UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarterquarterly period ended September 30, 20212022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission File Number 001-11476
———————
VERTEX ENERGY, INC.
(Exact name of registrant as specified in its charter)
———————
| | | | | |
| Nevada | 94-3439569 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
| |
| |
| |
1331 Gemini Street, Suite 250, 77058
Houston, Texas 77058
(Address of principal executive offices) (Zip Code)
866-660-8156
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.001 Par Value Per Share | VTNR | The NASDAQ Stock Market LLC
|
| (Nasdaq Capital Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☑ NoYes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑Yes ý¨ No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | ☐ | | Accelerated filer | ☐☑ |
| Non-accelerated filer | ☒☐ | | Smaller reporting company | ☒☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
¨Yes ☐☑ Noý
State the numberAs of shares of the issuer’s common stock outstanding, as of the latest practicable date: 63,284,215November 7, 2022, there were 75,668,826 shares of common stock are issued and outstanding as of November 8, 2021.outstanding.
TABLE OF CONTENTS
| | | | | | | | | | | |
| | | | Page |
| |
| | | PART I | |
| Item 1. | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | |
| | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Item 2 | | | |
| | | | |
| Item 3. | | | |
| | | | |
| Item 4. | | | |
| | | | |
| | | |
| | | PART II | |
| Item 1. | | | |
| | | | |
| Item 1A. | | | |
| | | | |
| Item 2. | | | |
| | | | |
| Item 3. | | | |
| | | | |
| Item 4. | | | |
| | | | |
| Item 5. | | | |
| | | | |
| Item 6. | | | |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATIONGLOSSARY OF TERMS
This Quarterly ReportPlease see the “Glossary” beginning on Form 10-Q (this "Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industrypage 4 in which the Company operates and the beliefs and assumptions of the management of the Company. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Report. Factors that might cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Report, including under “Risk Factors”, and in other reports the Company files with the Securities and Exchange Commission (“SEC”), including the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as2021, filed with the SECSecurities and Exchange Commission on March 9, 2021 (under14, 2022 (the "Annual Report"), for a list of abbreviations and definitions used throughout this Report. In addition, unless the heading context otherwise requires and for the purposes of this report only:
•“Risk FactorsBBL” and in other parts(also “bbl” or “Bbl”) is the abbreviated form for one barrel, 42 U.S. gallons of that report), which factors include:
•risks associated with our outstanding convertible notes, including amounts owed, restrictive covenants, dilution caused by“BPD” (also “bpd”) is the conversion thereof, optional and mandatory redemption rights in connection therewith and our abilityabbreviated form for barrels per day. This can refer to repay such amounts when due;
•“BCD” (also “bcd”, “b/cd”) is the levelabbreviated form of competition in our industry and our ability to compete;barrels per calendar day; meaning the total number of barrels of actual throughput processed within 24 hours under typical operating conditions.
•our ability to respond to changes“Base oil” is a lubricant grade oil initially produced from refining crude oil or through chemical synthesis used in our industry;manufacturing lubricant products such as lubricating greases, motor oil, and metal processing fluids.
•“Black Oil” is a term used to describe used lubricating oils, which may be visually characterized as dark in color due to carbon and other residual elements and compounds which accumulate through use. This term can also refer to the loss of key personnel or failure to attract, integratebusiness segment within the Company, which manages used motor oil related operations and retain additional personnel;processes such as purchase, sales, aggregation, processing, and re-refining.
•our ability“Catalytic Reforming” is a process that uses heat, pressure, and a catalyst to protect our intellectual property and not infringe on others’ intellectual property;convert low-octane naphthas into high-octane gasoline blending components.
•our ability“Cracking” refers to scale our business;the process of breaking down larger, heavier, and more complex hydrocarbon molecules into simpler and lighter molecules through the use of heat, pressure, and sometimes a catalyst.
•our ability“Crude oil distillation” means the process of distilling vapor from liquid crudes, usually by heating and condensing the vapor slightly above atmospheric pressure turning it back to maintain supplier relationships and obtain adequate supplies of feedstocks;liquid in order to purify, fractionate or form the desired products.
•our ability“Cutterstock” also known as “cutter stock”, refers to obtain and retain customers;any stream that is blended to adjust various properties of the resulting blend.
•our ability to produce our“Distillates” are finished fuel products at competitive rates;such as diesel fuels, jet fuel and kerosene.
•our ability“Generator” means any person, by site, whose act or process produces used oil or whose act first causes used oil to execute our business strategy in a very competitive environment;become subject to regulation. Generators can be service stations, governments or other businesses that produce or receive used oil.
•trends“IMO 2020” refers to the International Maritime Organization’s rule, effective January 1, 2020, which limited sulfur content in and the market for, the price of oil and gas and alternative energy sources;fuels used on board ships operating outside designated emission control areas to 0.50% mass by mass.
•our ability to maintain our relationship“Industrial fuel” is a distillate fuel oil, 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 KMTEXlow viscosity, as well as low sulfur, ash, and Bunker One (USA) Inc;heavy metal content, making it an ideal blending agent.
•the impact“LLS” means Louisiana Light Sweet Crude and is a grade of competitive services and products;crude oil classified by its low sulfur content.
•our ability to integrate acquisitions;
•our ability to complete future acquisitions;
•risks associated with our planned sale of substantially all of our used motor oil assets and operations and the planned acquisition of the Mobile Refinery (defined and discussed below);
•our ability to maintain insurance;
•potential future litigation, judgments and settlements;
•rules and regulations making our operations more costly or restrictive, including IMO 2020;
•changes in environmental and other laws and regulations and risks associated with such laws and regulations;“LPG” means liquefied petroleum gases.
•economic downturns both“Lubricant” or “lube” means a solvent-neutral paraffinic product used in the United Statescommercial heavy-duty engine oils, passenger car oils, and globally;specialty products for industrial applications such as heat transfer, metalworking, rubber, and other general process oil.
•risk of increased regulation of our operations and products;“MBL” means one thousand barrels.
•negative publicity“Metals” consist of recoverable ferrous and public oppositionnon-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 our operations;a steel mill for re-purposing.
•disruptions in“Oil collection services” include the infrastructure that wecollection, handling, treatment, and our partners rely on;transacting of used motor oil and related products which contain used motor oil (such as oil filters and absorbents) acquired from customers.
•an inability to identify attractive acquisition opportunities and successfully negotiate acquisition terms;“Olefins” are hydrotreated VGO.
•our ability to effectively integrate acquired assets, companies, employees or businesses;“Other refinery products” include the sales of asphalt, condensate, recovered products, and other petroleum products.
•liabilities associated“Pygas” or pyrolysis gasoline, is a product that can be blended with acquired companies, assetsgasoline as an octane booster or businesses;distilled and separated into its components, including benzene and other hydrocarbons.
•interruptions at our facilities;“Re-Refining” refers to the process or industry which uses refining processes and technology with used oil as a feedstock to produce high-quality base stocks and intermediate feedstocks for lubricants, fuels, and other petroleum products.
•unexpected changes“Refining adjusted EBITDA” represents income (loss) from operations plus depreciation and amortization, unrealized gains and losses on hedging activities, gain and loss on intermediation agreement, and certain other unusual or non-recurring charges included in our anticipated capital expenditures resulting from unforeseen required maintenance, repairs, or upgrades;
•our ability“Refining gross margin” is defined as gross profit (loss) less the cost of fuel intakes and other fuel costs. It excludes operating expenses and depreciation attributable to acquirecost of revenues and construct new facilities;other non-operating items included in costs of revenues, including unrealized losses on hedging activities and loss on inventory intermediation agreement.
•certain events“Refining gross margin per barrel of default which have occurred under our debt facilities and previously been waived;throughput” is calculated as refining gross margin divided by total throughput barrels for the period presented.
•prohibitions on borrowing and other covenants of our debt facilities;“Reformate” is a gasoline blending stock produced by catalytic reforming.
•our ability to effectively manage our growth;“Renewable Diesel” means a diesel fuel derived from vegetable oils or animal fats that is produced through various processes, most commonly through hydrotreating, reacting the feedstock with hydrogen under temperatures and pressure in the presence of a catalyst.
•decreases in global demand for,“RINs” means renewable identification numbers and refers to serial numbers assigned to credits generated from renewable fuel production under the priceEnvironmental Protection Agency’s Renewable Fuel Standard (“RFS”) regulations, which require blending renewable fuels into the nation’s fuel supply. In lieu of oil, dueblending, refiners may purchase these transferable credits to COVID-19, and/or state, federal and foreign responses thereto;comply with the regulations.
•our ability“Sour Crude Oil” refers to acquire sufficient amountscrude oil containing quantities of used oil feedstock through our collection routes, to produce finished products, and in the absence of such internally collected feedstocks, our ability to acquire third-party feedstocks on commercially reasonable terms;
•risks associated with COVID-19, the global efforts“Sweet Crude Oil” refers to stop the spreadcrude oil containing quantities of COVID-19, potential downturns in the U.S. and global economies duesulfur equal to COVID-19 and the efforts to stop the spread of the virus, and COVID-19 in general;
•repayment“UMO” is the abbreviation for used motor oil.
•“Vacuum Distillation” is the process of distilling vapor from liquid crudes, usually by heating and covenantscondensing the vapor below atmospheric pressure turning it back to a liquid in our debt facilities;
•the lack of capital available on acceptable terms“Vacuum Gas Oil” or “VGO” is a product produced from a vacuum distillation column which is predominately used as an intermediate feedstock to finance our continued growth;produce transportation fuels and other by-products such as gasoline, diesel and marine fuels.
•other risk factors included under “Risk Factors”VTB” refers to vacuum tower bottoms, the leftover bottom product of distillation, which can be processed in our latest Annual Report on Form 10-Kcokers and set forth below under “Risk Factors”.
You should read the matters described in,used for upgrading into gasoline, diesel, and incorporated by reference in, “Risk Factors” and the other cautionary statements made in this Report, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. All forward-looking statements included herein speak only of the date of the filing of this Report. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.gas oil.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
VERTEX ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares and par value)
(UNAUDITED)
| | | | September 30,
2021 | | December 31,
2020 | | September 30,
2022 | | December 31,
2021 |
| ASSETS | ASSETS | | | | ASSETS | | | |
| Current assets | Current assets | | | | Current assets | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 12,112,577 | | | $ | 10,895,044 | | Cash and cash equivalents | $ | 117,464 | | | $ | 36,130 | |
| Restricted cash | Restricted cash | 100,125 | | | 100,125 | | Restricted cash | 4,929 | | | 100,497 | |
| Accounts receivable, net | Accounts receivable, net | 5,796,484 | | | 4,858,847 | | Accounts receivable, net | 51,830 | | | 14,880 | |
| | Inventory | Inventory | 2,402,126 | | | 1,458,288 | | Inventory | 169,772 | | | 8,031 | |
| | Derivative commodity asset | | Derivative commodity asset | 1,219 | | | 96 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 5,062,889 | | | 1,942,137 | | Prepaid expenses and other current assets | 33,337 | | | 4,567 | |
| Assets held for sale, current | Assets held for sale, current | 87,670,167 | | | 10,530,947 | | Assets held for sale, current | 11,651 | | | 10,070 | |
| Total current assets | Total current assets | 113,144,368 | | | 29,785,388 | | Total current assets | 390,202 | | | 174,271 | |
| | Noncurrent assets | | | | |
| | Fixed assets, at cost | Fixed assets, at cost | 16,508,660 | | | 15,495,562 | | Fixed assets, at cost | 198,088 | | | 62,196 | |
| Less accumulated depreciation | Less accumulated depreciation | (1,926,886) | | | (1,573,025) | | Less accumulated depreciation | (33,371) | | | (26,043) | |
| Fixed assets, net | Fixed assets, net | 14,581,774 | | | 13,922,537 | | Fixed assets, net | 164,717 | | | 36,153 | |
| Finance lease right-of-use assets | Finance lease right-of-use assets | 14,842 | | | 18,100 | | Finance lease right-of-use assets | 43,649 | | | 377 | |
| Operating lease right-of use assets | Operating lease right-of use assets | 4,850,112 | | | 4,734,497 | | Operating lease right-of use assets | 33,960 | | | 33,272 | |
| Intangible assets, net | Intangible assets, net | 385,798 | | | 466,546 | | Intangible assets, net | 12,803 | | | 6,652 | |
| | Other assets | Other assets | 11,708,732 | | | 1,008,733 | | Other assets | 2,246 | | | 15,335 | |
| Assets held for sale, noncurrent | — | | | 72,164,157 | | |
| | | TOTAL ASSETS | TOTAL ASSETS | $ | 144,685,626 | | | $ | 122,099,958 | | TOTAL ASSETS | $ | 647,577 | | | $ | 266,060 | |
| | LIABILITIES, TEMPORARY EQUITY, AND EQUITY | LIABILITIES, TEMPORARY EQUITY, AND EQUITY | | | | LIABILITIES, TEMPORARY EQUITY, AND EQUITY | | | |
| Current liabilities | Current liabilities | | | | Current liabilities | | | |
| Accounts payable | Accounts payable | $ | 5,673,876 | | | $ | 2,419,543 | | Accounts payable | $ | 70,906 | | | $ | 11,980 | |
| Accrued expenses | Accrued expenses | 2,185,282 | | | 980,233 | | Accrued expenses | 42,650 | | | 4,942 | |
| Dividends payable | — | | | 606,550 | | |
| Liabilities held for sale, current | 38,765,716 | | | 14,342,808 | | |
| | Finance lease liability-current | Finance lease liability-current | 346,322 | | | 122,702 | | Finance lease liability-current | 1,155 | | | 342 | |
| Operating lease liability-current | Operating lease liability-current | 872,694 | | | 783,747 | | Operating lease liability-current | 6,421 | | | 5,849 | |
| Current portion of long-term debt, net of unamortized finance costs | 14,398,267 | | | 4,367,169 | | |
| Revolving note | — | | | 133,446 | | |
| Derivative commodity liability | 155,929 | | | 94,214 | | |
| Current portion of long-term debt, net | | Current portion of long-term debt, net | 16,637 | | | 2,413 | |
| Obligations under inventory financing agreements, net | | Obligations under inventory financing agreements, net | 134,244 | | | — | |
| Total current liabilities | Total current liabilities | 62,398,086 | | | 23,850,412 | | Total current liabilities | 272,013 | | | 25,526 | |
| Long-term liabilities | | | | |
| Long-term debt, net of unamortized finance costs | 124,124 | | | 7,981,496 | | |
| | | | | |
| Long-term debt, net | | Long-term debt, net | 167,665 | | | 64,131 | |
| Finance lease liability-long-term | Finance lease liability-long-term | — | | | 315,513 | | Finance lease liability-long-term | 44,339 | | | 256 | |
| | Operating lease liability-long-term | Operating lease liability-long-term | 3,977,418 | | | 3,950,750 | | Operating lease liability-long-term | 27,539 | | | 27,423 | |
| | Liabilities held for sale, noncurrent | — | | | 24,380,440 | | |
| | Derivative warrant liability | Derivative warrant liability | 1,072,620 | | | 330,412 | | Derivative warrant liability | 14,303 | | | 75,211 | |
| Other liabilities | | Other liabilities | 1,378 | | | — | |
| Total liabilities | Total liabilities | 67,572,248 | | | 60,809,023 | | Total liabilities | 527,237 | | | 192,547 | |
| | COMMITMENTS AND CONTINGENCIES (Note 3) | — | | | — | | |
| | TEMPORARY EQUITY | | |
| COMMITMENTS AND CONTINGENCIES (Note 4) | | COMMITMENTS AND CONTINGENCIES (Note 4) | — | | | — | |
| | | | September 30,
2021 | | December 31,
2020 | | September 30,
2022 | | December 31,
2021 |
Series B Convertible Preferred Stock, $0.001 par value per share; 10,000,000 shares designated, 4,102,690 and 4,102,690 shares issued and 0 and 4,102,690 shares outstanding at September 30, 2021 and December 31, 2020, respectively with a liquidation preference of $— and $12,718,339 at September 30, 2021 and December 31, 2020, respectively. | — | | | 12,718,339 | | |
| Series B1 Convertible Preferred Stock, $0.001 par value per share; 17,000,000 shares designated, 7,399,649 and 7,399,649 shares issued and 0 and 7,399,649 shares outstanding at September 30, 2021 and December 31, 2020, respectively with a liquidation preference of $— and $11,543,452 at September 30, 2021 and December 31, 2020, respectively. | — | | | 11,036,173 | | |
| TEMPORARY EQUITY | | TEMPORARY EQUITY | |
| | | Redeemable non-controlling interest | Redeemable non-controlling interest | 39,771,408 | | | 31,611,674 | | Redeemable non-controlling interest | — | | | 43,447 | |
| Total temporary equity | Total temporary equity | 39,771,408 | | | 55,366,186 | | Total temporary equity | — | | | 43,447 | |
| EQUITY | EQUITY | | | | EQUITY | | | |
| 50,000,000 of total Preferred shares authorized: | 50,000,000 of total Preferred shares authorized: | | | | 50,000,000 of total Preferred shares authorized: | | | |
Series A Convertible Preferred Stock, $0.001 par value; 5,000,000 shares designated, 385,601 and 419,859 shares issued and outstanding at September 30, 2021 and December 31, 2020, with a liquidation preference of $574,545 and $625,590 at September 30, 2021 and December 31, 2020. | 386 | | | 420 | | |
Series A Convertible Preferred Stock, $0.001 par value; zero and 5,000,000 shares designated, zero and 385,601 shares issued and outstanding at September 30, 2022 and December 31, 2021, with a liquidation preference of $0 and $574,545 at September 30, 2022 and December 31, 2021. | | Series A Convertible Preferred Stock, $0.001 par value; zero and 5,000,000 shares designated, zero and 385,601 shares issued and outstanding at September 30, 2022 and December 31, 2021, with a liquidation preference of $0 and $574,545 at September 30, 2022 and December 31, 2021. | — | | | — | |
| Series C Convertible Preferred Stock, $0.001 par value; 44,000 shares designated, no shares issued or outstanding. | — | | | — | | |
| Common stock, $0.001 par value per share; 750,000,000 shares authorized; 63,003,766 and 45,554,841 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively. | 63,004 | | | 45,555 | | |
| Common stock, $0.001 par value per share; 750,000,000 shares authorized; 75,608,826 and 63,287,965 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively. | | Common stock, $0.001 par value per share; 750,000,000 shares authorized; 75,608,826 and 63,287,965 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively. | 76 | | | 63 | |
| Additional paid-in capital | Additional paid-in capital | 136,905,764 | | | 94,569,674 | | Additional paid-in capital | 278,930 | | | 138,620 | |
| Accumulated deficit | Accumulated deficit | (101,475,299) | | | (90,008,778) | | Accumulated deficit | (160,354) | | | (110,614) | |
| Total Vertex Energy, Inc. stockholders' equity | 35,493,855 | | | 4,606,871 | | |
| Total Vertex Energy, Inc. shareholders' equity | | Total Vertex Energy, Inc. shareholders' equity | 118,652 | | | 28,069 | |
| Non-controlling interest | Non-controlling interest | 1,848,115 | | | 1,317,878 | | Non-controlling interest | 1,688 | | | 1,997 | |
| Total equity | Total equity | 37,341,970 | | | 5,924,749 | | Total equity | 120,340 | | | 30,066 | |
