 30, 2020 , our
Refining and Marketing cost of revenues (exclusive of depreciation and
amortization) were $8,554,830 , which included the processing costs at KMTEX of
$873,825 , and depreciation and amortization attributable to cost of revenues of
$219,754 . Revenues for the same period were $8,807,920 .
Our Refining segment includes the business operations of our Refining and
Marketing operations, as well as our assets from Crystal Energy which was
acquired in June 2020 . Overall volume for the Refining and Marketing division
increased 258% during the six months ended June 30, 2021 , as compared to the
same period in 2020. Our fuel oil cutter volumes increased 75% for the six
months ended June 30, 2021 , compared to the same period in 2020. Our pygas
volumes were unchanged for the six months ended June 30, 2021 , as compared to
the same period in 2020. The improved margins were a result of increases in
available feedstock volumes as compared to the same period during 2020. We
experienced a large increase in volumes being received from third party
facilities as a result of changes in COVID-19 restrictions in 2021 compared to
the prior 2020 period. We have 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 $13,653,616 for the six months
ended June 30, 2021 , with cost of revenues (exclusive of depreciation and
amortization) of $11,631,292 , and depreciation and amortization attributable to
cost of revenues of $325,430 . During the six months ended June 30, 2020 , these
revenues were $7,695,130 with cost of revenues (exclusive of depreciation and
amortization) of $8,565,254 , and depreciation and amortization attributable to
cost of revenues of $277,252 . Income from operations increased for the six
months ended June 30, 2021 , compared to 2020, as a result of increased volumes
attributable to our Recovery segment and margins related thereto, through our
various facilities. This segment benefits from certain one-time projects that
drive increases in volumes as well as revenues and margins from time to time and
the increase for the current period was due to certain one-time projects which
were completed.
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'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 . Vertex and Penthol are currently involved in ongoing
litigation described in greater detail above under " Part I " - " Item 1.
Financial Statements " in the Notes to Consolidated Financial Statements in
" Note 3. Concentrations, Significant Customers, Commitments and
Contingencies ", under the heading " Litigation ". Revenues for this
segment increased 77% as a result of increased commodity prices when compared to
the same period in 2020. Volumes of products acquired in our Recovery business
were down 12% during the six months ended June 30, 2021 , compared to the same
period during 2020. This segment periodically participates in project work that
is not ongoing, thus we expect to see fluctuations in revenue and income before
income taxes from period to period. These projects are typically bid related and
can take time to line out and get started; however, we believe these are very
good projects for the Company and we anticipate more in the upcoming periods.
The Company purchases product/feedstock from third-party collectors as well as
internally collected product using its fleet of trucks. Our long-term goal is to
collect as much of our product/feedstock as possible as this helps to improve
margins and ultimately net income of the Company. The more product/feedstock we
can collect with our own fleet and displace third-party purchases improves the
overall profitability of the Company through cost reductions, as our internally
collected product/feedstock is generally cheaper than product/feedstock we have
to purchase from third-parties. In general, the more product/feedstock we are
required to acquire from third-parties, the lower our margins. While the
breakdown between internally sourced and third-party sourced product/feedstock
has no effect on revenue (which is a function of fluctuating product spreads),
it does have an effect on cost of revenues, and therefore our gross profit.
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.
22
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The following table sets forth the high and low spot prices during the six
months ended
High Date Low Date
U.S. Gulfcoast No. 2 Waterborne
(dollars per gallon) $ 2.10 June 22 $ 1.32 January 4
U.S. Gulfcoast Unleaded 87 Waterborne
(dollars per gallon) $ 2.21 June 23 $ 1.36 January 4
U.S. Gulfcoast Residual Fuel No. 6 3%
(dollars per barrel) $ 64.92 June 25 $ 45.08 January 4
NYMEX Crude oil (dollars per barrel) $ 74.05 June 25 $ 47.62 January 4
Reported in Platt's US Marketscan (
The following table sets forth the high and low spot prices during the six months endedJune 30, 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 (
We saw an increase in the first half 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 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. 23 --------------------------------------------------------------------------------
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$135,108,226 as ofJune 30, 2021 , compared to$122,099,958 atDecember 31, 2020 . The increase was mainly due to exercises of options and warrants that provided cash, along with increases in accounts receivable and inventory levels, due to the increases in commodity prices and volumes, during the six months endedJune 30, 2021 , compared to the prior year's period. We had total current liabilities of$30,998,919 as ofJune 30, 2021 , compared to$23,850,412 atDecember 31, 2020 . We had total liabilities of$79,577,270 as ofJune 30, 2021 , compared to total liabilities of$60,809,023 as ofDecember 31, 2020 . The increase in current liabilities and total liabilities was mainly due to the increase in commodity prices and volumes, current portion of debt due in less than a year, and derivative warrant liability during the six months endedJune 30, 2021 , compared to the prior year's period. We had working capital of$12,812,221 as ofJune 30, 2021 , compared to working capital of$5,934,977 as ofDecember 31, 2020 . The increase in working capital fromDecember 31, 2020 toJune 30, 2021 is mainly due to the generation of additional liquidity as a result of option and warrant exercises for cash and the increase in accounts receivable and inventory offset by the increase in accounts payable, as explained above, and the increase in the debt owed toEncina Business Credit, LLC andEncina Business Credit SPV, LLC (as shown below), which is a current liability because it is due in less than a year during the six months endedJune 30, 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 and other borrowings will be sufficient to fund our operations and service our debt in the near term, notwithstanding the funding which will be required to complete the acquisition of theMobile Refinery , and a planned capital project following such acquisition, and the funds we plan to receive upon the closing of the Sale (each as discussed in greater detail above). 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 and/or may make it more difficult or costly to raise funding to complete theMobile Refinery acquisition and the planned capital project associated therewith. Current global and market conditions have increased the potential for that difficulty.