| TOTAL LIABILITIES, TEMPORARY EQUITY, AND EQUITY | TOTAL LIABILITIES, TEMPORARY EQUITY, AND EQUITY | $ | 144,685,626 | | | $ | 122,099,958 | | TOTAL LIABILITIES, TEMPORARY EQUITY, AND EQUITY | $ | 647,577 | | | $ | 266,060 | |
See accompanying condensed notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(UNAUDITED)
| | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | 2021 | | 2020 | | 2021 | | 2020 | | | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | Revenues | | $ | 28,974,471 | | | $ | 16,249,312 | | | $ | 84,823,476 | | | $ | 30,460,606 | | | Revenues | | $ | 810,208 | | | $ | 50,982 | | | $ | 1,915,423 | | | $ | 147,807 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 28,061,498 | | | 15,324,914 | | | 79,319,678 | | | 28,598,874 | | | Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 750,463 | | | 46,142 | | | 1,819,757 | | | 127,986 | |
| Depreciation and amortization attributable to costs of revenues | Depreciation and amortization attributable to costs of revenues | | 126,795 | | | 115,562 | | | 358,905 | | | 327,672 | | | Depreciation and amortization attributable to costs of revenues | | 4,050 | | | 1,028 | | | 9,144 | | | 3,002 | |
| Gross profit | Gross profit | | 786,178 | | | 808,836 | | | 5,144,893 | | | 1,534,060 | | | Gross profit | | 55,695 | | | 3,812 | | | 86,522 | | | 16,819 | |
| | Operating expenses: | Operating expenses: | | | Operating expenses: | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | | 4,944,719 | | | 1,832,067 | | | 12,111,951 | | | 6,044,050 | | | Selling, general and administrative expenses | | 36,978 | | | 8,177 | | | 89,934 | | | 21,742 | |
| Depreciation and amortization attributable to operating expenses | Depreciation and amortization attributable to operating expenses | | 26,916 | | | 28,002 | | | 80,748 | | | 48,118 | | | Depreciation and amortization attributable to operating expenses | | 1,120 | | | 420 | | | 2,656 | | | 1,260 | |
| | | Total operating expenses | Total operating expenses | | 4,971,635 | | | 1,860,069 | | | 12,192,699 | | | 6,092,168 | | | Total operating expenses | | 38,098 | | | 8,597 | | | 92,590 | | | 23,002 | |
| | Loss from operations | | (4,185,457) | | | (1,051,233) | | | (7,047,806) | | | (4,558,108) | | | |
| Income (loss) from operations | | Income (loss) from operations | | 17,597 | | | (4,785) | | | (6,068) | | | (6,183) | |
| | Other income (expense): | Other income (expense): | | | | | | | | | | Other income (expense): | | | | | | | | |
| | Other income | | — | | | — | | | 4,222,000 | | | — | | | |
| Loss on sale of assets | | (3,351) | | | (136,434) | | | (1,927) | | | (124,090) | | | |
| Other income (expenses) | | Other income (expenses) | | 417 | | | (3) | | | 1,060 | | | 4,220 | |
| | Gain (loss) on change in value of derivative warrant liability | Gain (loss) on change in value of derivative warrant liability | | 11,907,413 | | | 256,587 | | | (11,380,122) | | | 1,844,369 | | | Gain (loss) on change in value of derivative warrant liability | | 12,312 | | | 11,907 | | | 7,788 | | | (11,380) | |
| | Interest expense | Interest expense | | (352,587) | | | (97,157) | | | (603,398) | | | (291,933) | | | Interest expense | | (13,131) | | | (455) | | | (65,083) | | | (919) | |
| Total other income (expense) | Total other income (expense) | | 11,551,475 | | | 22,996 | | | (7,763,447) | | | 1,428,346 | | | Total other income (expense) | | (402) | | | 11,449 | | | (56,235) | | | (8,079) | |
| Income (loss) from continuing operations before income tax | Income (loss) from continuing operations before income tax | | 7,366,018 | | | (1,028,237) | | | (14,811,253) | | | (3,129,762) | | | Income (loss) from continuing operations before income tax | | 17,195 | | | 6,664 | | | (62,303) | | | (14,262) | |
| Income tax benefit (expense) | Income tax benefit (expense) | | — | | | — | | | — | | | — | | | Income tax benefit (expense) | | — | | | — | | | — | | | — | |
| Income (loss) from continuing operations | Income (loss) from continuing operations | | 7,366,018 | | | (1,028,237) | | | (14,811,253) | | | (3,129,762) | | | Income (loss) from continuing operations | | 17,195 | | | 6,664 | | | (62,303) | | | (14,262) | |
| Income (loss) from discontinued operations, net of tax | | 3,278,498 | | | (926,933) | | | 12,464,445 | | | (5,323,630) | | | |
| Income from discontinued operations, net of tax (see note 23) | | Income from discontinued operations, net of tax (see note 23) | | 4,975 | | | 3,981 | | | 19,882 | | | 11,915 | |
| Net income (loss) | Net income (loss) | | 10,644,516 | | | (1,955,170) | | | (2,346,808) | | | (8,453,392) | | | Net income (loss) | | 22,170 | | | 10,645 | | | (42,421) | | | (2,347) | |
| Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | | (115,131) | | | 136,334 | | | 510,618 | | | 155,322 | | | Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | | (64) | | | (115) | | | 33 | | | 511 | |
| Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations | | 2,400,141 | | | 343,881 | | | 7,183,268 | | | 35,449 | | | |
| Net income attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations | | Net income attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations | | — | | | 2,400 | | | 6,829 | | | 7,183 | |
| Net income (loss) attributable to Vertex Energy, Inc. | Net income (loss) attributable to Vertex Energy, Inc. | | 8,359,506 | | | (2,435,385) | | | (10,040,694) | | | (8,644,163) | | | Net income (loss) attributable to Vertex Energy, Inc. | | 22,234 | | | 8,360 | | | (49,283) | | | (10,041) | |
| | Accretion of redeemable noncontrolling interest to redemption value from continued operations | Accretion of redeemable noncontrolling interest to redemption value from continued operations | | (414,690) | | | (1,287,559) | | | (1,176,683) | | | (13,635,797) | | | Accretion of redeemable noncontrolling interest to redemption value from continued operations | | — | | | (415) | | | (428) | | | (1,177) | |
| Accretion of discount on Series B and B1 Preferred Stock | Accretion of discount on Series B and B1 Preferred Stock | | — | | | (29,157) | | | (507,282) | | | (1,500,395) | | | Accretion of discount on Series B and B1 Preferred Stock | | — | | | — | | | — | | | (507) | |
| Dividends on Series B and B1 Preferred Stock | | — | | | (591,777) | | | 258,138 | | | (1,296,493) | | | |
| | Net income (loss) available to shareholders from continuing operations | | 7,066,459 | | | (3,073,064) | | | (16,747,698) | | | (19,717,769) | | | |
| Net income (loss) available to shareholders from discontinued operations, net of tax | | 878,357 | | | (1,270,814) | | | 5,281,177 | | | (5,359,079) | | | |
| Net income (loss) available to common shareholders | | $ | 7,944,816 | | | $ | (4,343,878) | | | $ | (11,466,521) | | | $ | (25,076,848) | | | |
| | Net income (loss) attributable to common shareholders from continuing operations | | Net income (loss) attributable to common shareholders from continuing operations | | 17,259 | | | 6,364 | | | (62,764) | | | (16,457) | |
| Net income attributable to common shareholders from discontinued operations, net of tax | | Net income attributable to common shareholders from discontinued operations, net of tax | | 4,975 | | | 1,581 | | | 13,053 | | | 4,732 | |
| Net income (loss) attributable to common shareholders | | Net income (loss) attributable to common shareholders | | $ | 22,234 | | | $ | 7,945 | | | $ | (49,711) | | | $ | (11,725) | |
|
| | Basic income (loss) per common share | Basic income (loss) per common share | | | | | | | | | | Basic income (loss) per common share | | | | | | | | |
| Continuing operations | Continuing operations | | $ | 0.12 | | | $ | (0.07) | | | $ | (0.31) | | | $ | (0.43) | | | Continuing operations | | $ | 0.23 | | | $ | 0.10 | | | $ | (0.91) | | | $ | (0.31) | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | | $ | 0.01 | | | $ | (0.03) | | | $ | 0.10 | | | $ | (0.12) | | | Discontinued operations, net of tax | | 0.07 | | | 0.03 | | | 0.19 | | | 0.09 | |
| Basic income (loss) per common share | Basic income (loss) per common share | | $ | 0.13 | | | $ | (0.10) | | | $ | (0.21) | | | $ | (0.55) | | | Basic income (loss) per common share | | $ | 0.30 | | | $ | 0.13 | | | $ | (0.72) | | | $ | (0.22) | |
| | Diluted income (loss) per common share | Diluted income (loss) per common share | | | Diluted income (loss) per common share | |
| Continuing operations | Continuing operations | | $ | 0.11 | | | $ | (0.07) | | | $ | (0.31) | | | $ | (0.43) | | | Continuing operations | | $ | 0.22 | | | $ | 0.10 | | | $ | (0.91) | | | $ | (0.31) | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | | $ | 0.01 | | | $ | (0.03) | | | $ | 0.10 | | | $ | (0.12) | | | Discontinued operations, net of tax | | 0.06 | | | 0.02 | | | 0.19 | | | 0.09 | |
| Diluted income (loss) per common share | Diluted income (loss) per common share | | $ | 0.12 | | | $ | (0.10) | | | $ | (0.21) | | | $ | (0.55) | | | Diluted income (loss) per common share | | $ | 0.28 | | | $ | 0.12 | | | $ | (0.72) | | | $ | (0.22) | |
| | Shares used in computing earnings per share | Shares used in computing earnings per share | | | | | | | | | | Shares used in computing earnings per share | | | | | | | | |
| Basic | Basic | | 61,348,508 | | | 45,554,841 | | | 53,963,617 | | | 45,494,235 | | | Basic | | 75,591 | | | 61,349 | | | 69,007 | | | 53,964 | |
| Diluted | Diluted | | 64,605,326 | | | 45,554,841 | | | 53,963,617 | | | 45,494,235 | | | Diluted | | 79,638 | | | 64,605 | | | 69,007 | | | 53,964 | |
See accompanying condensed notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020(in thousands, except par value)
(UNAUDITED) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Common Stock | | Series A Preferred | | Series C Preferred | | | | | | | | |
| | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Additional Paid-In Capital | | Retained Earnings | | Non-controlling Interest | | Total Equity |
| Balance on January 1, 2021 | 45,554,841 | | | $ | 45,555 | | | 419,859 | | | $ | 420 | | | — | | | $ | — | | | $ | 94,569,674 | | | $ | (90,008,778) | | | $ | 1,317,878 | | | $ | 5,924,749 | |
| Exercise of options | 22,992 | | | 23 | | | — | | | — | | | — | | | — | | | (23) | | | — | | | — | | | — | |
| Exercise of B1 warrants | 1,079,753 | | | 1,080 | | | — | | | — | | | — | | | — | | | 2,756,877 | | | — | | | — | | | 2,757,957 | |
| Exchanges of Series B Preferred stock to common | 2,359,494 | | | 2,359 | | | — | | | — | | | — | | | — | | | 4,114,570 | | | 630,321 | | | — | | | 4,747,250 | |
| Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 150,514 | | | — | | | — | | | 150,514 | |
| | | | | | | | | | | | | | | | | | | |
| Conversion of Series B Preferred stock to common | 638,224 | | | 638 | | | — | | | — | | | — | | | — | | | 1,977,856 | | | — | | | — | | | 1,978,494 | |
| Conversion of Series B1 Preferred stock to common | 2,087,195 | | | 2,087 | | | — | | | — | | | — | | | — | | | 3,253,937 | | | — | | | — | | | 3,256,024 | |
| Dividends on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (372,183) | | | — | | | (372,183) | |
| Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (223,727) | | | — | | | (223,727) | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (373,748) | | | — | | | (373,748) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 974,369 | | | 1,990,969 | | | 2,965,338 | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,542,402) | | | (1,542,402) | |
| Balance on March 31, 2021 | 51,742,499 | | | $ | 51,742 | | | 419,859 | | | $ | 420 | | | — | | | $ | — | | | $ | 106,823,405 | | | $ | (89,373,746) | | | $ | 1,766,445 | | | $ | 19,268,266 | |
| Exercise of options to common | 505,376 | | | 505 | | | — | | | — | | | — | | | — | | | 229,007 | | | — | | | — | | | 229,512 | |
| Exercise of options to common- unissued | — | | | — | | | — | | | — | | | — | | | — | | | 474,866 | | | — | | | — | | | 474,866 | |
| Leverage Lubricants contribution | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (13,491) | | | (13,491) | |
| Exercise of B1 warrants | 156,792 | | | 157 | | | — | | | — | | | — | | | — | | | 1,634,409 | | | — | | | — | | | 1,634,566 | |
| Exercise of B1 warrants-unissued | — | | | — | | | — | | | — | | | — | | | — | | | 1,185,831 | | | — | | | — | | | 1,185,831 | |
| Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 205,039 | | | — | | | — | | | 205,039 | |
| Conversion of Series A Preferred stock to common | 28,257 | | | 28 | | | (28,257) | | | (28) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Conversion of Series B Preferred stock to common | 1,841,406 | | | 1,842 | | | — | | | — | | | — | | | — | | | 5,706,517 | | | — | | | — | | | 5,708,359 | |
| Conversion of Series B Preferred stock to common-unissued | — | | | — | | | — | | | — | | | — | | | — | | | 759,983 | | | — | | | — | | | 759,983 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion of Series B1 Preferred stock to common | 5,634,889 | | | 5,635 | | | — | | | — | | | — | | | — | | | 8,784,782 | | | — | | | — | | | 8,790,417 | |
| | | | | | | | | | | | | | | | | | | |
| Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (283,555) | | | — | | | (283,555) | |
| | | | | | | | | | | | | | | | | | | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (388,245) | | | — | | | (388,245) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (19,374,569) | | | 3,417,907 | | | (15,956,662) | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,111,743) | | | (3,111,743) | |
| Balance on June 30, 2021 | 59,909,219 | | | $ | 59,909 | | | 391,602 | | | $ | 392 | | | — | | | $ | — | | | $ | 125,803,839 | | | $ | (109,420,115) | | | $ | 2,059,118 | | | $ | 18,503,143 | |
| Exercise of options to common | 1,267,472 | | | 1,268 | | | — | | | — | | | | | | | 1,481,119 | | | — | | | — | | | 1,482,387 | |
| Exercise of options to common- unissued | — | | | — | | | — | | | — | | | — | | | — | | | 2,925 | | | — | | | — | | | 2,925 | |
| Exercise of B1 warrants | 1,575,918 | | | 1,576 | | | — | | | — | | | — | | | — | | | 9,361,053 | | | — | | | — | | | 9,362,629 | |
| Conversion of Series B Preferred stock to common | 245,156 | | | 245 | | | — | | | — | | | — | | | — | | | (245) | | | — | | | — | | | — | |
| Conversion of Series A Preferred stock to common | 6,001 | | | 6 | | | (6,001) | | | (6) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Leverage Lubricants contribution | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,260 | | | 2,260 | |
| Distribution from VRM LA | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (169,368) | | | (169,368) | |
| Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 257,073 | | | — | | | — | | | 257,073 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (414,690) | | | — | | | (414,690) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | | | 8,359,506 | | | 2,285,010 | | | 10,644,516 | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | $ | (2,328,905) | | | $ | (2,328,905) | |
| Balance on September 30, 2021 | 63,003,766 | | | $ | 63,004 | | | 385,601 | | | $ | 386 | | | $ | — | | | $ | — | | | $ | 136,905,764 | | | $ | (101,475,299) | | | $ | 1,848,115 | | | $ | 37,341,970 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Common Stock | | Series A Preferred | | Series C Preferred | | | | | | | | |
| | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Additional Paid-In Capital | | Retained Earnings | | Non-controlling Interest | | Total Equity |
| Balance on January 1, 2020 | 43,395,563 | | | $ | 43,396 | | | 419,859 | | | $ | 420 | | | — | | | $ | — | | | $ | 81,527,351 | | | $ | (59,246,514) | | | $ | 777,373 | | | $ | 23,102,026 | |
| Purchase of shares of consolidated subsidiary | — | | | — | | | — | | | — | | | — | | | — | | | (71,171) | | | — | | | — | | | (71,171) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 163,269 | | | — | | | — | | | 163,269 | |
| Adjustment of carrying amount of non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | 9,091,068 | | | — | | | — | | | 9,091,068 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion of Series B1 Preferred stock to common | 2,159,278 | | | 2,159 | | | — | | | — | | | — | | | — | | | 3,366,315 | | | — | | | — | | | 3,368,474 | |
| Dividends on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (344,499) | | | — | | | (344,499) | |
| Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (932,003) | | | — | | | (932,003) | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10,966,349) | | | — | | | (10,966,349) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,788,860 | | | (398,609) | | | 2,390,251 | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 517,877 | | | 517,877 | |
| Balance on March 31, 2020 | 45,554,841 | | | $ | 45,555 | | | 419,859 | | | $ | 420 | | | — | | | $ | — | | | $ | 94,076,832 | | | $ | (68,700,505) | | | $ | 896,641 | | | $ | 26,318,943 | |
| | | | | | | | | | | | | | | | | | | |
| Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 156,539 | | | — | | | — | | | 156,539 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Dividends on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (360,217) | | | — | | | (360,217) | |
| Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (539,235) | | | — | | | (539,235) | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,381,889) | | | — | | | (1,381,889) | |
| Net income (loss) | | | | | | | | | | | | | | | (8,997,638) | | | 109,165 | | | (8,888,473) | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (127,044) | | | (127,044) | |
| Balance on June 30, 2020 | 45,554,841 | | | $ | 45,555 | | | 419,859 | | | $ | 420 | | | — | | | $ | — | | | $ | 94,233,371 | | | $ | (79,979,484) | | | $ | 878,762 | | | $ | 15,178,624 | |
| | | | | | | | | | | | | | | | | | | |
| Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 171,149 | | | — | | | — | | | 171,149 | |
| | | | | | | | | | | | | | | | | | | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,287,559) | | | — | | | (1,287,559) | |
| | | | | | | | | | | | | | | | | | | |
| Dividends on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (591,777) | | | | | (591,777) | |
| Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (29,157) | | | | | (29,157) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,435,385) | | | 480,215 | | | (1,955,170) | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (306,251) | | | (306,251) | |
| Balance on September 30, 2020 | 45,554,841 | | | $ | 45,555 | | | 419,859 | | | $ | 420 | | | — | | | $ | — | | | $ | 94,404,520 | | | $ | (84,323,362) | | | $ | 1,052,726 | | | $ | 11,179,859 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Common Stock | | Series A Preferred | | | | | | | | | | |
| | Shares | | $0.001 Par | | Shares | | $0.001 Par | | | | | | Additional Paid-In Capital | | Retained Earnings | | Non-controlling Interest | | Total Equity |
| Balance on January 1, 2022 | 63,288 | | | $ | 63 | | | 386 | | | $ | — | | | | | | | $ | 138,620 | | | $ | (110,614) | | | $ | 1,997 | | | $ | 30,066 | |
| Exercise of options | 60 | | | — | | | — | | | — | | | | | | | 76 | | | — | | | — | | | 76 | |
| Exercise of warrants | 1,113 | | | 1 | | | — | | | — | | | | | | | (1) | | | — | | | — | | | — | |
| Share based compensation expense | — | | | — | | | — | | | — | | | | | | | 250 | | | — | | | — | | | 250 | |
| Conversion of Series A Preferred stock to common | 5 | | | — | | | (5) | | | — | | | | | | | — | | | — | | | — | | | — | |
| Reclassification of derivative liabilities | — | | | — | | | — | | | — | | | | | | | 78,789 | | | — | | | — | | | 78,789 | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | | | | | — | | | (422) | | | — | | | (422) | |
| Net income (loss) | — | | | — | | | — | | | — | | | | | | | — | | | (4,547) | | | 3,739 | | | (808) | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (3,769) | | | (3,769) | |
| Balance on March 31, 2022 | 64,466 | | | 64 | | | 381 | | | — | | | | | | | 217,734 | | | (115,583) | | | 1,967 | | | 104,182 | |
| Exercise of options to common | 498 | | | 1 | | | — | | | — | | | | | | | 553 | | | — | | | — | | | 554 | |
| Exercise of options to common- unissued | — | | | — | | | — | | | — | | | | | | | 3 | | | — | | | — | | | 3 | |
| Distribution to noncontrolling shareholder | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (380) | | | (380) | |
| Adjustment of redeemable non controlling interest | — | | | — | | | — | | | — | | | | | | | 29 | | | (29) | | | — | | | — | |
| Conversion of Convertible Senior Notes to common | 10,165 | | | 10 | | | — | | | — | | | | | | | 59,812 | | | — | | | — | | | 59,822 | |
| Share based compensation expense | — | | | — | | | — | | | — | | | | | | | 324 | | | — | | | — | | | 324 | |
| Conversion of Series A Preferred stock to common | 381 | | | 1 | | | (381) | | | — | | | | | | | — | | | — | | | — | | | 1 | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | | | | | — | | | (6) | | | — | | | (6) | |
| Net income (loss) | — | | | — | | | — | | | — | | | | | | | — | | | (66,970) | | | 3,188 | | | (63,782) | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (3,023) | | | (3,023) | |
| Balance on June 30, 2022 | 75,510 | | | 76 | | | — | | | — | | | | | | | 278,455 | | | (182,588) | | | 1,752 | | | 97,695 | |
| Exercise of options to common | 4 | | | — | | | — | | | — | | | | | | | — | | | — | | | — | | | — | |
| Exercise of options to common- unissued | — | | | — | | | — | | | — | | | | | | | 97 | | | — | | | — | | | 97 | |
| Exercise of warrants | 96 | | | — | | | — | | | — | | | | | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Share based compensation expense | — | | | — | | | — | | | — | | | | | | | 378 | | | — | | | — | | | 378 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) | — | | | — | | | — | | | — | | | | | | | | | 22,234 | | | (64) | | | 22,170 | |
| | | | | | | | | | | | | | | | | | | |
| Balance on September 30, 2022 | 75,610 | | | $ | 76 | | | — | | | $ | — | | | | | | | $ | 278,930 | | | $ | (160,354) | | | $ | 1,688 | | | $ | 120,340 | |
| | | | | | | | | | | | | | | | | | | |
See accompanying condensed notes to the consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Common Stock | | Series A Preferred | | | | | | | | | | |
| | Shares | | $0.001 Par | | Shares | | $0.001 Par | | | | | | Additional Paid-In Capital | | Retained Earnings | | Non-controlling Interest | | Total Equity |
| Balance on January 1, 2021 | 45,555 | | | $ | 46 | | | 420 | | | $ | — | | | | | | | $ | 94,570 | | | $ | (90,009) | | | $ | 1,318 | | | $ | 5,925 | |
| Exercise of options | 23 | | | — | | | — | | | — | | | | | | | — | | | — | | | — | | | — | |
| Exercise of B1 warrants | 1,080 | | | 1 | | | — | | | — | | | | | | | 2,757 | | | — | | | — | | | 2,758 | |
| Exchanges of Series B Preferred stock to common | 2,359 | | | 2 | | | — | | | — | | | | | | | 4,114 | | | 630 | | | — | | | 4,746 | |
| Share based compensation expense | — | | | — | | | — | | | — | | | | | | | 150 | | | — | | | — | | | 150 | |
| | | | | | | | | | | | | | | | | | | |
| Conversion of Series B Preferred stock to common | 638 | | | 1 | | | — | | | — | | | | | | | 1,978 | | | — | | | — | | | 1,979 | |
| Conversion of Series B1 Preferred stock to common | 2,087 | | | 2 | | | — | | | — | | | | | | | 3,254 | | | — | | | — | | | 3,256 | |
| Dividends on Series B and B1 | — | | | — | | | — | | | — | | | | | | | — | | | (372) | | | — | | | (372) | |
| Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | | | | | — | | | (224) | | | — | | | (224) | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | | | | | — | | | (373) | | | — | | | (373) | |
| Net income | — | | | — | | | — | | | — | | | | | | | — | | | 974 | | | 1,991 | | | 2,965 | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (1,542) | | | (1,542) | |
| Balance on March 31, 2021 | 51,742 | | | 52 | | | 420 | | | — | | | | | | | 106,823 | | | (89,374) | | | 1,767 | | | 19,268 | |
| Exercise of options to common | 505 | | | — | | | — | | | — | | | | | | | 229 | | | — | | | — | | | 229 | |
| Exercise of options to common- unissued | — | | | — | | | — | | | — | | | | | | | 475 | | | — | | | — | | | 475 | |
| Leverage Lubricants contribution | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (13) | | | (13) | |
| Exercise of B1 warrants | 157 | | | — | | | — | | | — | | | | | | | 1,634 | | | — | | | — | | | 1,634 | |
| Exercise of B1 warrants-unissued | — | | | — | | | — | | | — | | | | | | | 1,186 | | | — | | | — | | | 1,186 | |
| Share based compensation expense | — | | | — | | | — | | | — | | | | | | | 205 | | | — | | | — | | | 205 | |
| Conversion of Series A Preferred stock to common | 28 | | | — | | | (28) | | | — | | | | | | | — | | | — | | | — | | | — | |
| Conversion of Series B Preferred stock to common | 1,842 | | | 2 | | | — | | | — | | | | | | | 5,707 | | | — | | | — | | | 5,709 | |
| Conversion of Series B Preferred stock to common-unissued | — | | | — | | | — | | | — | | | | | | | 760 | | | — | | | — | | | 760 | |
| Conversion of Series B1 Preferred stock to common | 5,635 | | | 6 | | | — | | | — | | | | | | | 8,785 | | | — | | | — | | | 8,791 | |
| | | | | | | | | | | | | | | | | | | |
| Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | | | | | — | | | (284) | | | — | | | (284) | |
| | | | | | | | | | | | | | | | | | | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | | | | | — | | | (387) | | | — | | | (387) | |
| Net income (loss) | — | | | — | | | — | | | — | | | | | | | — | | | (19,375) | | | 3,418 | | | (15,957) | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (3,113) | | | (3,113) | |
| Balance on June 30, 2021 | 59,909 | | | 60 | | | 392 | | | — | | | | | | | 125,804 | | | (109,420) | | | 2,059 | | | 18,503 | |
| Exercise of options to common | 1,267 | | | 1 | | | — | | | — | | | | | | | 1,481 | | | — | | | — | | | 1,482 | |
| Exercise of options to common- unissued | — | | | — | | | — | | | — | | | | | | | 3 | | | — | | | — | | | 3 | |
| Exercise of B1 warrants | 1,576 | | | 2 | | | — | | | — | | | | | | | 9,361 | | | — | | | — | | | 9,363 | |
| Conversion of Series B Preferred stock to common | 245 | | | — | | | — | | | — | | | | | | | — | | | — | | | — | | | — | |
| Conversion of Series A Preferred stock to common | 6 | | | — | | | (6) | | | — | | | | | | | — | | | — | | | — | | | — | |
| Leverage Lubricants contribution | — | | | — | | | — | | | — | | | | | | | — | | | — | | | 2 | | | 2 | |
| Distribution from VRM LA | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (169) | | | (169) | |
| Share based compensation expense | — | | | — | | | — | | | — | | | | | | | 257 | | | — | | | — | | | 257 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | | | | | — | | | (415) | | | — | | | (415) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | | | | | — | | | 8,360 | | | 2,285 | | | 10,645 | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (2,329) | | | (2,329) | |
| Balance on September 30, 2021 | 63,003 | | | $ | 63 | | | 386 | | | $ | — | | | | | | | $ | 136,906 | | | $ | (101,475) | | | $ | 1,848 | | | $ | 37,342 | |
See accompanying condensed notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (in thousands)
(UNAUDITED)
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | |
| | 2022 | | 2021 | |
| Cash flows from operating activities | | | | |
| Net loss | $ | (42,421) | | | $ | (2,347) | | |
| Income from discontinued operations, net of tax | 19,882 | | | 11,915 | | |
| Loss from continuing operations | (62,303) | | | (14,262) | | |
Adjustments to reconcile net loss from continuing operations to cash
provided by (used in) operating activities, net of acquisitions | | | | |
| Stock based compensation expense | 952 | | | 613 | | |
| Depreciation and amortization | 11,800 | | | 4,263 | | |
| | | | |
| Gain on forgiveness of debt | — | | | (4,222) | | |
| (Gain) loss on sale of assets | (112) | | | 2 | | |
| Provision for environment clean up | 1,428 | | | — | | |
| | | | |
| Increase in allowance for bad debt | 157 | | | 717 | | |
| Increase in fair value of derivative warrant liability | (7,788) | | | 11,380 | | |
| Loss on commodity derivative contracts | 87,218 | | | 2,205 | | |
| Net cash settlements on commodity derivatives | (100,253) | | | (1,999) | | |
| Amortization of debt discount and deferred costs | 44,537 | | | 38 | | |
| Changes in operating assets and liabilities, net of acquisition | | | | |
| Accounts receivable and other receivables | (37,157) | | | (6,123) | | |
| | | | |
| Inventory | (31,521) | | | (3,716) | | |
| Prepaid expenses and other current assets | (16,433) | | | (2,366) | | |
| Accounts payable | 58,925 | | | 1,945 | | |
| Accrued expenses | 37,658 | | | 2,450 | | |
| Other assets | 54 | | | (648) | | |
| Net cash used in operating activities from continuing operations | (12,838) | | | (9,723) | | |
| Cash flows from investing activities | | | | |
| Acquisition of business, net of cash | (227,525) | | | 2 | | |
| | | | |
| Software purchase | (106) | | | — | | |
| | | | |
| | | | |
| Purchase of fixed assets | (34,744) | | | (2,313) | | |
| | | | |
| Investment in Mobile Refinery assets | — | | | (10,241) | | |
| | | | |
| Proceeds from sale of fixed assets | 188 | | | 75 | | |
| Net cash used in investing activities from continuing operations | (262,187) | | | (12,477) | | |
| Cash flows from financing activities | | | | |
| Payments on finance leases | (201) | | | (409) | | |
| Proceeds from exercise of options and warrants to common stock | 729 | | | 6,493 | | |
| Distributions to noncontrolling interest | (380) | | | (169) | | |
| | | | |
| | | | |
| Net borrowings on inventory financing agreements | 133,744 | | | — | | |
| Net change in line of credit | — | | | (166) | | |
| Redemption of noncontrolling interest | (50,666) | | | — | | |
| Proceeds from note payable | 173,315 | | | 10,078 | | |
| Payments on note payable | (14,101) | | | (3,779) | | |
| Net cash provided by financing activities from continuing operations | 242,440 | | | 12,050 | | |
| | | | |
| | | | |
| Discontinued operations: | | | | |
| Net cash provided by operating activities | 20,199 | | | 13,043 | | |
| Net cash used in investing activities | (1,848) | | | (1,675) | | |
| | | | |
| Net cash provided by discontinued operations | 18,351 | | | 11,368 | | |
| | | | |
| Net change in cash, cash equivalents and restricted cash | (14,234) | | | 1,218 | | |
| Cash, cash equivalents, and restricted cash at beginning of the period | 136,627 | | | 10,995 | | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 122,393 | | | $ | 12,213 | | |
| | | | |
| | | | | | | | | | | | |
| | Nine Months Ended | |
| | September 30,
2021 | | September 30,
2020 | |
| Cash flows from operating activities | | | | |
| Net income (loss) before adjustment for non-controlling interest | $ | (2,346,808) | | | $ | (8,453,392) | | |
| Income (loss) from discontinued operations, net of tax | 12,464,445 | | | (5,323,630) | | |
| Income (loss) from continuing operations | (14,811,253) | | | (3,129,762) | | |
Adjustments to reconcile net loss from continuing operations to cash
used in operating activities, net of acquisitions | | | | |
| Stock based compensation expense | 612,626 | | | 490,958 | | |
| Depreciation and amortization | 439,653 | | | 375,790 | | |
| | | | |
| Gain on forgiveness of debt | (4,222,000) | | | — | | |
| Loss on sale of assets | 1,927 | | | 124,090 | | |
| | | | |
| | | | |
| Bad debt expense | 629,791 | | | (9,875) | | |
| Increase (decrease) in fair value of derivative warrant liability | 11,380,122 | | | (1,844,369) | | |
| Loss (gain) on commodity derivative contracts | 2,204,606 | | | (4,489,355) | | |
| Net cash settlements on commodity derivatives | (1,998,707) | | | 5,484,734 | | |
| Amortization of debt discount and deferred costs | 37,500 | | | 47,826 | | |
| Changes in operating assets and liabilities, net of effect of acquisition | | | | |
| Accounts receivable and other receivables | (1,513,058) | | | 206,352 | | |
| | | | |
| Inventory | (911,980) | | | 1,008,343 | | |
| Prepaid expenses and other current assets | (3,232,253) | | | (1,186,023) | | |
| Accounts payable | 3,184,965 | | | 1,729,129 | | |
| Accrued expenses | 1,203,283 | | | (1,207,230) | | |
| Other assets | (699,999) | | | (581,534) | | |
| Net cash used by operating activities | (7,694,777) | | | (2,980,926) | | |
| Cash flows from investing activities | | | | |
| Acquisition of business, net of cash | 2,058 | | | (1,822,690) | | |
| | | | |
| Internally developed software | — | | | (49,229) | | |
| | | | |
| | | | |
| Purchase of fixed assets | (1,060,039) | | | (642,186) | | |
| | | | |
| Deposit for Refinery Purchase | (10,000,000) | | | — | | |
| | | | |
| Proceeds from sale of fixed assets | 74,991 | | | 36,465 | | |
| Net cash used in investing activities | (10,982,990) | | | (2,477,640) | | |
| Cash flows from financing activities | | | | |
| Payments on finance leases | (91,893) | | | (93,438) | | |
| Proceeds from exercise of options and warrants to common stock | 6,492,759 | | | — | | |
| Distributions to noncontrolling interest | (169,368) | | | — | | |
| Contributions received from noncontrolling interest and redeemable noncontrolling interest | 2,260 | | | 21,000,000 | | |
| | | | |
| Line of credit (payments) proceeds, net | (166,129) | | | — | | |
| | | | |
| Proceeds from note payable (includes proceeds from PPP note) | 10,078,115 | | | 7,992,346 | | |
| Payments on note payable | (3,778,589) | | | (12,601,976) | | |
| Net cash provided by financing activities | 12,367,155 | | | 16,296,932 | | |
| | | | |
| | | | | | | | | | | | |
| | Nine Months Ended | |
| | September 30,
2021 | | September 30,
2020 | |
| | | | |
| Discontinued operations: | | | | |
| Net cash provided (used) by operation activities | 11,014,236 | | | 4,370,152 | | |
| Net cash used in investing activities | (3,168,865) | | | (3,527,980) | | |
| Net cash provided (used) by financing activities | (317,226) | | | (227,259) | | |
| Net cash provided by discontinued operations | 7,528,145 | | | 614,913 | | |
| | | | |
| Net change in cash, cash equivalents and restricted cash | 1,217,533 | | | 11,453,279 | | |
| Cash, cash equivalents, and restricted cash at beginning of the period | 10,995,169 | | | 4,199,825 | | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 12,212,702 | | | $ | 15,653,104 | | |
| | | | |
| | | | | | | | | | | |
| SUPPLEMENTAL INFORMATION | | | |
| Cash paid for interest | $ | 843,523 | | | $ | 812,887 | |
| Cash paid for taxes | $ | — | | | $ | — | |
| NON-CASH INVESTING AND FINANCING TRANSACTIONS | | | |
| Exchanges of Series B Preferred Stock into common stock | $ | 4,747,250 | | | $ | — | |
| Conversion of Series A Preferred Stock into common stock | $ | 34 | | | $ | — | |
| Conversion of Series B Preferred Stock into common stock | $ | 8,446,836 | | | $ | — | |
| Conversion of Series B1 Preferred Stock into common stock | $ | 12,046,441 | | | $ | 3,368,474 | |
| Accretion of discount on Series B and B1 Preferred Stock | $ | 507,282 | | | $ | 1,500,395 | |
| Dividends-in-kind accrued on Series B and B1 Preferred Stock | $ | (258,138) | | | $ | 1,296,493 | |
| Option exercised | $ | 650 | | | $ | — | |
| Equipment acquired under finance leases | $ | — | | | $ | 1,017,638 | |
| Initial adjustment of carrying amount redeemable noncontrolling interests | $ | — | | | $ | 9,091,068 | |
| Accretion of redeemable noncontrolling interest to redemption value | $ | 1,176,683 | | | $ | 13,635,797 | |
| | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
(Continued)
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the same such amounts shown in the consolidated statements of cash flows (in thousands).
| | | | | | | | | | | |
| Nine Months Ended |
| September 30,
2022 | | September 30,
2021 |
| Cash and cash equivalents | $ | 117,464 | | | $ | 12,113 | |
| Restricted cash | 4,929 | | | $ | 100 | |
| Cash and cash equivalents and restricted cash as shown in the consolidated statements of cash flows | $ | 122,393 | | | $ | 12,213 | |
| | | |
| |
| | | |
| SUPPLEMENTAL INFORMATION | | | |
| Cash paid for interest | $ | 20,191 | | | $ | 844 | |
| Cash paid for taxes | $ | — | | | $ | — | |
| NON-CASH INVESTING AND FINANCING TRANSACTIONS | | | |
| Equity component of the convertible note issuance | $ | 78,789 | | | $ | — | |
| | | |
| Conversion of Series B Preferred Stock into common stock | $ | — | | | $ | 8,447 | |
| Conversion of Series B1 Preferred Stock into common stock | $ | — | | | $ | 12,046 | |
| Exchanges of Series B Preferred Stock into common stock | $ | — | | | $ | 4,747 | |
| Accretion of discount on Series B and B1 Preferred Stock | $ | — | | | $ | 507 | |
| Dividends-in-kind accrued on Series B and B1 Preferred Stock | $ | — | | | $ | (258) | |
| | | |
| Conversion of Convertible Senior Notes to common stock | $ | 59,822 | | | $ | — | |
| Equipment acquired (disposed) under leases | $ | 45,096 | | | $ | 174 | |
| Accretion of redeemable noncontrolling interest to redemption value | $ | 428 | | | $ | 1,177 | |
| | | |
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20212022
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Vertex Energy, Inc. (the "Company" or "Vertex Energy") is an energy transition company focused on the production and distribution of conventional and alternative fuels. We operate used motor oil processing plants in Houston, Texas, Port Arthur, Texas, Marrero, Louisiana, and Columbus, Ohio.
The accompanying unaudited interim consolidated financial statements of Vertex Energy, Inc. (the "the Company" or "Vertex Energy") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2020,2021, contained in the Company's annual report, as filed with the SEC on Form 10-K on March 9, 202114, 2022 (the "Form 10-K").
The December 31, 20202021 balance sheet was derivedretroactively restated from the audited financial statements of our 20202021 Form 10-K.10-K to account for the change for our discontinued business, see Note 23 "Discontinued Operations". In the opinion of management all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of financial position and the results of operations for the interim periods presented, have been reflected herein. All significant intercompany transactions have been eliminated in consolidation. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for the most recent fiscal year 20202021 as reported in Form 10-K have been omitted.
Our UMO Business Sale
On June 29, 2021, Vertex entered into an Asset Purchase Agreement (the “Sale Agreement”) with Vertex Energy Operating, LLC, Vertex’s wholly-owned subsidiary (“Vertex Operating”) and Vertex Refining LA, LLC (“Vertex LA”) (wholly-owned by Vertex Operating), Vertex Refining OH, LLC (“Vertex OH”) (wholly-owned by HPRM, LLC,consists of which we own a 35% interest), Cedar Marine Terminals, L.P. (“CMT”) (indirectly wholly-owned), and H & H Oil, L.P. (“H&H”) (indirectly wholly-owned)(collectively, the “Vertex Entities”, and together, Vertex, Vertex Operating and the Vertex Entities, the “Seller Parties”), as sellers, and Safety-Kleen Systems, Inc., as purchaser (“Safety-Kleen”).
Pursuant to the Sale Agreement, Safety-Kleen agreed to acquire the Company’s Marreroour used oil refinery in Marrero, Louisiana, (currently owned by Vertex LA, which entity is indirectly wholly-owned); our Columbus, Ohio, Heartland used oil refinery in Ohio, (currently owned by Vertex OH, of which we indirectly own a 35% interest and will acquire the remaining 65% interest prior to Closing); our H&H and Heartland used motor oil (“UMO”)(UMO) collections business; our oil filters and absorbent materials recycling facility in East Texas; and the rights CMT holds to a lease onat the Cedar Marine terminal in Baytown, Texas, includingTexas. The UMO Business is presented as part of our Black Oil segment in our consolidated financial statements. On June 29, 2021, the Company, through certain of its subsidiaries, entered into an Asset Purchase Agreement (the “UMO Sale Agreement”) with Safety-Kleen Systems, Inc. (“Safety-Kleen”) by which Safety-Kleen agreed to acquire the Company’s UMO Business. Assets which form a part of our Black Oil Segment which will not be sold as part of the sale of the operations conducted at the various properties subjectUMO Business consent of (1) our re-refining complex located in Belle Chasse, Louisiana, which we refer to as our Myrtle Grove Facility; (2) our Marine division established in 2022, which consists of blending and distribution of fuels to the Sale Agreement (discussed below), which primarily consist of (1) operatingmarine market; and (3) our Marrero, Louisianafinished lubricants and Columbus, Ohio re-refineries and the Cedar Marine terminal, and in connection therewith, acquiring used lubricating oils from commercial and retail establishments and re-refining such oils into processed oils and other products formetal operations, including the distribution supply and sale to end-customers, (2) collecting and processing used motor oil, oil filters, and related automotive waste streams and (3) the provisionblending of related products and support services (collectively, the “UMO Business” and the assets and operations associated therewith, the “Purchased Assets”).
During the third quarter of 2021, the Company classified the UMO businessBusiness as held for sale based on management’s intention and shareholdersthe Company’s shareholders’ approval to sell this business, which is expected to occur in the first half of 2022.UMO Business. The Company’s historical financial statements have been revised to present the operating results of the UMO businessBusiness as discontinued operations. The results of operations of this business are presented as “Income (loss) from discontinued operations” in the statement of operations and the related cash flows of this business have been reclassified to discontinued operations for all periods presented. The assets and liabilities of the UMO businessBusiness have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance sheet for all periods presented.
Novel Coronavirus (COVID-19)
In December 2019, a novel strain of coronavirus,”) pursuant to which causes the infectious disease known as COVID-19,UMO Sale Agreement 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 have mainly been terminated or expired asterminated. Under the terms of the dateUMO Termination Agreement, the Company paid a termination fee to Safety-Kleen of this report. Notwithstanding$3.0 million. Immediately upon receipt of such ‘stay-at-home’ orders, our operations were fortermination fee, which the most part deemed an essential business under applicable governmental orders based onCompany paid simultaneously with the critical natureexecution of the products we offer.