The Company's outstanding debt facilities as of
24
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Balance on June Balance on
Creditor Loan Type Origination Date Maturity Date Loan Amount 30, 2021 December 31, 2020
Encina Business Credit,
LLC Term Loan February 1, 2017 February 1, 2022 $ 20,000,000 $ 4,983,000 $ 5,433,000
Encina Business Credit SPV, LLC Revolving Note February 1, 2017 February 1, 2022$ 10,000,000 1,165,183
133,446
Encina Business Credit, LLC Capex Loan August 7, 2020 February 1, 2022$ 2,000,000 1,194,386
1,378,819
Wells Fargo Equipment Lease-Ohio Finance Lease April-May, 2019 April-May, 2024$ 621,000 376,738
436,411 AVT Equipment Lease-Ohio Finance Lease April 2, 2020 April 2, 2023$ 466,030 318,689 380,829 AVT Equipment Lease-HH Finance Lease May 22, 2020 May 22, 2023$ 551,609 377,933 450,564 John Deere Note Note May 27, 2020 June 24, 2024$ 152,643 112,768 131,303 Tetra Capital Lease Finance Lease May, 2018 May, 2022$ 419,690 116,308
172,235
Loan-Leverage
Lubricants SBA Loan July 18, 2020 July 18, 2050$ 58,700 58,700
-
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
Insurance premiums
Various institutions financed Various < 1 year $ 2,902,428 - 1,183,543
Total $ 8,703,705 $ 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 $ 4,983,000 $ - $ - $ - $ - $ -
Encina Business Credit SPV,
LLC 1,165,183 - - - - -
Encina Business Credit, LLC 1,194,386 - - - - -
John Deere Note 37,759 38,696 36,313 - - -
Well Fargo Equipment Lease-
Ohio 124,041 130,574 122,123 - - -
AVT Equipment Lease-Ohio 132,443 186,246 - - - -
AVT Equipment Lease-HH 154,805 223,128 - - - -
Tetra Capital Lease 99,832 16,476 - - - -
Loan-Leverage Lubricants - 413 1,273 1,321 1,371 54,322
Texas Citizens Bank - - - - - -
Various institutions - - - - - -
Totals $ 7,891,449 $ 595,533 $ 159,709 $ 1,321 $ 1,371 $ 54,322
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. We also estimate the need for additional
funding to complete the transactions contemplated by the Purchase Agreement.
25
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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.
Our current near term plans include closing the transactions contemplated by the
Purchase Agreement and the Sale Agreement and transitioning the majority of our
assets and operations away from used motor oil and towards several important
objectives, the combination of which we believe will advance our strategy of
becoming a leading pure-play energy transition company of scale in connection
with the planned acquisition of the Mobile Refinery . The refinery, which has a
long track record of safe, reliable operations and consistent financial
performance, is expected to become Vertex's flagship refining asset upon the
close of the transaction, positioning the Company to become a pure-play producer
of renewable and conventional products. The addition of renewable fuels
production associated with the refinery is anticipated to accelerate Vertex's
strategic focus on "clean" refining. By year-end 2022, assuming the completion
of the planned acquisition and our capital project at the facility, the Mobile
Refinery is projected to produce approximately 10,000 barrels per day (bpd) of
renewable diesel fuel and renewable byproducts. By mid-year 2023, based on
current projections, Vertex expects to increase renewable diesel production to
14,000 bpd. Upon completion of the planned renewable diesel project, Vertex
expects to become one of the leading independent producers of renewable fuels in
the southeastern United States .
We anticipate that market for our common stock will be 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;
(4)the status of planned acquisitions and divestitures; and
(5)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 and industry information.
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Cash flows for the six months ended June 30, 2021 compared to the six months
ended June 30, 2020 :
Six Months Ended June 30,
2021 2020
Beginning cash, cash equivalents and restricted cash $ 10,995,169 $ 4,199,825
Net cash provided by (used in):
Operating activities 5,046,217 3,712,156
Investing activities (2,746,928) (3,375,454)
Financing activities 1,772,279 13,317,899
Net increase in cash, cash equivalents and restricted cash 4,071,568 13,654,601
Ending cash, cash equivalents and restricted cash $
15,066,737
Our primary sources of liquidity are cash flows from our operations and the
availability to borrow funds under our credit and loan facilities. We also
raised
Net cash provided by operating activities was$5,046,217 for the six months endedJune 30, 2021 , as compared to net cash provided by operating activities of$3,712,156 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 increase in cash provided by operating activities for the six month period endedJune 30, 2021 , compared to the same period in 2020, was the increase in volumes, commodity prices, and production at our refineries during the six months endedJune 30, 2021 . Investing activities used cash of$2,746,928 for the six months endedJune 30, 2021 , as compared to having used$3,375,454 of cash during the corresponding period in 2020, due mainly to the purchase of fixed assets. Financing activities provided cash of$1,772,279 for the six months endedJune 30, 2021 , as compared to providing cash of$13,317,899 during the corresponding period in 2020. Financing activities for the six months endedJune 30, 2021 were comprised of proceeds from the exercise of options and warrants of$2,829,228 and proceeds from our line of credit totaling$1,031,737 , offset by$1,836,511 used to pay down our long-term debt. Financing activities for the six months endedJune 30, 2020 were comprised of contributions the Company received from certain transactions undertaken with Tensile duringJanuary 2020 totaling$21,000,000 , of which$8,618,202 was used to pay down our long-term debt, and$3,276,230 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, variable interest entities, 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 as of and for the six months endedJune 30, 2021 . 27 --------------------------------------------------------------------------------
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 ".
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 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.
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--------------------------------------------------------------------------------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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