Weeffect, and with no further liability to any party thereunder, other than certain confidentiality obligations of the parties and ongoing liability for any willful or intentional breach of, or non-compliance with, the UMO Sale Agreement.
The Company is still exploring opportunities to sell productsthe UMO Business and services primarilybelieves it will sell such assets within a year. As of the day of this filing, the Company is in ongoing discussions with a third party regarding a potential sale of the Company's Heartland refinery in Ohio, and as such has determined to present only the Company's Heartland refinery options as discontinued operations ("Heartland Business").
Use of Estimates
The preparation of GAAP financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates. Any effects on the business, financial position or results of operations from revisions to these estimates are recorded in the U.S. domestic oil and gas commodity markets. Throughoutperiod in which the first quarter of 2020,facts that give rise to 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 Organizationrevision become known.
The majority of the Petroleum Exporting Countries (OPEC)+ supply curtailments,numbers presented below are rounded numbers and should be considered as approximate.
Reclassification of Prior Year Presentation
Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on 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, second and third quarters 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 during the remainder 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, and/or have experienced a decreased demand for services. As a result of the above, and due to prior ‘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 future 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 andreported results of operations.
The full extentCompany included the Heartland Business as discontinued operation, and reclassified the other UMO Business operations out of the impact of COVID-19 on our businessassets held for sale, and operations currently cannot be estimated and will depend on a number of factors including the scope and durationall liabilities of the global pandemic,UMO Business out of liabilities held for sale, other than in connection with the efficacy of, and the willingness of the general public to obtain vaccines and boosters, further mutations of the virus, 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.
NOTE 2. SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
With the exception of the accounting policies below, there have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
The following table providesRestricted cash as of September 30, 2022, consisted of a reconciliation$4.8 million deposit in a bank for financing of casha short-term equipment lease, and cash equivalents and restricted cash reported within the consolidated balance sheets to the same such amounts shown in the consolidated statements of cash flows.
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Cash and cash equivalents | $ | 12,112,577 | | | $ | 10,895,044 | |
| Restricted cash | 100,125 | | | 100,125 | |
| Cash and cash equivalents and restricted cash as shown in the consolidated statements of cash flows | $ | 12,212,702 | | | $ | 10,995,169 | |
The Company placed all the restricted casha $0.1 million deposit in a money market account to serve as collateral for payment of a credit card.
As of December 31, 2021, a total of $100.4 million was held in an escrow account in connection with the issuance of certain convertible notes (see Note 15. "Long-Term Debt". The funds were released on April 1, 2022 and used in the purchase of the Mobile Refinery. See Note 3 “Mobile Refinery Acquisition”.Accounts Receivable
Accounts receivable represents amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, do not bear interest and are not collateralized. The Company uses its best estimate to determine the required allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, economic trends and conditions affecting its customer base, significant one-time events, and historical write-off experience. Specific provisions are recorded for individual receivables when we become aware of a customer’s inability to meet its financial obligations. The Company reviews the adequacy of its reserves and allowances quarterly.
Receivable balances greater than 90 days past due are individually reviewed for collectability and if deemed uncollectible, are charged off against the allowance accounts after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance was $1.5 million and $1.4 million at September 30, 2022 and December 31, 2021, respectively.
Inventory and Obligations Under Inventory Financing Agreements
Mobile Refinery. Inventories of productsat the recently acquired Mobile Refinery consist of crude oil and refined petroleum products. Simultaneously with the acquisition of the Mobile Refinery, the Company entered into an inventory financing agreement with Macquarie Energy North America Trading Inc. (“Macquarie”) under which Macquarie agreed to finance all the crude oil utilized at the Mobile Refinery under procurement contracts. In addition, the Company became a party to a Supply and Offtake Agreement with Macquarie. Under this arrangement, the Company purchases crude oil supplied from third-party suppliers and Macquarie provides credit support for certain of these purchases. Macquarie holds title to all crude oil and refined products inventories at all times, except for liquefied petroleum gases and sulfur, which the Company has pledged, together with all receivables arising from the sales of such inventories.
The crude oil remains in the legal title of Macquarie and is stored in our storage tanks governed by a storage agreement. Legal title to the crude oil passes to us at the tank outlet. After processing, Macquarie takes title to the refined products stored in our storage tanks until they are sold to our retail locations or to third parties. We record the inventory owned by Macquarie on our behalf as inventory with a corresponding accrued liability on our balance sheet because we maintain the risk of loss until the refined products are sold to third parties and we have an obligation to repurchase it. The valuation of our repurchase obligation requires that we make estimates of the prices and differentials assuming settlement occurs at the end of the reporting period.
Hydrocarbon inventories at the Mobile Refinery are stated at the lower of cost or net realizable value using the weighted average inventory accounting method. Estimating the net realizable value of our inventory requires management to make assumptions about the timing of sales and the expected proceeds that will be realized for these sales. See Note 9 “Inventory” and Note 10 “Inventory Financing Agreement” for more information. Other locations. Inventories from our legacy business consist of feedstocks and refined petroleum products and recovered ferrous and non-ferrous metals andmetals. These commodity inventories are reportedstated at the lower of cost or net realizable value. Cost is determinedvalue using the first-in, first-out (“FIFO”FIFO”) accounting method. The Company reviews its inventory commodities for impairment whenever events or circumstances indicate that the value may not be recoverable.
Our revenues are generated through the sale of refined petroleum products and terminalling and storage services. We recognize revenue from product sales at prevailing market rates at the point in time in which the customer obtains control of the product. Terminalling and storage revenues are recognized as services are rendered, and our performance obligations have been satisfied once the product has been transferred back to the customer. These services are short-term in nature, and the service fees charged to our customers are at prevailing market rates. The timing of our revenue recognition may differ from the timing of payment from our customers. A receivable is recorded when revenue is recognized prior to payment and we have an unconditional right to payment.
Environmental Reserves
We accrue for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. The liability represents the expected costs of remediating contaminated soil and groundwater at the site. Costs of future expenditures for environmental remediation obligations are discounted to their present value.
Impairment of long-lived assets
The Company evaluates the carrying value and recoverability of its long-lived assets when circumstances warrant such evaluation by applying the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) regarding long-lived assets. It requires that long-livedevaluation. Long-lived assets beare 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 during the three and nine months ended September 30, 2021.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates2022 and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates. Any effects on the business, financial position or results of operations from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
Reclassification of Prior Year Presentation
Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on the reported results of operations. 2021.
Redeemable Noncontrolling Interests
As more fully described in “Note 14. Share Purchase and Subscription Agreements22. Non-Controlling Interests”, the Company iswas party to put/call option agreements with the holder of Vertex Refining Myrtle Grove LLC (“MG SPV”SPV”) and HPRM LLC, a Delaware limited liability company (“Heartland SPV”SPV”), which entities were formed as special purpose vehicles in connection with the transactions described in greater detail below,in non-controlling interests. The put options permitpermited MG SPV’sSPV's and Heartland SPV’sSPV'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”“MG Redemption” and “Heartland Redemption”“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 Class B 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, LLC, our wholly-owned subsidiary (“Vertex Operating”) (provided that Vertex Operating still owns Class A Units (as to MG SPV) or Class B 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 September 30, 2021 and December 31, 2020 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 willwere to 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 willwould 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 accounts for the investments it makes in certain legal entitiesdetermines whether each business entity in which it has equity investors do not have (1)interests, debt, or other investments constitutes a variable interest entity (“VIE”) based on consideration of the following criteria: (i) the entity lacks sufficient equity at risk for the legal entityat-risk to finance its activities without additional subordinated financial support, (2)or (ii) equity holders, as a group, (the holderslack the characteristics of the equity investment at risk), either the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impacts the entity’s economic performance, or (3) the obligation to absorb the expected losses of the legal entity or the right to receive expected residual returns of the legal entity. These certain legal entities are referred to as “variable interest entities” or “VIEs.”
The Company consolidates the results of any such entity in which it determines that it has a controlling financial interest. The Company has a “controlling financial interest” in suchinstrument.
If an entity ifis determined to be a VIE, the Company then determines whether to consolidate the entity as the primary beneficiary. The primary beneficiary has both (i) the power to direct the activities that most significantly affectimpact the VIE’s economic performance, and (ii) the obligation to absorb the losses of the VIE or the right to receive benefits from the VIE that could potentially 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.entity.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the disposal group; (2) the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; (3) an active program to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group have been initiated; (4) the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale, within one year, except if events or circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year; (5) the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A disposal group that is classified as held for sale is initially measured at the lower of its carrying amount or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. No loss was recognized during the periods presented.
Subsequent changes in the fair value of a disposal group less any costs to sell are reported as an adjustment to the carrying amount of the disposal group, as long as the new carrying amount does not exceed the carrying amount of the asset at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group for all periods presented in the line items assets held for sale and liabilities held for sale, respectively, in the consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that can be clearly distinguished, operationally and for financial reporting purposes, that either has been disposed of or is classified as held for sale is reported in discontinued operations, if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.
New Accounting Pronouncements
Accounting pronouncements adopted by the Company in 2022.
In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity to simplify the accounting for convertible debt and other equity-linked instruments. The new guidance simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity. Instead, the entity will account for the convertible debt or convertible preferred stock securities as a single unit of account, unless the conversion feature requires bifurcation and recognition as derivatives. Additionally, the guidance requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares. The Company adopted this new guidance as of January 1, 2022, under the modified retrospective method. On January 20, 2022, our shareholders approved the issuance of shares of our common stock issuable upon the conversion of our $155 million aggregate principal amount at maturity 6.25% Convertible Senior Notes due 2027 (the "Convertible Senior Notes"), the $79 million derivative liabilities were recorded as additional paid-in capital.
Accounting pronouncements not yet adopted.
The Company has not identified any recent accounting pronouncements that are expected to have a material impact on our financial condition, results of operations or cash flows upon adoption.
NOTE 3. CONCENTRATIONS, SIGNIFICANT CUSTOMERS, COMMITMENTS AND CONTINGENCIESMOBILE REFINERY ACQUISITION
At September 30,On April 1, 2022 (the “Effective Date”), Vertex Energy Operating, LLC (“Vertex Operating”), the Company’s wholly-owned subsidiary assigned its rights to that certain May 26, 2021 Sale and 2020Purchase Agreement between Vertex Operating and Equilon Enterprises LLC d/b/a Shell Oil Products US, Shell Oil Company and Shell Chemical LP, subsidiaries of Shell plc (“Shell”) (the “Refinery Purchase Agreement”), to Vertex Refining Alabama LLC, a Delaware limited liability company (“Vertex Refining”) which is indirectly wholly-owned by the Company, and on the same date, Vertex Refining completed the acquisition of a Mobile, Alabama refinery (the “Mobile Refinery”) from Shell (the “Mobile Acquisition”). On the Effective Date, a total of $75 million (less $10 million previously paid) was paid by Vertex Refining in consideration for eachthe acquisition of the nine months then ended,Mobile Refinery, which amount was subject to customary purchase price adjustments and reimbursement for certain capital expenditures in the Company’s revenuesamount of approximately $0.4 million, $15.9 million was paid to Shell for previously agreed upon capital expenditures and receivables were comprisedmiscellaneous prepaid and reimbursable items, and $130 million was paid to Shell by Vertex Refining in connection with the purchase of certain crude oil inventory and finished products owned by Shell and located at the Mobile Refinery on April 1, 2022 (approximately $124 million of which was funded by Macquarie as a result of the simultaneous sale of such inventory to Macquarie pursuant to an Inventory Sales Agreement between Vertex Refining and Macquarie). The Company also paid $8.7 million at closing pursuant to the terms of a Swapkit Purchase Agreement entered into with Shell on May 26, 2021 (the “Swapkit Agreement”), pursuant to which the Company agreed to fund a technology solution comprising the ecosystem required for the Company to run the Mobile Refinery after closing (the “Swapkit”).
The purchase price allocation is preliminary and subject to change based upon the finalization of our valuation report. The following customer concentrations:table summarizes the preliminary determination and recognition of assets acquired (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended
September 30, 2020 |
| % of
Revenues | | % of
Receivables | | % of
Revenues | | % of
Receivables |
| Customer 1 | 22% | | 17% | | 18% | | 16% |
| Customer 2 | 16% | | 13% | | 9% | | 11% |
| Customer 3 | 14% | | 11% | | 7% | | —% |
| | | | | | | |
| Customer 4 | 13% | | 14% | | 15% | | —% |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | |
| Financing agreement | | Vertex acquisition | | Total |
| Inventory | $ | 124,311 | | | $ | 5,909 | | | $ | 130,220 | |
| Prepaid assets | — | | | 147 | | | 147 | |
| Fixed assets | — | | | 97,158 | | | 97,158 | |
| Total purchase price | $ | 124,311 | | | $ | 103,214 | | | $ | 227,525 | |
For eachThe following table presents summarized results of operations of the nine monthsMobile Refinery for the period from April 1, 2022 to September 30, 2022, which are included in the accompanying consolidated statement of operations for the period ended September 30, 2021 and 2020, the Company’s segment revenues were comprised of the following customer concentrations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % of Revenue by Segment | | % Revenue by Segment |
| Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2020 |
| Black Oil | | Refining | | Recovery | | Black Oil | | Refining | | Recovery |
| Customer 1 | —% | | 27% | | —% | | —% | | 25% | | —% |
| Customer 2 | —% | | 20% | | —% | | —% | | 13% | | —% |
| Customer 3 | —% | | —% | | 73% | | —% | | —% | | 28% |
| Customer 4 | —% | | 16% | | —% | | —% | | 20% | | —% |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| For Three Months Ended September 30, 2022 | | For Six Months Ended September 30, 2022 |
| Revenue | $ | 733,521 | | | $ | 1,655,717 | |
| Net Income (loss) | $ | 18,370 | | | $ | (5,592) | |
The Companyfollowing table presents unaudited pro forma results of operations reflecting the acquisition of the Mobile Refinery as if the acquisition had oneoccurred as of January 1, 2021.This information has been compiled from current and no vendorshistorical financial statements and is not necessarily indicative of the results that represented 10%actually would have been achieved had the transaction occurred at the beginning of total purchasesthe periods presented or payables forthat may be achieved in the nine months ended September 30, 2021 and 2020, respectively.future (in thousands):
The Company’s revenue, profitability and future rate of growth are substantially dependent on prevailing prices for petroleum-based products. Historically, the energy markets have been very volatile, and there can be no assurance that these prices will not be subject to wide fluctuations in the future. A substantial or extended decline in such prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows, access to capital, and the quantities of petroleum-based products that the Company can economically produce. | | | | | | | | | | | |
| For Nine Months Ended September 30, |
| 2022 | | 2021 |
| Revenue | $ | 2,406,617 | | | $ | 1,473,700 | |
| Net income (loss) | $ | 49,509 | | | $ | (37,500) | |
NOTE 4. COMMITMENTS AND CONTINGENCIES
Litigation
The Company, in its normal course of business, is involved in various other claims and legal action. In the opinion of management, the outcome of these claims and actions will not have a material adverse impact upon the financial position of the Company. We are currently party to the following material litigation proceedings:
Vertex Refining LA, LLC (“Vertex Refining LA”), the wholly-owned subsidiary of Vertex Operating was named as a defendant, along with numerous other parties, in 5five lawsuits filed on or about February 12, 2016, in the Second Parish Court for the Parish of Jefferson, State of Louisiana, Case No. 121749, by Russell Doucet et. Al.al., Case No. 121750, by Kendra Cannon et. Al.al., Case No. 121751, by Lashawn Jones et. Al.al., Case No. 121752, by Joan Strauss et. Al.al. and Case No. 121753, by Donna Allen et. Al.al. The suits relate to alleged noxious and harmful emissions from our facility located in Marrero, Louisiana. The suits seek damages for physical and emotional injuries, pain and suffering, medical expenses and deprivation of the use and enjoyment of plaintiffs’ homes. We intend to vigorously defend ourselves and oppose the relief sought in the complaints, provided that at this stage of the litigation, the Company has no basis for determining whether there is any likelihood of material loss associated with the claims and/or the potential and/or the outcome of the litigation.
On November 17, 2020, Vertex filed a lawsuit against Penthol LLC (“Penthol”) in the 61st Judicial District Court of Harris County, Texas, Cause No. 2020-65269,, for breach of contract and simultaneously sought a Temporary Restraining Order and Temporary Injunction enjoining Penthol from, among other things, circumventing Vertex in violation of the terms of that certain June 5, 2016 Sales Representative and Marketing Agreement entered into between Vertex Operating and Penthol (the “Penthol Agreement”“Penthol Agreement”). Vertex is seeking permanent injunctive relief,seeks damages, attorney’s fees, costs of court, and all other relief to which it may be entitled. This lawsuit is pending.
On February 8, 2021, Penthol filed a complaint against Vertex Operating in the United States District Court for the Southern District of Texas; Civil Action No. 4:21-CV-416 (the “Complaint”“Complaint”). Penthol’s Complaint sought damages from Vertex Operating for alleged violations of the Sherman Act, breach of contract, business disparagement, and misappropriation of trade secrets under the Defend Trade Secrets Act and Texas Uniform Trade Secrets Act. On August 12, 2021, United States District Judge Andrew S. Hanen dismissed Penthol’s Sherman Act claim. Penthol’s remaining claims are pending. Penthol is seeking a declaration that Vertex has materially breached the agreement; an injunction that prohibits Vertex from using Penthol’s alleged trade secrets and requires Vertex to return any of Penthol’s alleged trade secrets; awards of actual, consequential and exemplary damages, attorneys’ fees and costs of court; and other relief to which it may be entitled. Vertex denies Penthol’s allegations in the Complaint. Vertex contends Penthol’s claims are completely without merit, and that Penthol’s termination of the Penthol Agreement was wrongful and resulted in damages to Vertex that it is seeking to recover in the Harris County lawsuit. Further, Vertex contends that Penthol’s the termination of the Penthol Agreement constitutes a breach by Penthol under the express terms of the Penthol Agreement, and that Vertex remains entitled to payment of the amounts due Vertex under the Penthol Agreement
for unpaid commissions and unpaid performance incentives. Vertex disputes Penthol’s allegations of wrongdoing and intends to vigorously defend itself in this matter. On February 26, 2021, Penthol filed its second amended answer and counterclaims, alleging that Vertex improperly terminated the Penthol Agreement and that Vertex tortiously interfered with Penthol’s prospective and existing business relationships. Vertex denies these allegations and is vigorously defending them.
Recently, the parties agreed to move the pending claims and defenses in the Texas state court lawsuit into the federal court lawsuit. Both parties also sought to amend their pleadings to add additional claims. By order dated October 18, 2022, the Judge in the lawsuit, Judge Hanen largely granted these requests. As a result, Vertex was granted leave to add Penthol C.V. as a defendant. Penthol was granted leave to add claims for fraud and breach of contract relating to an assignment agreement, and add claims for misappropriation of trade secrets. All pending claims between the parties are now in the federal court action.
This case is pending, but is currently set for trial in January 2023.
We cannot predict the impact (if any) that any of the matters described above may have on our business, results of operations, financial position, or cash flows. Because of the inherent uncertainties of such matters, including the early stage and lack of specific damage claims in the Penthol matter, we cannot estimate the range of possible losses from them (except as otherwise indicated).
Related Parties
From timeLike other petroleum refiners, we are subject to time,federal, state, and local environmental laws and regulations. These laws generally provide for control of pollutants released into the Company consults Ruddy Gregory, PLLC.,environment and require responsible parties to undertake remediation of hazardous waste disposal. These governmental entities may also propose or assess fines or require corrective actions for these asserted violations. Except as disclosed below, we do not anticipate that any such matters currently known to management will have a related party law firmmaterial impact on our financial condition, results of which James Gregory, a member ofoperations, or cash flows. On April 1, 2022, we acquired the Board of Directors, serves as a partner. DuringMobile Refinery and during the nine months ended on September 30, 2021 and 2020,2022, we paid $564,175 and $56,971, respectively, to such law firmreserved $1.4 million for services rendered ,which services includes the drafting and negotiation of, and due diligence associated with, the Sale Agreement and Refinery Purchase Agreement (defined and discussed below), and related transactions.environment clean up.
NOTE 5. REVENUES
Leverage Lubricants, LLC
On May 1, 2021, Vertex Energy Operating, LLC obtained a 51% membership interest in Leverage Lubricants, LLC. Leverage Lubricants is in the business of wholesale specialty blending of lubricants and warehousing and distribution of petroleum based products and related services.
May 2021 Purchase Agreement
On May 26, 2021, Vertex Operating, entered into a Sale and Purchase Agreement (the “Refinery Purchase Agreement”)Our revenues are primarily generated from contracts with Equilon Enterprises LLC d/b/a Shell Oil Products US and/or Shell Chemical LP and/or Shell Oil Company (“Seller”), to purchase the Seller’s Mobile, 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 the Mobile refinery (collectively, the “Mobile Refinery” and the “Mobile Acquisition”). The Mobile Refinery is located on an 800+ acre site in the city and county of Mobile, Alabama. The 91,000 barrel-per-day nameplate capacity Mobile Refinery is capable of sourcing a flexible mix of cost-advantaged light-sweet domestic and international feedstocks. Approximately 70% of 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 southeastern United 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 Mobile Acquisition 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, we will also pay for the hydrocarbon inventory located at the Mobile Refinery, as valued at closing, and the purchase price is subject to other customary purchase price adjustments and reimbursement for certain capital expenditures, resulting in an expected total purchase price of approximately $86.7 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 through December 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 occurred under such note, at which time interest was to accrue 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. This deposit is recorded in other assets in the consolidated balance sheet at September 30, 2021.
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 by May 26, 2022 (the “Refinery Purchase 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; or 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 Refinery Purchase Outside Date.
The Refinery Purchase Agreement provides that if all conditions to closing are satisfied other than government approvals and required permits and registrations, then the Refinery Purchase 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 Refinery Purchase Outside Date is automatically extended to May 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 in the first quarter of 2022, 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 recent sale of convertible notes (see “Note 16. Subsequent Events”) and the entry into a debt facility. The Company has not entered into any definitive lending agreements regarding such debt fundings to date, and such debt funding 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 the Mobile 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.
Upon completion of the transaction and provided that Vertex’s fundraising initiatives are successful, Vertex plans to complete an $85 million capital project designed to modify the Mobile Refinery’s hydrocracking unit to produce renewable diesel fuel on a standalone basis, $13.0 million of which, for engineering services and for the initial payments of purchase orders for long lead-time equipment associated with the capital project, are expected to be expended prior to closing such acquisition, with funds raisedcustomers through the sale of refined petroleum products and terminalling and storage services. We recognize revenue from product sales at prevailing market rates at the November 2021 convertible notes (see “Note 16. Subsequent Events”).
In connection withpoint in time in which the entry intocustomer obtains control of the Refinery Purchase Agreement, Vertex Operatingproduct. Terminalling and storage revenues are recognized as services are rendered, and our performance obligations have been satisfied once the product has been transferred back to the customer. These services are short-term in nature, and the Seller entered into a Swapkit Purchase Agreement (the “Swapkit Agreement”). Pursuantservice fees charged to the agreement, Vertex Operating agreed to fund a technology solution comprising the ecosystem required for the Company to run the Mobile Refinery after closing (the “Swapkit”),our customers are 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.
Safety-Kleen Sale Agreement
On June 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 LA, (“Vertex ”), OH, CMT, and H&H, as sellers, and Safety-Kleen, dated as of June 28, 2021.
Pursuant to the Sale Agreement, Safety-Kleen agreed to acquire the Company’s Marrero used oil refinery in Louisiana (currently owned by Vertex LA); our Heartland used oil refinery in Ohio (currently owned by Vertex OH); our H&H and Heartland UMO collections business; our oil filters and absorbent materials recycling facility in East Texas; and the rights CMT holds to a lease on the Cedar Marine terminal in Baytown, Texas (“UMO Business”).
The initial base purchase price for the assets is $140 million, which is subject to customary adjustments to account for working capital, taxes and assumed liabilities.
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.
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 by December 31, 2021 (the “Sale Agreement 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 Sale Agreement 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 Sale Agreement 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 first half of 2022, 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. We are currently responding to inquiries received from the Federal Trade Commission (the “FTC”), which is not required to rule on the matter until the expiration of 30 days following submission of our responses which is not expected to occur before November 30, 2021, if then. The Sale Agreement also required us to hold a shareholders meeting to seek shareholder approval for the Sale Agreement, which shareholder approval was received in September 2021. 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 acted as financial advisor to the Company on the transaction. Vallum Advisors acted as financial communications counsel to the Company.
NOTE 4. REVENUES
Disaggregation of Revenueprevailing market rates.
The following tables present our revenues disaggregated by geographical market and revenue source:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
| Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
| Southern United States | $ | 446,676 | | | $ | 24,572,390 | | | $ | 3,955,405 | | | $ | 28,974,471 | |
| Sources of Revenue | | | | | | | |
| | | | | | | |
| Pygas | $ | — | | | $ | 3,736,534 | | | $ | — | | | $ | 3,736,534 | |
| Industrial fuel | — | | | 417,096 | | | — | | | 417,096 | |
| Distillates | — | | | 20,418,760 | | | — | | | 20,418,760 | |
| Oil collection services | 158,676 | | | — | | | 0 | | 158,676 | |
| Metals | — | | | — | | | 3,669,411 | | | 3,669,411 | |
| Other re-refinery products | — | | | — | | | 285,994 | | | 285,994 | |
| VGO/Marine fuel sales | 288,000 | | | — | | | — | | | 288,000 | |
| Total revenues | $ | 446,676 | | | $ | 24,572,390 | | | $ | 3,955,405 | | | $ | 28,974,471 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
| Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
| Southern United States | $ | 1,300,220 | | | $ | 67,683,034 | | | $ | 15,840,222 | | | $ | 84,823,476 | |
| Sources of Revenue | | | | | | | |
| | | | | | | |
| Pygas | $ | — | | | $ | 10,570,907 | | | $ | — | | | $ | 10,570,907 | |
| Industrial fuel | — | | | 1,138,311 | | | — | | | 1,138,311 | |
| Distillates | — | | | 55,973,816 | | | — | | | 55,973,816 | |
| Oil collection services | 436,220 | | | — | | | 3,423 | | | 439,643 | |
| Metals | — | | | — | | | 15,464,375 | | | 15,464,375 | |
| Other re-refinery products | — | | | — | | | 372,424 | | | 372,424 | |
| VGO/Marine fuel sales | 864,000 | | | — | | | — | | | 864,000 | |
| Total revenues | $ | 1,300,220 | | | $ | 67,683,034 | | | $ | 15,840,222 | | | $ | 84,823,476 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
| Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
| Southern United States | $ | 288,000 | | | $ | 13,501,751 | | | $ | 2,459,561 | | | $ | 16,249,312 | |
| Sources of Revenue | | | | | | | |
| | | | | | | |
| Pygas | $ | — | | | $ | 1,184,434 | | | $ | — | | | $ | 1,184,434 | |
| Industrial fuel | — | | | 82,644 | | | — | | | 82,644 | |
| Distillates | — | | | 12,234,673 | | | — | | | 12,234,673 | |
| | | | | | | |
| Metals | — | | | — | | | 2,459,561 | | | 2,459,561 | |
| | | | | | | |
| VGO/Marine fuel sales | 288,000 | | | — | | | — | | | 288,000 | |
| Total revenues | $ | 288,000 | | | $ | 13,501,751 | | | $ | 2,459,561 | | | $ | 16,249,312 | |
| | | Nine Months Ended September 30, 2020 | | Three Months Ended September 30, 2022 |
| | Black Oil | | Refining & Marketing | | Recovery | | Total | | Black Oil* & Recovery | | Refining &
Marketing | | | Consolidated |
| Primary Geographical Markets | Primary Geographical Markets | | | | | | | | Primary Geographical Markets | | | | | | |
| | Southern United States | Southern United States | $ | 864,000 | | | $ | 22,309,670 | | | $ | 7,286,936 | | | $ | 30,460,606 | | Southern United States | $ | 43,439 | | | $ | 766,769 | | | | $ | 810,208 | |
| Sources of Revenue | Sources of Revenue | | | | | | | | Sources of Revenue | | | | | | |
| | Refined products: | | Refined products: | | | |
| Gasolines | | Gasolines | $ | — | | | $ | 171,023 | | | | $ | 171,023 | |
| Jet Fuels | | Jet Fuels | — | | | 138,962 | | | | 138,962 | |
| Diesel | | Diesel | — | | | 276,355 | | | | 276,355 | |
Other refinery products (1) | | Other refinery products (1) | 37,607 | | | 108,337 | | | | 145,944 | |
| Re-refined products: | | Re-refined products: | | | |
| Pygas | Pygas | $ | — | | | $ | 4,815,040 | | | $ | — | | | $ | 4,815,040 | | Pygas | — | | | 15,285 | | | | 15,285 | |
| Industrial fuel | — | | | 135,396 | | | — | | | 135,396 | | |
| Distillates | — | | | 17,359,234 | | | — | | | 17,359,234 | | |
| | Metals | — | | | — | | | 7,286,936 | | | 7,286,936 | | |
| | VGO/Marine fuel sales | 864,000 | | | — | | | — | | | 864,000 | | |
Metals (2) | | Metals (2) | 4,060 | | | — | | | | 4,060 | |
Other re-refined products (3) | | Other re-refined products (3) | 1,490 | | | 54,663 | | | | 56,153 | |
| Services: | | Services: | | | |
| Terminalling | | Terminalling | — | | | 2,144 | | | | 2,144 | |
| Oil collection services | | Oil collection services | 282 | | | — | | | | 282 | |
| Total revenues | Total revenues | $ | 864,000 | | | $ | 22,309,670 | | | $ | 7,286,936 | | | $ | 30,460,606 | | Total revenues | $ | 43,439 | | | $ | 766,769 | | | | $ | 810,208 | |
NOTE 5. ACCOUNTS RECEIVABLE
Accounts receivable, net, consists of the following at September 30, 2021 and December 31, 2020:
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Accounts receivable trade | $ | 6,779,049 | | | $ | 5,211,621 | |
| Allowance for doubtful accounts | (982,565) | | | (352,774) | |
| Accounts receivable trade, net | $ | 5,796,484 | | | $ | 4,858,847 | |
Accounts receivable trade represents amounts due from customers. Accounts receivable trade are recorded at invoiced amounts, net of reserves and allowances and do not bear interest.
NOTE 6. LINE OF CREDIT AND LONG-TERM DEBT
On April 24, 2020, (a) Encina Business Credit, LLC (“EBC”) and the lenders under our February 2017 Revolving Credit Agreement with EBC (the “EBC Lenders”), and Vertex Operating, entered into a Fourth Amendment and Limited Waiver to Credit Agreement, effective on April 24, 2020, pursuant to which the EBC Lenders agreed to amend the EBC Credit Agreement; and (b) the EBC Lenders and Vertex Operating entered into a Fourth Amendment and Limited Waiver to our February 2017 ABL Credit Agreement, (the “Revolving Credit Agreement”), effective on April 24, 2020, pursuant to which the EBC Lenders agreed to amend the Revolving Credit Agreement (collectively, the “Waivers”). The Waivers amended the credit agreements to extend the due date of amounts owed thereunder from February 1, 2021 to February 1, 2022.
On August 7, 2020, the Company and Vertex Operating entered into a Fifth Amendment to Credit Agreement with EBC (the “Fifth Amendment”), which amended the EBC Credit Agreement to provide the Company up to a $2 million term loan to be used for capital expenditures (the “CapEx Loan”), which amounts may be requested from time to time by the Company, provided that not more than four advances of such amount may be requested, with each advance being not less than $500,000 (in multiples of $100,000). The amendment also provided that any prepayments of the EBC Credit Agreement would first be applied to the term loan and then to the CapEx Loan. The CapEx Loan bears interest at the rate of LIBOR (0.08% at September 30, 2021) plus 7%, 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 CapEx Loan in monthly installments of 1/48th of the amount borrowed, each month that the CapEx Loan is outstanding, with a final balloon payment due at maturity. The obligation of EBC to fund the CapEx Loan is subject to customary conditions and requirements set forth in the Fifth Amendment, including the requirement that the Company has maintained daily availability under the ABL Credit Agreement greater than $1 million for the last thirty days, and that such availability would remain over $1 million, on a pro forma basis with such new loan. We are also required to provide the agent for the EBC Credit Agreement, a first priority security interest in the rolling stock collection assets or other assets acquired with the CapEx Loan. | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| Black Oil* & Recovery | | Refining &
Marketing | | | | Consolidated |
| Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
| Southern United States | $ | 26,410 | | | $ | 24,572 | | | | | $ | 50,982 | |
| Sources of Revenue | | | | | | | |
| Refined products: | | | | | | | |
| Gasolines | $ | — | | | $ | 6,674 | | | | | $ | 6,674 | |
| Jet Fuels | — | | | — | | | | | — | |
| Diesel | — | | | 13,745 | | | | | 13,745 | |
Other refinery products (1) | 20,339 | | | — | | | | | 20,339 | |
| Re-refined products: | | | | | | | |
| Pygas | — | | | 3,736 | | | | | 3,736 | |
Metals (2) | 4,328 | | | — | | | | | 4,328 | |
Other re-refined products (3) | 909 | | | 417 | | | | | 1,326 | |
| Services: | | | | | | | — | |
| | | | | | | |
| Oil collection services | 834 | | | — | | | | | 834 | |
| Total revenues | $ | 26,410 | | | $ | 24,572 | | | | | $ | 50,982 | |
On November 27, 2020, the Company, Vertex Operating, the Agent and the EBC Lenders, entered into a Fifth Amendment and Limited Waiver to Credit Agreement (the “Amendment and Waiver”), pursuant to which the Lenders agreed to amend the Revolving Credit Agreement, to (1) provide for the Lender’s waiver of an event of default which occurred under the Revolving Credit Agreement, relating solely to the Company exceeding the $3 million capital expenditure limitation for 2020 set forth in the Revolving Credit Agreement; (2) amend the capital expenditure limit set forth in the Revolving Credit Agreement to $4 million for 2020 (compared to $3 million previously) and $3 million thereafter; and (3) amended the minimum required availability under the Revolving Credit Agreement to be $1 million prior to December 31, 2020 (which amount was previously $2 million) and $2 million thereafter. Notwithstanding the technical default under the Revolving Credit Agreement discussed above, the Lenders did not take any action to accelerate amounts due under the Revolving Credit Agreement, such amounts due thereunder were not automatically accelerated in connection with the default, and as discussed above, such technical default was waived by the Lenders according to the Amendment and Waiver. | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Black Oil* & Recovery | | Refining &
Marketing | | | | Consolidated |
| Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
| Southern United States | $ | 147,545 | | | $ | 1,767,878 | | | | | $ | 1,915,423 | |
| Sources of Revenue | | | | | | | |
| Refined products: | | | | | | | |
| Gasolines | $ | — | | | $ | 432,173 | | | | | $ | 432,173 | |
| Jet Fuels | — | | | 282,650 | | | | | 282,650 | |
| Diesel | — | | | 620,580 | | | | | 620,580 | |
Other refinery products (1) | 129,078 | | | 259,667 | | | | | 388,745 | |
| Re-refined products: | | | | | | | |
| Pygas | — | | | 40,661 | | | | | 40,661 | |
Metals (2) | 13,080 | | | — | | | | | 13,080 | |
Other re-refined products (3) | 4,111 | | | 127,695 | | | | | 131,806 | |
| Services: | | | | | | | — | |
| Terminalling | — | | | 4,452 | | | | | 4,452 | |
| Oil collection services | 1,276 | | | — | | | | | 1,276 | |
| Total revenues | $ | 147,545 | | | $ | 1,767,878 | | | | | $ | 1,915,423 | |
On January 18, 2021, the Company, Vertex Operating and EBC as agent for the lenders named therein, and such lenders, entered into a Sixth Amendment to Credit Agreement (the “6th Amendments”), which amended the EBC Credit Agreement and the Revolving Credit Agreement, between Vertex Operating, the Company, substantially all of the Company’s subsidiaries, EBC, as agent for the lenders named therein, and such lenders, to permit availability at any time to be less than (a) $1,000,000 at any time during the period commencing on December 31, 2020 through and including March 31, 2021 and (b) $2,000,000 at any time from and after April 1, 2021. | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Black Oil* & Recovery | | Refining &
Marketing | | | | Consolidated |
| Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
| Southern United States | $ | 80,124 | | | $ | 67,683 | | | | | $ | 147,807 | |
| Sources of Revenue | | | | | | | |
| Refined products: | | | | | | | |
| Gasolines | — | | | 17,168 | | | | | 17,168 | |
| Jet Fuels | — | | | — | | | | | — | |
| Diesel | — | | | 38,806 | | | | | 38,806 | |
Other refinery products (1) | 58,039 | | | — | | | | | 58,039 | |
| Re-refined products: | | | | | | | |
| Pygas | — | | | 10,571 | | | | | 10,571 | |
Metals (2) | 17,455 | | | — | | | | | 17,455 | |
Other re-refined products (3) | 1,763 | | | 1,138 | | | | | 2,901 | |
| Services: | | | | | | | — | |
| | | | | | | |
| Oil collection services | 2,867 | | | — | | | | | 2,867 | |
| Total revenues | $ | 80,124 | | | $ | 67,683 | | | | | $ | 147,807 | |
On May 26, 2021,* The Company has determined to combine the Company, Vertex OperatingBlack Oil and EBC as agent forRecovery segments in the lenders named therein, and such lenders, entered into a Seventh Amendment to Credit Agreement and a Seventh Amendment to ABL Credit Agreement (collectively, the “7th Amendments”), which amended the EBC Credit Agreement and Revolving Credit Agreement, to allow the Company to enter into the Refinery Purchase Agreement, subjectpresentation above due to the Company agreeing to not use any fundsrevenue from the Revolving Credit Agreement towards such Refinery Purchase Agreement or to pay amounts in connection with a $10 million deposit note in connection with such Refinery Purchase Agreement.
On July 1, 2021, the Company and Vertex Operating entered into an Eighth Amendment to Credit Agreement with EBC (the “8th Amendment”), which amendment amended the EBC Credit Agreement. Pursuant to the 8th Amendment, Encina Business Credit SPV, LLC agreed to loan the Company $5 million under the termssegment being less than 10% of the EBC Credit Agreement (the “Term Loan”), underCompany's total revenue after the stipulation thatMobile Refinery acquisition. The Black Oil segment includes the Company use such loaned funds solely to paydown amounts owed underHeartland Business, which is presented herein as discontinued operations.
(1) Other refinery products include the $10 million deposit note payable in connection with the entry into the Refinery Purchase Agreement ( the "Deposit Note"). The $5 million Term Loan bears interest at the variable-ratesales of LIBOR (0.08% at September 30, 2021) plus 6.5% per year, or to the extent that LIBOR is not available, the highest of the prime ratebase oil, VGO, cutterstock 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 defaultsHydrotreated VGO 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.
On November 1, 2021, the Company repaid in full the amounts owed(2)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 the EBC Lenders (see “Note 16. Subsequent Events”).a steel mill for re-purposing.
Loan Agreements
On May 4, 2020,Other re-refinery products include the Company applied for a loan from Texas Citizens Bank in the principal amountsales of $4.22 million, pursuant to the Paycheck Protection Program (the “PPP”asphalt, condensate, recovered products, and the “PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. On May 5, 2020, the Company received the loan funds. The Note was unsecured, was to mature on April 28, 2022, and accrued interest at a rate of 1.00% per annum, payable monthly commencing in February 2021, following an initial deferral period as specified under the PPP.
Under the terms of the CARES Act, PPP loan recipients can apply for, and the U.S. Small Business Administration (“SBA”), which administers the CARES Act, can grant forgiveness of, all or a portion of loans made under the PPP if the recipients use the PPP loan proceeds for eligible purposes, including payroll costs, mortgage interest, rent or utility costs and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company used the PPP Loan proceeds for qualifying expenses and applied for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. On June 22, 2021, the Company received a notification from the Lender that the SBA approved the Company’s PPP Loan forgiveness application for the entire PPP Loan balance of $4.222 million and accrued interest and that the remaining PPP Loan balance is zero. The forgiveness of the PPP Loan was recognized during the quarter ending June 30, 2021.petroleum products.
NOTE 6. SEGMENT REPORTING
After the acquisition of the Mobile Refinery on April 1, 2022, the revenues of our Black Oil and Recovery segments are less than 10% of consolidated revenue. The Company decided to present our Black Oil and Recovery segment together during this reporting period.
The Refining and Marketing segment consists primarily of the sale of gasoline, diesel and jet fuel produced at the Mobile Refinery as well as pygas and industrial fuels, which are produced at a third-party facility.
The Black Oil and Recovery segment consists primarily 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; (e) the sale of VGO (vacuum gas oil)/marine fuel; (f) the sale of ferrous and non-ferrous recyclable Metal(s) products that are recovered from manufacturing and consumption; and (g) revenues generated from trading/marketing of Group III Base Oils. The Black Oil segment includes the Heartland Business, which is presented herein as discontinued operations.
We also disaggregate our revenue by product category for each of our segments, as we believe such disaggregation helps depict how our revenue and cash flows are affected by economic factors.
Segment information for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2022 |
| | Black Oil & Recovery | | Refining &
Marketing | | Corporate and Eliminations | | Consolidated |
| Revenues: | | | | | | | | |
| Refined products | | $ | 37,607 | | | $ | 694,677 | | | $ | — | | | $ | 732,284 | |
| Re-refined products | | 5,550 | | | 69,948 | | | — | | | 75,498 | |
| Services | | 282 | | | 2,144 | | | — | | | 2,426 | |
| Total revenues | | 43,439 | | | 766,769 | | | — | | | 810,208 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 35,299 | | | 715,164 | | | — | | | 750,463 | |
| Depreciation and amortization attributable to costs of revenues | | 939 | | | 3,111 | | | — | | | 4,050 | |
| Gross profit | | 7,201 | | | 48,494 | | | — | | | 55,695 | |
| Selling, general and administrative expenses | | 4,919 | | | 27,988 | | | 4,071 | | | 36,978 | |
| Depreciation and amortization attributable to operating expenses | | 39 | | | 850 | | | 231 | | | 1,120 | |
| Income (loss) from operations | | $ | 2,243 | | | $ | 19,656 | | | $ | (4,302) | | | $ | 17,597 | |
| | | | | | | | |
| Capital expenditures | | $ | 412 | | | $ | 26,333 | | | $ | — | | | $ | 26,745 | |
On May 27, 2020, the Company entered into a loan contract security agreement with John Deere to finance $152,643 to purchase equipment. The Note matures on June 27, 2024, and bears interest at a rate of 2.45% per annum, payable monthly commencing on June 27, 2020. The payment of the note is secured by the equipment purchased. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2021 |
| | Black Oil & Recovery | | Refining &
Marketing | | Corporate and Eliminations | | Consolidated |
| Revenues: | | | | | | | | |
| Refined products | | $ | 20,339 | | | $ | 20,419 | | | $ | — | | | $ | 40,758 | |
| Re-refined products | | 5,237 | | | 4,153 | | | — | | | 9,390 | |
| Services | | 834 | | | — | | | — | | | 834 | |
| Total revenues | | 26,410 | | | 24,572 | | | — | | | 50,982 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 22,205 | | | 23,937 | | | — | | | 46,142 | |
| Depreciation and amortization attributable to costs of revenues | | 901 | | | 127 | | | — | | | 1,028 | |
| Gross profit | | 3,304 | | | 508 | | | — | | | 3,812 | |
| Selling, general and administrative expenses | | 3,618 | | | 1,034 | | | 3,525 | | | 8,177 | |
| Depreciation and amortization attributable to operating expenses | | 59 | | | 108 | | | 253 | | | 420 | |
| Loss from operations | | $ | (373) | | | $ | (634) | | | $ | (3,778) | | | $ | (4,785) | |
| | | | | | | | |
| Capital expenditures | | $ | 228 | | | $ | — | | | $ | — | | | $ | 228 | |
On July 18, 2020, Leverage Lubricants LLC, which Vertex Energy Operating, LLC holds 51% interest, entered into a SBA loan in the amount of $58,700. The loan matures on July 18, 2050 and bears interest at the rate of 3.75% per annum. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2022 |
| | Black Oil & Recovery | | Refining &
Marketing | | Corporate and Eliminations | | Consolidated |
| Revenues: | | | | | | | | |
| Refined products | | $ | 129,078 | | | $ | 1,595,070 | | | $ | — | | | $ | 1,724,148 | |
| Re-refined products | | 17,191 | | | 168,356 | | | — | | | 185,547 | |
| Services | | 1,276 | | | 4,452 | | | — | | | 5,728 | |
| Total revenues | | 147,545 | | | 1,767,878 | | | — | | | 1,915,423 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 111,740 | | | 1,708,017 | | | — | | | 1,819,757 | |
| Depreciation and amortization attributable to costs of revenues | | 2,805 | | | 6,339 | | | — | | | 9,144 | |
| Gross profit | | 33,000 | | | 53,522 | | | — | | | 86,522 | |
| Selling, general and administrative expenses | | 13,383 | | | 52,709 | | | 23,842 | | | 89,934 | |
| Depreciation and amortization attributable to operating expenses | | 142 | | | 1,785 | | | 729 | | | 2,656 | |
| Income (loss) from operations | | $ | 19,475 | | | $ | (972) | | | $ | (24,571) | | | $ | (6,068) | |
| | | | | | | | |
| Capital expenditures | | $ | 2,830 | | | $ | 142,927 | | | $ | — | | | $ | 145,757 | |
Insurance Premiums
The Company financed insurance premiums through various financial institutions bearing interest rates from 4.00% to 4.90% per annum. All such premium finance agreements have maturities of less than one year and have a balance of $3,562,608 at September 30, 2021 and $1,183,543 at December 31, 2020.
Finance Leases
On April 2, 2020, the Company obtained 1 finance lease with payments of $9,322 per month for three years and on July 28, 2020, the Company entered into another finance lease with payments of $3,545 per month for three years. The amount of the finance lease obligation has been reduced to $0 at September 30, 2021.
On May 22, 2020, the Company entered into 1 finance lease. Payments are $15,078 per month for three years and the amount of the finance lease obligation has been reduced to $0 at September 30, 2021.
The Company's outstanding debt facilities as of September 30, 2021 and December 31, 2020 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Creditor | Loan Type | | Origination Date | | Maturity Date | | Loan Amount | | Balance on September 30, 2021 | Balance on December 31, 2020 |
| Encina Business Credit, LLC | Term Loan | | February 1, 2017 | | February 1, 2022 | | $ | 20,000,000 | | | $ | 9,758,000 | | $ | 5,433,000 | |
| Encina Business Credit SPV, LLC | Revolving Note | | February 1, 2017 | | February 1, 2022 | | $ | 10,000,000 | | | — | | 133,446 | |
| Encina Business Credit, LLC | Capex Loan | | August 7, 2020 | | February 1, 2022 | | $ | 2,000,000 | | | 1,102,170 | | 1,378,819 | |
| Wells Fargo Equipment Lease-Ohio | Finance Lease | | April-May, 2019 | | April-May, 2024 | | $ | 621,000 | | | 346,321 | | 436,411 | |
| | | | | | | | | | |
| | | | | | | | | | |
| John Deere Note | Note | | May 27, 2020 | | June 24, 2024 | | $ | 152,643 | | | 103,414 | | 131,303 | |
| | | | | | | | | | |
| 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 | |
| Various institutions | Insurance premiums financed | | Various | | < 1 year | | $ | 2,902,428 | | | 3,562,608 | | 1,183,543 | |
| Total | | | | | | | | | $ | 14,931,213 | | $ | 12,920,326 | |
| Deferred finance costs | | | | | | | | | (62,500) | | — | |
| Total, net of deferred finance costs | | | | | | | | | $ | 14,868,713 | | $ | 12,920,326 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2021 |
| | Black Oil & Recovery | | Refining &
Marketing | | Corporate and Eliminations | | Consolidated |
| Revenues: | | | | | | | | |
| Refined products | | $ | 58,039 | | | $ | 55,974 | | | $ | — | | | $ | 114,013 | |
| Re-refined products | | 19,218 | | | 11,709 | | | — | | | 30,927 | |
| Services | | 2,867 | | | — | | | — | | | 2,867 | |
| Total revenues | | 80,124 | | | 67,683 | | | — | | | 147,807 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 63,431 | | | 64,555 | | | — | | | 127,986 | |
| Depreciation and amortization attributable to costs of revenues | | 2,623 | | | 379 | | | — | | | 3,002 | |
| Gross profit | | 14,070 | | | 2,749 | | | — | | | 16,819 | |
| Selling, general and administrative expenses | | 10,841 | | | 2,482 | | | 8,419 | | | 21,742 | |
| Depreciation and amortization attributable to operating expenses | | 176 | | | 325 | | | 759 | | | 1,260 | |
| Income (loss) from operations | | $ | 3,053 | | | $ | (58) | | | $ | (9,178) | | | $ | (6,183) | |
| | | | | | | | |
| Capital expenditures | | $ | 2,313 | | | $ | — | | | $ | — | | | $ | 2,313 | |
Future contractual maturitiesTotal assets by segment were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| AS OF SEPTEMBER 30, 2022 |
| | Black Oil & Recovery | | Refining &
Marketing | | Corporate and Eliminations | | Consolidated |
| Total assets | | $ | 123,808 | | | $ | 395,692 | | | $ | 128,077 | | | $ | 647,577 | |
| | | | | | | | |
| AS OF SEPTEMBER 30, 2021 |
| | Black Oil & Recovery | | Refining &
Marketing | | Corporate and Eliminations | | Consolidated |
| Total assets | | $ | 101,461 | | | $ | 4,775 | | | $ | 38,414 | | | $ | 144,650 | |
Segment assets for the Refining and Marketing and Black Oil and Recovery segments consist of notes payableproperty, plant, and equipment, right-of-use assets, intangible assets, accounts receivable, inventories and other assets. Assets for the corporate unallocated amounts consist of property, plant, and equipment used at the corporate headquarters, intangible assets, derivative commodity assets, assets held for sale as of September 30, 2021 are summarizedwell as follows:cash.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Creditor | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
| Encina Business Credit, LLC | $ | 9,758,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| Encina Business Credit, LLC | 1,102,170 | | | — | | | — | | | — | | | — | | | — | |
| John Deere Note | 37,991 | | | 38,933 | | | 26,490 | | | — | | | — | | | — | |
| Well Fargo Equipment Lease- Ohio | 346,321 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Loan-Leverage Lubricants | — | | | 683 | | | 1,290 | | | 1,340 | | | 1,391 | | | 53,996 | |
| | | | | | | | | | | |
| Various institutions | 3,562,608 | | | — | | | — | | | — | | | — | | | — | |
| Totals | $ | 14,807,090 | | | $ | 39,616 | | | $ | 27,780 | | | $ | 1,340 | | | $ | 1,391 | | | $ | 53,996 | |
| Deferred finance costs, net | (62,500) | | | — | | | — | | | — | | | — | | | — | |
| Totals, net of deferred finance costs | $ | 14,744,590 | | | $ | 39,616 | | | $ | 27,780 | | | $ | 1,340 | | | $ | 1,391 | | | $ | 53,996 | |
NOTE 7. EARNINGS PER SHAREACCOUNTS RECEIVABLE
Accounts receivable, net, consists of the following at September 30, 2022 and December 31, 2021(in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Accounts receivable trade | $ | 52,338 | | | $ | 16,302 | |
| Allowance for doubtful accounts | (1,509) | | | (1,422) | |
| Accounts receivable trade, net | 50,829 | | | 14,880 | |
| Accounts receivable other | 1,001 | | | — | |
| Accounts receivable, net | $ | 51,830 | | | $ | 14,880 | |
Accounts receivable trade represents amounts due from customers. Accounts receivable trade are recorded at invoiced amounts, net of reserves and allowances and do not bear interest.
NOTE 8. CONCENTRATIONS OF RISK AND SIGNIFICANT CUSTOMERS
At September 30, 2022 and 2021 and for each of the nine months then ended, the Company’s revenues and receivables were comprised of the following customer concentrations:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the Nine Months Ended |
| | September 30, 2022 | | September 30, 2021 |
| % of
Revenues | | % of
Receivables | | % of
Revenues | | % of
Receivables |
| Customer 1 | 40% | | 2% | | 34% | | 11% |
| Customer 2 | 22% | | 45% | | 12% | | 6% |
| Customer 3 | 10% | | 7% | | 9% | | 5% |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
For each of the nine months ended September 30, 2022 and 2021, the Company’s segment revenues were comprised of the following customer concentrations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % of Revenue by Segment | | % Revenue by Segment |
| Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
| Black Oil and Recovery | | Refining | | | | Black Oil and Recovery | | Refining | | |
| Customer 1 | —% | | 43% | | | | —% | | 27% | | |
| Customer 2 | —% | | 24% | | | | —% | | 20% | | |
| Customer 3 | 83% | | 4% | | | | 64% | | —% | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The Company had one vendor that represented 57% of total purchases and 49% of total payables for the nine months ended September 30, 2022, and one vendor that represented 38% of total purchases and 26% of total payables at September 30, 2021.
NOTE 9. INVENTORY
The following table describes the Company's inventory balances by category (in thousands):
| | | | | | | | | | | |
| | |
| As of September 30, 2022 | | As of December 31, 2021 |
| Crude oil | $ | 60,504 | | | $ | 926 | |
| Refined products | 97,568 | | 4,729 |
| Re-refined products | 6,590 | | 2,376 |
| Total hydrocarbon inventories | 164,662 | | 8,031 |
| Other inventories | 5,110 | | — | |
| Total inventories | $ | 169,772 | | | $ | 8,031 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Basic earnings
NOTE 10. INVENTORY FINANCING AGREEMENT
On April 1, 2022, pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all the Mobile Refinery Inventory from Vertex Refining for $130 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement, discussed in detail below. The following table summarizes our outstanding obligations under our inventory financing agreements as of September 30, 2022 (in thousands):
| | | | | | | | |
| | September 30, 2022 |
| Obligations under inventory financing agreement | | $ | 135,744 | |
| Unamortized financing cost | | (1,500) | |
| Obligations under inventory financing agreement, net | | $ | 134,244 | |
The valuation of our obligations at the end of each reporting period requires that we make estimates of the prices and differentials for our then monthly forward purchase obligations.
Supply and Offtake Agreement
On April 1, 2022 (the “Commencement Date”), Vertex Refining entered into a Supply and Offtake Agreement (the “Supply and Offtake Agreement”) with Macquarie, pertaining to crude oil supply and offtake of finished products located at the Mobile Refinery acquired on April 1, 2022. On the Commencement Date, pursuant to an Inventory Sales Agreement and in connection with the Supply and Offtake Agreement, Macquarie purchased from Vertex Refining all crude oil and finished products within the categories covered by the Supply and Offtake Agreement and the Inventory Sales Agreement, which were held at the Mobile Refinery and a certain specified third party storage terminal, which were previously purchased by Vertex Refining as part of the acquisition of the Mobile Refinery as discussed in greater detail above in Note 3. "Mobile Refinery Acquisition".
Pursuant to the Supply and Offtake Agreement, beginning on the Commencement Date and subject to certain exceptions, substantially all of the crude oil located at the Mobile Refinery and at a specified third party storage terminal from time to time will be owned by Macquarie prior to its sale to Vertex Refining for consumption within the Mobile Refinery processing units. Also pursuant to the Supply and Offtake Agreement, and subject to the terms and conditions and certain exceptions set forth therein, Macquarie will purchase from Vertex Refining substantially all of the Mobile Refinery’s output of certain refined products and will own such refined products while they are located within certain specified locations at the Mobile Refinery. Macquarie takes title to the refined products stored in our storage tanks until they are sold to our retail locations or to third parties. We record the inventory owned by Macquarie on our behalf as inventory with a corresponding accrued liability on our balance sheet because we maintain the risk of loss until the refined products are sold to third parties and we have an obligation to repurchase it.
Pursuant to the Supply and Offtake Agreement and subject to the terms and conditions therein, Macquarie may during the term of the Supply and Offtake Agreement procure crude oil and refined products from certain third parties which may be sold to Vertex Refining or third parties pursuant to the Supply and Offtake Agreement and may sell Refined Products to Vertex Refining or third parties (including customers of Vertex Refining).
The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are guaranteed by the Company. The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are also secured by a Pledge and Security Agreement in favor of Macquarie, discussed below, executed by Vertex Refining. In addition, the Supply and Offtake Agreement also requires that Vertex Refining post and maintain cash collateral (in the form of an independent amount) as security for Vertex Refining’s obligations under the Supply and Offtake Agreement and the related transaction documents. The amount of cash collateral is subject to adjustments during the term.
Pursuant to the Supply and Offtake Agreement, Vertex Refining and Macquarie are in discussions to cooperate to develop and document, by no later than 180 days after the Commencement Date, procedures relating to the unwinding and termination of the agreement and related agreements, in the event of the expiration or early termination of the Supply and Offtake Agreement. The parties also agreed to use commercially reasonable efforts to negotiate mutually agreeable terms for Macquarie’s intermediating of renewable feedstocks and renewable diesel that will be utilized and/or produced by Vertex Refining in connection with and following a planned renewable diesel conversion project at the Mobile Refinery (including providing Macquarie a right of first refusal in connection therewith), for 90 days after the Commencement Date (the “RD Period”), which discussions are ongoing. If, by the end of the RD Period, Macquarie and Vertex Refining, each acting in good faith and in a commercially reasonable manner, have not been able to reach commercial agreement regarding the entry into a renewable diesel intermediation, Vertex Refining may elect to terminate the Supply and Offtake Agreement by providing notice of any such election to Macquarie; provided that no such election may be effective earlier than the date falling 90 calendar days following the date on which such notice is delivered. The agreement is also subject to termination upon the occurrence of certain events, including the termination of certain agreements relating to the delivery of crude oil to and the offtake of products from the Mobile Refinery. Upon an early termination of the Supply and Offtake Agreement, Vertex Refining is required to pay amounts relating to such termination to Macquarie including, among other things, outstanding unpaid amounts, amounts owing
with respect to terminating transactions under the Supply and Offtake Agreement and related transaction documents, unpaid ancillary costs, and breakage costs, losses and out-of-pocket costs with respect to the termination, liquidation, maintenance or reestablishment, or redeployment of certain hedges put in place by Macquarie in connection with the transactions contemplated by the agreement, and Vertex Refining is required to pay other termination fees and amounts to Macquarie in the event of any termination of the agreement. Additionally, upon the termination of the Supply and Offtake Agreement, the outstanding obligations of Vertex Refining and Macquarie to each other will be calculated and reduced to an estimated net settlement payment which will be subject to true-up when the final settlement payment has been calculated following termination.
The Supply and Offtake Agreement requires Vertex Refining to prepare and deliver certain forecasts, projections and estimates and comply with financial statement delivery obligations and other disclosure obligations. The agreement also requires Vertex Refining to provide Macquarie notice of certain estimated monthly crude oil delivery, crude oil consumption, product production, target inventory levels and product offtake terms, which Macquarie has the right to reject, subject to certain disclosure requirements.
The Supply and Offtake Agreement has a 24 month term following the Commencement Date, subject to the performance of customary covenants, and certain events of default and termination events provided therein (certain of which are discussed in greater detail below), for a facility of this size and type. Additionally, either party may terminate the agreement at any time, for any reason, with no less than 180 days prior notice to the other.
The Supply and Offtake Agreement includes certain customary representations, warranties, indemnification obligations and limitations of liability of the parties for a facility of this size and type, and also requires Vertex Refining to be responsible for certain ancillary costs relating to the Supply and Offtake Agreement and the transactions contemplated thereby. The Supply and Offtake Agreement requires Vertex Refining to comply with various indemnity, insurance and tax obligations, and also includes a prohibition on any amendments to Vertex Refining’s financing agreements which, among other things, adversely affect Macquarie’s rights and remedies under the Supply and Offtake Agreement and related transaction documents without the prior consent of Macquarie; a prohibition on Vertex Refining entering into any financing agreement which would cause Vertex Refining’s specified indebtedness to exceed $10 million without Macquarie’s prior consent, subject to certain exceptions; and a requirement that Vertex Refining not have less than $17.5 million in unrestricted cash for any period of more than three consecutive business days. The Supply and Offtake Agreement includes events of default and termination events, including if the Company ceases to beneficially own, directly or indirectly, 100% of the capital stock of Vertex Refining; the change in ownership of the Company or Vertex Refining resulting in one person or group acquiring 50% or more of the capital stock of the Company or Vertex Refining (as applicable); or a change in a majority of the Board of Directors of the Company or Vertex Refining during any 12 consecutive months, without certain approvals, including the approval of the Board of Directors of the Company or Vertex Refining (as applicable) immediately prior to such change; and a cross default to indebtedness (other than indebtedness under financing agreements) of the Company or Vertex Refining for over $20 million, a cross default to indebtedness under financing agreements of Vertex Refining or the Company, or a final judgment or order being rendered against Vertex Refining or the Company in an amount exceeding $20 million.
The price for crude oil purchased by the Company from Macquarie and for products sold by the Company to Macquarie within each agreed product group, in each case, is equal to a pre-determined benchmark, plus a pre-agreed upon differential, subject to adjustments and monthly true-ups.
Vertex Refining is required to pay Macquarie various monthly fees in connection with the Supply and Offtake Agreement and related arrangements, including, without limitation, (1) an inventory management fee, calculated based on the value of the inventory owned by Macquarie in connection with the Supply and Offtake Agreement, (2) a lien inventory fee based upon the value of certain inventory on which Macquarie has a lien, (3) a per share includes no dilutionbarrel crude handling fee based upon the volume of crude oil Macquarie sells to Vertex Refining, (4) per barrel crude oil and is computed by dividing incomeproducts intermediation fees for each barrel of crude oil which Macquarie buys from a third party and each barrel of products Macquarie sells to a third party, in each case, in connection with the Supply and Offtake Agreement, and (5) a services fee in respect of which Macquarie agrees to make Crude Oil and Products available to common shareholdersthe Company in accordance with the weekly nomination procedure as set forth in the Supply and Offtake Agreement. Vertex Refining will also be responsible for certain payments relating to Macquarie’s hedging of the inventory it owns in connection with the Supply and Offtake Agreement, including the costs of rolling hedges forward each month, as well as any costs (or gains) resulting from a mismatch between the Company’s projected target inventory levels (which provide the basis for Macquarie’s hedge position) and actual month end inventory levels.
In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into various ancillary agreements which relate to supply, storage, marketing and sales of crude oil and refined products including, but not limited to the following: Inventory Sales Agreement, Master Crude Oil and Products Agreement, Storage and Services Agreement, and a Pledge and Security Agreement (collectively with the Supply and Offtake Agreement, the “Supply Transaction Documents”).
The Company agreed to guarantee the obligations of Vertex Refining and any of its subsidiaries arising under the Supply Transaction Documents pursuant to the entry into a Guaranty in favor of Macquarie.
Tripartite Agreements
Also on the Commencement Date, Vertex Refining, Macquarie and certain parties subject to crude oil supply and products offtake agreements with Vertex Refining, relating to the Mobile Refinery, entered into various tripartite agreements (the “Tripartite Agreements”), whereby Vertex Refining granted Macquarie the right, on a rolling daily or monthly basis, as applicable, to elect to assume Vertex Refining’s rights and obligations under such crude oil supply and products offtake agreements in connection with the performance of the Supply and Offtake Agreement, and the counterparties thereto are deemed to have consented to Macquarie’s assuming such obligations. Such Tripartite Agreements also provided for certain interpretations of the provisions of such supply and offtake agreements between Vertex Refining and such third parties in connection with Macquarie’s right to elect to assume Vertex Refining’s rights and obligations under such agreements. The Tripartite Agreements remain in place until the termination of the agreements to which they relate, or the earlier termination thereof as set forth in the Tripartite Agreements, including in the event of certain events of default by the weighted average number of common shares outstanding forparties thereto under the periods presented. Diluted earnings per share reflectsmodified crude oil supply and products offtake agreements or the potential dilution of securities that could shareSupply and Offtake Agreement and related transaction documents and also in the earningsevent of an entity,the termination of the Supply and Offtake Agreement. Macquarie, Vertex Refining and a third party offtaker also entered into a tripartite agreement pursuant to which certain storage capacity within the Mobile Refinery which Macquarie had leased pursuant to the Storage and Services Agreement was effectively made available to such as convertible preferred stock, stock options, warrants or convertible securities. Duethird party consistent with the terms agreed by such party and Vertex Refining in its underlying products offtake agreement. Macquarie, Vertex Refining and a third party storage terminal operator also entered into a tripartite agreement relating to their anti-dilutive effect, the calculationstorage of diluted earnings per shareMacquarie-owned crude oil in such terminal in connection with the Supply and Offtake Agreement.
Guaranty
Vertex Refining’s obligations under the Supply and Offtake Agreement and related transaction documents (other than the hedges which are secured and guaranteed on a pari passu basis under the Loan and Security Agreement) were unconditionally guaranteed by the Company pursuant to the terms of a Guaranty entered into on April 1, 2022, by the Company in favor of Macquarie (the “Guaranty”).
NOTE 11. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The following table describes the Company's prepaid expenses and other current assets balances (in thousands):
| | | | | | | | | | | |
| As of September 30, 2022 | | As of December 31, 2021 |
| Prepaid insurance | $ | 15,168 | | | $ | 2,638 | |
| Commodity derivative advance | 12,468 | | | 556 | |
| Renewable volume obligation (RVO) assets | 1,389 | | | — | |
| Other prepaid expenses | 4,312 | | | 1,373 | |
| Total prepaid expenses | $ | 33,337 | | | $ | 4,567 | |
NOTE 12. FIXED ASSETS, NET
Fixed assets consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Useful Life
(in years) | | September 30, 2022 | | December 31, 2021 |
| Equipment | 10 | | $ | 116,370 | | | $ | 38,682 | |
| Furniture and fixtures | 7 | | 106 | | | 106 | |
| Leasehold improvements | 15 | | 2,779 | | | 2,473 | |
| Office equipment | 5 | | 1,433 | | | 1,183 | |
| Vehicles | 5 | | 8,168 | | | 6,999 | |
| Building | 20 | | 2,334 | | | 274 | |
| Land improvements | 20 | | 158 | | | — | |
| Construction in progress | | | 57,730 | | | 10,484 | |
| Land | | | 9,010 | | | 1,995 | |
| Total fixed assets | | | 198,088 | | | 62,196 | |
| Less accumulated depreciation | | | (33,371) | | | (26,043) | |
| Net fixed assets | | | $ | 164,717 | | | $ | 36,153 | |
The increase in fixed assets is due to the fixed assets acquired by the acquisition of the Mobile Refinery on April 1, 2022. Depreciation expense was $3.3 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively, for the continued operations. Depreciation expense was $7.6 million and 2020 excludes: 1) options to purchase 915,179 and 5,140,288 shares, respectively, of common stock, 2) warrants to purchase 55,563 and 8,633,193 shares, respectively, of common stock, 3) Series B Preferred Stock which is convertible into 0 and 3,883,449 shares, respectively, of common stock, 4) Series B1 Preferred Stock which is convertible into 0 and 7,004,236 shares, respectively, of common stock, and 5) Series A Preferred Stock which is convertible into 385,601 and 419,859 shares of common stock as of September 30, 2021 and 2020. Due to their anti-dilutive effect, the calculation of diluted earnings per share$2.9 million for the nine months ended September 30, 2022 and 2021, respectively for the continued operations.
Asset Retirement Obligations:
The Company has asset retirement obligations with respect to certain of its refinery assets due to various legal obligations to clean and/or dispose of various component parts of each refinery at the time they are retired. However, these component parts can be used for extended and 2020 excludes: 1) optionsindeterminate periods of time as long as they are properly maintained and/or upgraded. It is the Company’s practice and current intent to maintain its refinery assets and continue making improvements to those assets based on technological advances. As a result, the Company believes that its refinery assets have indeterminate lives for purposes of estimating asset retirement obligations because dates, or ranges of dates, upon which the Company would retire refinery assets cannot reasonably be estimated. When a date or range of dates can reasonably be estimated for the retirement of any component part of a refinery, the Company estimates the cost of performing the retirement activities and records a liability for the fair value of that cost using established present value techniques.
NOTE 13. INTANGIBLE ASSETS, NET
Components of intangible assets (subject to amortization) consist of the following items:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2022 | | December 31, 2021 |
| | Useful Life
(in years) | | Gross
Carrying
Amount | | Accumulated Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | |
Accumulated Amortization | | Net
Carrying
Amount |
| Customer relations | | 5 | | $ | 978 | | | $ | 971 | | | $ | 7 | | | $ | 978 | | | $ | 940 | | | $ | 38 | |
| Vendor relations | | 10 | | 4,778 | | | 4,557 | | | 221 | | | 4,778 | | | 4,199 | | | 579 | |
| Trademark/Trade name | | 15 | | 887 | | | 595 | | | 292 | | | 887 | | | 550 | | | 337 | |
| TCEP Technology/Patent | | 15 | | 13,287 | | | 8,617 | | | 4,670 | | | 13,287 | | | 7,952 | | | 5,335 | |
| Non-compete | | 3 | | 197 | | | 196 | | | 1 | | | 197 | | | 192 | | | 5 | |
| Software | | 3 | | 9,344 | | | 1,732 | | | 7,612 | | | 538 | | | 180 | | | 358 | |
| | | | $ | 29,471 | | | $ | 16,668 | | | $ | 12,803 | | | $ | 20,665 | | | $ | 14,013 | | | $ | 6,652 | |
Intangible assets are amortized on a straight-line basis. We continually evaluate the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant a revised estimated useful life or reduction in value.
Total amortization expense of intangibles was $1.1 million and $0.4 million for the three months ended September 30, 2022 and 2021, respectively. Total amortization expense of intangibles was $2.7 million and $1.3 million for the nine months ended September 30, 2022 and 2021, respectively.
Estimated future amortization expense is as follows (in thousands):
| | | | | |
| Year 1 | $ | 4,061 | |
| Year 2 | 4,005 | |
| Year 3 | 2,549 | |
| Year 4 | 950 | |
| Year 5 | 948 | |
| Thereafter | 290 | |
| $ | 12,803 | |
NOTE 14. ACCRUED LIABILITIES
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| Accrued purchases | | $ | 18,496 | | | $ | 1,877 | |
| Accrued interest | | 1 | | | 1,594 | |
| Accrued compensation and benefits | | 3,625 | | | 1,082 | |
| Accrued income, real estate, sales and other taxes | | 1,454 | | | 389 | |
| RINS liabilities | | 19,023 | | | — | |
| Environmental liabilities - current | | 51 | | | — | |
| | $ | 42,650 | | | $ | 4,942 | |
The increase in accrued liabilities from December 31, 2021 is due to the operation of the Mobile Refinery, which was acquired on April 1, 2022.
NOTE 15. LONG-TERM DEBT
The Company's long-term debt consisted of the following as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Creditor | Loan Type | | | | | | | | Balance on September 30, 2022 | | Balance on December 31, 2021 |
| Senior Convertible Note | Convertible note | | | | | | | | $ | 95,178 | | | $ | 155,000 | |
| Term Loan 2025 | Loan | | | | | | | | 165,000 | | | — | |
| John Deere Note | Note | | | | | | | | — | | | 94 | |
| SBA Loan | SBA Loan | | | | | | | | 59 | | | 59 | |
| | | | | | | | | | | |
| Various institutions | Insurance premiums financed | | | | | | | | 10,449 | | | 2,375 | |
| Principal amount of long-term debt | | | | | | | | | 270,686 | | | 157,528 | |
| Less: unamortized discount and deferred financing costs | | | | | | | | | (86,384) | | | (90,984) | |
| Total debt, net of unamortized discount and deferred financing costs | | | | | | | | | 184,302 | | | 66,544 | |
| Less: current maturities, net of unamortized discount and deferred financing costs | | | | | | | | | (16,637) | | | (2,413) | |
| Long term debt, net of current maturities | | | | | | | | | $ | 167,665 | | | $ | 64,131 | |
Future maturities of long-term debt, excluding financing lease obligations, as of September 30, 2022 are summarized as follows (in thousands):
| | | | | | | | |
| Period Ended September 30, | | Amount Due |
| 2023 | | $ | 16,637 | |
| 2024 | | 8,252 | |
| 2025 | | 150,563 | |
| 2026 | | 1 | |
| 2027 | | 95,180 | |
| Thereafter | | 53 | |
| Total | | $ | 270,686 | |
Term Loan
On April 1, 2022 (the “Closing Date”), Vertex Refining; the Company, as a guarantor; substantially all of the Company’s direct and indirect subsidiaries, as guarantors (together with the Company, the “Initial Guarantors”); certain funds and accounts under management by BlackRock Financial Management, Inc. or its affiliates, as lenders (“BlackRock”), certain funds managed or advised by Whitebox Advisors, LLC, as lenders (“Whitebox”), certain funds managed by Highbridge Capital Management, LLC, as lenders (“Highbridge”), Chambers Energy Capital IV, LP, as a lender (“Chambers”), CrowdOut Capital LLC, as a lender (“CrowdOut Capital”), CrowdOut Credit Opportunities Fund LLC, as a lender (collectively with BlackRock, Whitebox, Highbridge, Chambers and CrowdOut Capital, the “Lenders”); and Cantor Fitzgerald Securities, in its capacity as administrative agent and collateral agent for the Lenders (the “Agent”), entered into a Loan and Security Agreement (the “Loan and Security Agreement”).
Pursuant to the Loan and Security Agreement, the Lenders agreed to provide a $125 million term loan to Vertex Refining (the “Initial Term Loan”), the proceeds of which, less agreed upon fees and discounts, were held in escrow prior to the Closing Date, pursuant to an Escrow Agreement. On the Closing Date, net proceeds from the term loans, less the agreed upon fees and discounts, as well as certain transaction expenses, were released from escrow to Vertex Refining in an aggregate amount of $94 million.
On May 26, 2022, each of the Initial Guarantors (including the Company), Vertex Refining OH, LLC, which is indirectly wholly-owned by the Company ("Vertex OH"), Heartland SPV, and Tensile-Heartland Acquisition Corporation, a Delaware corporation (“Tensile-Heartland”, and together with Vertex Ohio and Heartland SPV, the “Additional Guarantors”, and the Additional Guarantors, together with the Initial Guarantors, the “Guarantors”, and the Guarantors, together with Vertex Refining, the “Loan Parties”), entered into an Amendment Number One to Loan and Security Agreement (“Amendment No. One to Loan Agreement”), with certain of the Lenders and CrowdOut Warehouse LLC, as a lender (the “Additional Lenders” and together with the Initial Lenders, the “Lenders”) and the Agent, pursuant to which, the amount of the Term Loan (as defined below) was increased from $125 million to $165 million, with the Additional Lenders providing an additional term loan in the amount of $40 million (the “Additional Term Loan”, and together with the Initial Term Loan, the “Term Loan”).
Pursuant to the Loan and Security Agreement, on the last day of March, June, September and December of each year (or if such day is not a business day, the next succeeding business day), beginning on March 31, 2023 and ending on December 31, 2024, Vertex Refining is required to repay $2 million of the principal amount owed under the Loan and Security Agreement (i.e., 1.25% of the original principal amount per quarter), subject to reductions in the event of any prepayment of the Loan and Security Agreement.
The Company used a portion of the proceeds from the Term Loan borrowing to pay a portion of the purchase price associated with the acquisition of the Mobile Refinery (defined above) acquired by Vertex Refining on April 1, 2022, as discussed in greater detail above, and to pay certain fees and expenses associated with the closing of the Loan and Security Agreement and is required to use the remainder of the funds for (i) the planned renewable diesel conversion of the Mobile Refinery, and (ii) working capital and liquidity needs.
On September 30, 2022, Vertex Refining; the Company, as a guarantor; substantially all of the Company’s direct and indirect subsidiaries, as guarantors; Vertex Marine Fuel Services LLC (“Vertex Marine”) and Vertex Refining Texas LLC (“Vertex Texas,” and together with Vertex Marine, the “New Subsidiary Guarantors”), which are indirectly wholly-owned by the Company; the lenders thereto; and the Agent, entered into a second amendment (“Amendment No. Two”) to the Loan and Security Agreement.
Amendment No. Two (a) extends the date that the Company is required to begin initial commercial production of renewable diesel at the Mobile Refinery, from February 28, 2023 to April 28, 2023, and provides other corresponding extensions of the milestones required to complete the Company’s capital project designed to modify the Mobile Refinery’s existing hydrocracking unit to produce renewable diesel fuel on a standalone basis, which as previously described, is currently anticipated for mechanical completion during the first quarter of 2023; and (b) waives and extends certain deadlines and time periods for the Company to take other actions in connection with the Loan and Security Agreement.
In addition, each of the New Subsidiary Guarantors also entered into a Guarantor Joinder, agreeing to be bound by the terms of the Loan and Security Agreement, and to guaranty the amounts owed thereunder.
Warrant Agreement and Derivative Liabilities
In connection with the Loan and Security Agreement, and as additional consideration for the Lenders agreeing to loan funds to the Company thereunder, the Company granted warrants to purchase 4,195,168 and 5,140,288 shares, respectively, of common stock, 2) warrants to purchase 288,458 and 8,633,193 shares, respectively, of common stock, 3) Series B Preferred Stock which is convertible into 0 and 3,883,449 shares, respectively, of common stock, 4) Series B1 Preferred Stock which is convertible into 0 and 7,004,236 shares, respectively, of common stock, and 5) Series A Preferred Stock which is convertible into 385,601 and 419,8592.75 million shares of common stock of the Company to the Lenders (and/or their affiliates) on the Closing Date (the “Initial Warrants”). The terms of the warrants are set forth in a Warrant Agreement (the “April 2022 Warrant Agreement”) entered into on April 1, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent.
In connection with the entry into the Amendment No. One to Loan Agreement, and as a required term and condition thereof, on May 26, 2022, the Company granted warrants (the “Additional Warrants” and together with the Initial Warrants, the “Warrants”) to purchase 250 thousand shares of September 30, 2021the Company’s common stock to the Additional Lenders and 2020.their affiliates. The terms of the Additional Warrants are set forth in a Warrant Agreement (the “May 2022 Warrant Agreement” and together with the April 2022 Warrant Agreement, the “Warrant Agreements”) entered into on May 26, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent.
Each Warrant holder has a put right to require the Company to repurchase any portion of the warrants held by such holder concurrently with the consummation of such fundamental transaction. The fundamental transaction clause requires the warrants to be classified as liabilities.
InIndenture and Convertible Senior Notes
On November 1, 2021, we issued $155 million aggregate principal amount at maturity of our 6.25% Convertible Senior Notes due 2027 (the “Convertible Senior Notes”) pursuant to an Indenture (the “Indenture”), dated November 1, 2021, between the Company and U.S. Bank National Association, as trustee (the “Trustee”), in a private offering (the “Note Offering”) to persons reasonably believed to be “qualified institutional buyers” and/or to “accredited investors” in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Securities Purchase Agreements. The issue price was 90% of the face amount of each note. Interest payments on the Notes are paid semiannually on April 1 and October 1 of each year, beginning on April 1, 2022. As of October 1, 2022, a total of $7 million of interest was paid on our outstanding Convertible Senior Notes.
A total of seventy-five percent (75%) of the net proceeds from the offering were placed into an escrow account to be released to the Company, upon the satisfaction of certain conditions, including the satisfaction or waiver of all of the conditions precedent to the Company’s obligation to consummate the Mobile Acquisition (collectively, the “Escrow Release Conditions”). The Mobile Acquisition was consummated on April 1, 2022, and the proceeds from the sale of the Convertible Senior Notes which were held in escrow were released on April 1, 2022.
Prior to July 1, 2027, the Convertible Senior Notes are convertible at the option of the holders of the Convertible Senior Notes only upon the satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election, provided that until such time as the Company’s stockholders had approved
the issuance of more than 19.99% of our common stock issuable upon conversion of the Convertible Senior Notes in accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, our Series A Preferred Stock, Series C Preferred Stock, and Series B and B1 Preferred Stock are considered participating securities. Basic earnings per common share are calculated by dividing the net income, adjusted for preferred dividends and income allocated to participating securities, by the weighted average numberrules of The Nasdaq Capital Market, such Convertible Senior Notes were not convertible.
Initially, a maximum of 36 million shares of common shares outstanding during the period. Diluted net income per common share reflects the dilutions that would occur if any potential dilutive instruments were exercised or converted into common shares. The dilutive effect of participating securities is calculated using the more dilutivestock can be issued upon conversion of the treasuryConvertible Senior Notes, based on the initial maximum conversion rate of 233.6449 shares of the Company’s common stock method or two-class method. Other potentially dilutive securities include preferredper $1,000 principal amount of Convertible Senior Notes, which is subject to customary and other adjustments described in the Indenture.
On January 20, 2022, our shareholders approved the issuance of shares of our common stock issuable upon conversion of the Convertible Senior Notes, in accordance with Nasdaq Listing Rules 5635 (a) and (d). Accordingly, $79 million of derivative Convertible Senior Note liabilities were reclassified to additional paid in capital.
On May 26, 2022, May 27, 2022, May 31, 2022, and June 1, 2022, holders of an aggregate of $60 million of the Convertible Senior Notes due 2027, converted such notes into 10.2 million shares of common stock options and warrants, and restricted stock. These are included in diluted sharesof the Company pursuant to the extent they are dilutive under the treasury stock method for the applicable periods. During the periods of net loss, no effect is given to the participating securities because they do not share in the lossesterms of the Company.Indenture. Upon the conversion, the Company recognized $33.9 million unamortized deferred loan cost and discount as interest expense.
The components of the Convertible Senior Notes are presented as follows (in thousands):
| | | | | | | | |
| | September 30, 2022 |
| Principal Amounts | | $ | 155,000 | |
| Conversion of principal into common stock | | (59,822) | |
| Outstanding principal amount | | 95,178 | |
| Unamortized discount and issuance costs | | (52,362) | |
| Net Carrying Amount | | $ | 42,816 | |
Our Convertible Senior Notes will mature on October 1, 2027, unless earlier repurchased, redeemed or converted. Interest is payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022.
NOTE 16. LEASES
Finance Leases
The following is a reconciliationCompany's finance leases liabilities consisted of the numeratorfollowing as of September 30, 2022 and denominatorDecember 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Creditor | Loan Type | | | | | | | | Balance on September 30, 2022 | | Balance on December 31, 2021 |
| AVT Equipment Lease-HH | Finance Lease | | | | | | | | $ | — | | | $ | 302 | |
| AVT Equipment Lease-Ohio | Finance Lease | | | | | | | | — | | | 296 | |
| VRA Finance Lease | Finance Lease | | | | | | | | 45,494 | | | — | |
| | | | | | | | | $ | 45,494 | | | $ | 598 | |
Future maturities of finance lease obligations, as of September 30, 2022 are summarized as follows (in thousands):
| | | | | | | | |
| Period Ended September 30, | | Amount Due |
| 2023 | | $ | 1,155 | |
| 2024 | | 1,301 | |
| 2025 | | 1,466 | |
| 2026 | | 1,652 | |
| 2027 | | 1,862 | |
| Thereafter | | 38,058 | |
| Total | | $ | 45,494 | |
On April 1, 2022, the Company entered into one finance lease. Base payments are $0.4 million per month for basicthe first six months, increasing to $0.5 million per month for the next 180 months. The amount of the right of use assets is $43.6 million at September 30, 2022, and diluted earnings per sharethe finance lease obligation is $45.5 million at September 30, 2022. The associated amortization expenses for the three months ended September 30, 2022 and 2021 were $0.7 million and $28.7 thousand, respectively, and are included in depreciation and amortization on the unaudited consolidated statements of operations. The associated interest expense for the three months ended September 30, 2022 and 2021 were $1.4 million and $19.4 thousand, respectively, and are included in interest expense on the unaudited consolidated statements of operations. The associated amortization expenses for the nine months ended September 30, 2022 and 2021 were $0.7 million and $86.0 thousand, respectively, and are included in depreciation and amortization on the unaudited consolidated statements of operations. The associated interest expense for the nine months ended September 30, 2022 and 2021 were $2.7 million and $37 thousand, respectively, and are included in interest expense on the unaudited consolidated statements of operations.
Operating Leases
Operating leases are included in operating lease right-of-use lease assets, and operating current and long-term lease liabilities on the consolidated balance sheets. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Lease expense for equipment is included in cost of revenues and other rents are included in selling, general and administrative expense on the unaudited consolidated statements of operations and are reported net of lease income. Lease income is not material to the results of operations for the three and nine months ended September 30, 2022 and 2021. Total operating lease costs for both the three months ended September 30, 2022 and 2021 were $1.5 million and 2020:$1.4 million, respectively. Total operating lease costs for both the nine months ended September 30, 2022 and 2021 were $4.4 million and $4.2 million, respectively.
Cash Flows
Cash paid for amounts included in operating lease liabilities was $4.4 million and $4.2 million during the nine months ended September 30, 2022 and 2021, respectively, and is included in operating cash flows. Cash paid for amounts included in finance lease was $201 thousand and $409 thousand during the nine months ended September 30, 2022 and 2021, respectively, and is included in financing cash flows.
Maturities of our lease liabilities for all operating leases are as follows as of September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Facilities | | Equipment | | Plant | | Railcar | | Total |
| Year 1 | $ | 715 | | | $ | 262 | | | $ | 4,111 | | | $ | 1,333 | | | $ | 6,421 | |
| Year 2 | 495 | | | 262 | | | 4,111 | | | 1,437 | | | 6,305 | |
| Year 3 | 394 | | | 259 | | | 4,111 | | | 489 | | | 5,253 | |
| Year 4 | 306 | | | 259 | | | 4,111 | | | 305 | | | 4,981 | |
| Year 5 | 300 | | | 234 | | | 4,111 | | | 181 | | | 4,826 | |
| Thereafter | 1,550 | | | — | | | 22,482 | | | — | | | 24,032 | |
| Total lease payments | 3,760 | | | 1,276 | | | 43,037 | | | 3,745 | | | 51,818 | |
| Less: interest | (1,139) | | | (218) | | | (15,728) | | | (773) | | | (17,858) | |
| Present value of operating lease liabilities | $ | 2,621 | | | $ | 1,058 | | | $ | 27,309 | | | $ | 2,972 | | | $ | 33,960 | |
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Basic loss per Share | | | | | | | | |
| Numerator: | | | | | | | | |
| Net income (loss) available to shareholders from continuing operations | | $ | 7,066,459 | | | $ | (3,073,064) | | | $ | (16,747,698) | | | $ | (19,717,769) | |
| Net income (loss) available to shareholders from discontinued operations, net of tax | | 878,357 | | | (1,270,814) | | | 5,281,177 | | | (5,359,079) | |
| Net income (loss) available to common shareholders | | $ | 7,944,816 | | | $ | (4,343,878) | | | $ | (11,466,521) | | | $ | (25,076,848) | |
| Denominator: | | | | | | | | |
| Weighted-average common shares outstanding | | 61,348,508 | | | 45,554,841 | | | 53,963,617 | | | 45,494,235 | |
| Continuing operations | | $ | 0.12 | | | $ | (0.07) | | | $ | (0.31) | | | $ | (0.43) | |
| Discontinued operations, net of tax | | $ | 0.01 | | | $ | (0.03) | | | $ | 0.10 | | | $ | (0.12) | |
| Basic earnings (loss) per share | | $ | 0.13 | | | $ | (0.10) | | | $ | (0.21) | | | $ | (0.55) | |
| | | | | | | | |
| Diluted Earnings per Share | | | | | | | | |
| Numerator: | | | | | | | | |
| Net income (loss) available to shareholders from continuing operations | | $ | 7,066,459 | | | $ | (3,073,064) | | | $ | (16,747,698) | | | $ | (19,717,769) | |
| Net income (loss) available to shareholders from discontinued operations, net of tax | | 878,357 | | | (1,270,814) | | | 5,281,177 | | | (5,359,079) | |
| Net income (loss) available to common shareholders | | $ | 7,944,816 | | | $ | (4,343,878) | | | $ | (11,466,521) | | | $ | (25,076,848) | |
| Denominator: | | | | | | | | |
| Weighted-average shares outstanding | | 61,348,508 | | | 45,554,841 | | | 53,963,617 | | | 45,494,235 | |
| Effect of dilutive securities | | | | | | | | |
| Stock options and warrants | | 2,871,217 | | | — | | | — | | | — | |
| Preferred stock | | 385,601 | | | — | | | — | | | — | |
| Diluted weighted-average shares outstanding | | 64,605,326 | | | 45,554,841 | | | 53,963,617 | | | 45,494,235 | |
| Continuing operations | | $ | 0.11 | | | $ | (0.07) | | | $ | (0.31) | | | $ | (0.43) | |
| Discontinued operations, net of tax | | $ | 0.01 | | | $ | (0.03) | | | $ | 0.10 | | | $ | (0.12) | |
| Diluted earnings (loss) per share | | $ | 0.12 | | | $ | (0.10) | | | $ | (0.21) | | | $ | (0.55) | |
| | | | | | | | |
| Remaining lease term and discount rate: | | September 30, 2022 |
| Weighted average remaining lease terms (years) | | |
| Lease facilities | | 4.79 |
| Lease equipment | | 10.69 |
| Lease plant | | 10.47 |
| Lease railcar | | 3.22 |
| Weighted average discount rate | | |
| Lease facilities | | 9.13 | % |
| Lease equipment | | 7.97 | % |
| Lease plant | | 9.37 | % |
| Lease railcar | | 8.00 | % |
The Company will reassess the lease terms and purchase options when there is a significant change in circumstances or when the Company elects to exercise an option that had previously been determined that it was not reasonably certain to do so.
NOTE 8. COMMON STOCK17. EQUITY
The total numberDuring the nine months ended September 30, 2022, the Company issued 385,593 shares of authorizedcommon stock in connection with the conversion of Series A Convertible Preferred Stock, pursuant to the terms of such securities, issued 1,112,728 shares of the Company’sCompany's common stock is 750,000,000in exchange for warrants to purchase 1,500,000 shares $0.001 par valueof the Company's common stock with an exercise price of $2.25 per share. Asshare, issued 96,074 shares of September 30, 2021, there were 63,003,766the Company's common stock in exchange for warrants to purchase 165,100 shares of the Company's common stock with an exercise price of $4.50 per share on a cash and cashless basis, and issued and outstanding.
During the nine months ended September 30, 2021, the Company issued 15,653,08513,826,010 shares of common stock in connection with the conversion of Series A, Series B and& B1 Convertible Preferred Stock (which has since been fully converted and exerciseterminated) and exercises of warrants into common stock of the Company, pursuant to the terms of such securities. In addition, the Company issued 1,795,840528,368 shares of common stock in connection with the exercise of options.
During the nine months ended September 30, 2020,On March 24, 2022, the Company entered into an Exchange Agreement with Tensile Capital Partners Master Fund LP (the “Holder” and "Tensile"). The Holder agreed to exchange outstanding warrants to purchase 1,500,000 shares of the Company’s common stock with an exercise price of $2.25 per share and an expiration date of July 25, 2029, for 1,112,728 shares of the Company’s common stock, effectively resulting in a net cashless exercise of the warrants (which were cancelled in connection with the transaction), with the value of such surrendered shares based on the five day trailing volume weighted average price of the Company’s common stock.
Warrant Agreement in connection with term loan. On July 11, 2022, the holders of warrants to purchase 165,000 shares of the Company’s common stock exercised warrants to purchase 165,000 shares of the Company's common stock with an exercise price of $4.50 per share and an expiration date of April 1, 2027, on a cashless basis, and were issued 2,159,27895,974 shares of the Company’s common stock, with the value of such surrendered shares based on the five day trailing volume weighted average price of the Company’s common stock.
On July 22, 2022, the holders of warrants to purchase 100 shares of common stock in connectionexercised warrants to purchase 100 shares of the Company's common stock with an exercise price of $4.50 per share and were issued 100 shares of common stock.
Conversion of Convertible Senior Notes. On May 26, 2022, May 27, 2022, May 31, 2022, and June 1, 2022, holders of an aggregate of $59,822,000 of the conversionCompany’s 6.25% Convertible Senior Notes due 2027, converted such notes into 10,165,149 shares of Series B1 Convertible Preferred Stock into common stock of the Company pursuant to the terms of such securities.the Indenture.
Series B Exchange Agreements
On February 23, 2021, the Company entered into a Series B Preferred Stock Exchange Agreement with Pennington Capital LLC, the then holder of sharesConversion of Series BA Preferred Stock, pursuantStock. Pursuant to which the holder exchanged 822,824 sharesprior designation of the rights and preferences of the Series BA Convertible Preferred Stock of the Company, which it held, which had an aggregate liquidation preferenceeach share of $2,550,754 ($3.10 per share), for 1,261,246Series A Convertible Preferred Stock was to be automatically converted into shares of the Company’s common stock (based on an exchange ratio equalof the Company (on a one-for-one basis), automatically and without further action by the Company or any holder, upon the first to approximatelyoccur of certain events, including if the five-day volume-weighted averageclosing price per share of the Company’s common stock on the date the Exchange Agreement was entered into). The Series B Preferred Stock shares were subsequently returned to the Company and cancelled in consideration for the issuance of the 1,261,246 shares of common stock. The Exchange Agreement included customary representations and warranties of the parties. This resulted in a deemed dividend recognition of $267,899 due to more shares being issued than were provided in the original agreement.
On March 2, 2021, the Company entered into a Series B Preferred Stock Exchange Agreement with Carrhae & Co FBO Wasatch Micro Cap Value Fund, the then holder of shares of Series B Preferred Stock, pursuant to which the holder exchanged 708,547 shares of the Series B Preferred Stock of the Company which it held, which had an aggregate liquidation preference of $2,196,496 ($3.10 per share), for 1,098,248 shares of the Company’s common stock (based on an exchange ratio equal to $2.00Nasdaq Capital Market averaged at least $15.00 per share of common stock). The Series B Preferred Stock was returned to the Company and cancelled in consideration for the issuance of the 1,098,248 shares of common stock. The Exchange Agreement included customary representations and warranties of the parties. This resulted inover a deemed dividend recognitionperiod of $362,422 due to more shares being issued than were provided in the original agreement.
As described in ASC 260-10-S99-2, when preferred stock is exchanged, the difference between fair value of the consideration transferred to the holders of the preferred stock and (2) the carrying amount of the preferred stock in the registrant’s balance sheet (net of issuance costs) should be subtracted from (or added to) net income to arrive at income available to common shareholders in the calculation of earnings per share. As a result, the Company recorded a credit to retained earnings with a corresponding debit to additional paid in capital (APIC) of $630,321 which was added to net income to arrive at net income available to common shareholders, as a result of the transactions above.
Series B and B1 Conversions
During the three months ended June 30, 2021, holders our Series B and Series B1 Preferred Stock converted 58,114 and 2,500,000 shares, respectively, of such preferred stock into the same number of shares of common stock, on a 1-for-one basis, pursuant to the terms of such preferred stock.
During the three months ended March 31, 2021, holders our Series B and Series B1 Preferred Stock converted 638,224 and 2,087,195 shares, respectively, of such preferred stock into the same number of shares of common stock, on a 1-for-one basis, pursuant to the terms of such preferred stock.
Series B and B1 Automatic Conversions
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 suchand the daily trading volume over the same 20-day period averaged at least 7,500 shares of Series B Preferred Stock and Series B1 Preferred Stock were to convert automatically into common stock of the Company on a 1-for-one basis (the “Automatic“Automatic Conversion Provisions”Provision”).
Effective on June 24, 2021 (as to the Series B1 Preferred Stock) and June 25, 2021 (as to the Series B Preferred Stock),10, 2022, the Automatic Conversion ProvisionsProvision of the Series BA Convertible Preferred Stock and Series B1 Preferred Stock werewas triggered, and the 374,337 then outstanding shares of the Company’s Series B Preferred Stock and Series B1A Convertible Preferred Stock automatically converted into 374,337 shares of common stock of the Company.
Specifically,Company and on June 10, 2022, all rights of any holder with respect to the 1,783,292 then outstanding shares of the Series BA Convertible Preferred Stock automaticallyso converted, into 1,783,292including the rights, if any, to receive distributions of the Company’s assets terminated, except only for the rights of such holders to receive certificates for the number of whole shares of common stock and the 3,134,889 then outstandinginto which such shares of the Series B1A Convertible Preferred Stock automatically converted into 3,134,889 shares of common stock (or 4,918,181 shares of common stock in total).
NOTE 9. PREFERRED STOCK AND DETACHABLE WARRANTSwere converted.
The total number of authorized shares of the Company’s preferred stock is 50,000,000 shares, $0.001 par value per share. The total number of designated shares of the Company’s Series A Convertible Preferred Stock is 0 and 5,000,000, as of September 30, 2022 and December 31, 2021 (“Series A Preferred”). The total number of designated shares of the Company’s Series B Convertible Preferred Stock is 10,000,000.0 and 10 million, as of September 30, 2022 and December 31, 2021. The total number of designated shares of the Company’s Series B1 Convertible Preferred Stock is 17,000,000.0 and 17,000,000 as of September 30, 2022 and December 31, 2021. The total number of designated shares of Series C Convertible Preferred Stock is 0 and 44,000 as of September 30, 2022 and December 31, 2021. As of September 30, 20212022 and December 31, 2020,2021, there were 385,6010 and 419,859385,601 shares, respectively, of Series A Preferred Stock issued and outstanding. As of September 30, 20212022 and December 31, 2020,2021, there were 4,102,690 and 4,102,690 shares issued and 0 and 4,102,690no shares of Series B, B1 and C Preferred Stock outstanding, respectively. Asoutstanding. On
August 31, 2022, the Company decided to withdraw and terminate the designations of September 30, 2021the Series A, Series B, Series B1 and December 31, 2020, there were 7,399,649Series C preferred stock.
Certificates of Withdrawal of Previously Designated Preferred Stock. The Company filed Certificates of Withdrawal relating to each series of Preferred Stock previously designated with the Secretary of State of Nevada and 7,399,649 shares issued and 0 and 7,399,649 sharesterminated the designation of its Series A Preferred Stock (on August 24, 2022); Series B Preferred Stock (on August 24, 2022); Series B1 Preferred Stock outstanding, respectively.
(on August 23, 2022) and Series BC Preferred Stock (on August 23, 2022). At the time of the filing of the Certificates of Withdrawal, no shares of any of the previously designated series of Preferred Stock were outstanding. The Certificates of Withdrawal were effective upon filing, and Temporary Equityeliminated from our Articles of Incorporation all matters set forth in the previously-filed Certificates of Designation with respect to the previously designated series of Preferred Stock.
NOTE 18. EARNINGS PER SHARE
The following table representsis a reconciliation of the activity related tonumerator and denominator for basic and diluted income (loss) per share for the Series B Preferred Stock, classified as Temporary Equity on the accompanying unaudited consolidated balance sheet, during thethree months and nine months ended September 30, 2022 and 2021 and 2020:
| | | | | | | | | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2021 | | 2020 |
| Balance at beginning of period | $ | 12,718,339 | | | $ | 11,006,406 | |
| Less: conversions of shares to common | (8,446,837) | | | — | |
| Less: exchanges of shares to common | (4,747,250) | | | — | |
| Plus: discount accretion | — | | | 854,364 | |
| | | |
| Plus: dividends in kind | 475,748 | | | 547,349 | |
| | | |
| Balance at end of period | $ | — | | | $ | 12,408,119 | |
At September 30, 2021 and December 31, 2020, a total of $0 and $317,970 of dividends were accrued on our outstanding Series B Preferred Stock, respectively. During the three months ended September 30, 2021 and 2020, we paid dividends in-kind in additional shares of Series B Preferred Stock of $0 and $188,837, respectively. Because such preferred stock was not redeemed on June 24, 2020, the preferred stock accrued a 10% per annum dividend (payable in-kind at the option of the Company), until such preferred stock was redeemed or converted into common stock, which preferred stock was automatically converted into common stock effective on June 25, 2021. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Basic income (loss) per Share | | | | | | | | |
| Numerator: | | | | | | | | |
| Net income (loss) attributable to shareholders from continuing operations | | $ | 17,259 | | | $ | 6,364 | | | $ | (62,764) | | | $ | (16,457) | |
| Net income attributable to shareholders from discontinued operations, net of tax | | 4,975 | | | 1,581 | | | 13,053 | | | 4,732 | |
| Net income (loss) attributable to common shareholders | | $ | 22,234 | | | $ | 7,945 | | | $ | (49,711) | | | $ | (11,725) | |
| Denominator: | | | | | | | | |
| Weighted-average common shares outstanding | | 75,591 | | | 61,349 | | | 69,007 | | | 53,964 | |
| Basic income (loss) per common shares | | | | | | | | |
| Continuing operations | | $ | 0.23 | | | $ | 0.10 | | | $ | (0.91) | | | $ | (0.31) | |
| Discontinued operations, net of tax | | 0.07 | | | 0.03 | | | 0.19 | | | 0.09 | |
| Basic income (loss) per share | | $ | 0.30 | | | $ | 0.13 | | | $ | (0.72) | | | $ | (0.22) | |
| | | | | | | | |
| Diluted Income (Loss) per Share | | | | | | | | |
| Numerator: | | | | | | | | |
| Net income (loss) attributable to shareholders from continuing operations | | $ | 17,259 | | | $ | 6,364 | | | $ | (62,764) | | | $ | (16,457) | |
| Net income available to shareholders from discontinued operations, net of tax | | 4,975 | | | 1,581 | | | 13,053 | | | 4,732 | |
| Net income (loss) available to common shareholders | | $ | 22,234 | | | $ | 7,945 | | | $ | (49,711) | | | $ | (11,725) | |
| Denominator: | | | | | | | | |
| Weighted-average shares outstanding | | 75,591 | | | 61,349 | | | 69,007 | | | 53,964 | |
| Effect of dilutive securities | | | | | | | | |
| Stock options and warrants | | 4,047 | | | 2,871 | | | — | | | — | |
| Preferred stock | | — | | | 385 | | | — | | | — | |
| Diluted weighted-average shares outstanding | | 79,638 | | | 64,605 | | | 69,007 | | | 53,964 | |
| Diluted income (loss) per common shares | | | | | | | | |
| Continuing operations | | $ | 0.22 | | | $ | 0.10 | | | $ | (0.91) | | | $ | (0.31) | |
| Discontinued operations, net of tax | | 0.06 | | | 0.02 | | | 0.19 | | | 0.09 | |
| Diluted income (loss) per share | | $ | 0.28 | | | $ | 0.12 | | | $ | (0.72) | | | $ | (0.22) | |
Series B1 Preferred Stock and Temporary EquityNOTE 19. FAIR VALUE MEASUREMENTS
The following table represents the activity related to the Series B1 Preferred Stock, classifiedtables present assets and liabilities accounted for at fair value on a recurring basis as Temporary Equity on the accompanying unaudited consolidated balance sheet, for the nine months endedof September 30, 2022 and December 31, 2021 and 2020:
| | | | | | | | | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2021 | | 2020 |
| Balance at beginning of period | $ | 11,036,173 | | | $ | 12,743,047 | |
| Less: conversions of shares to common | (12,046,441) | | | (3,368,474) | |
| Plus: discount accretion | 507,282 | | | 646,031 | |
| Plus: dividends in kind | 502,986 | | | 546,557 | |
| Balance at end of period | $ | — | | | $ | 10,567,161 | |
As of September 30, 2021 and December 31, 2020, respectively, a total of $0 and $288,594 of dividends were accrued on our outstanding Series B1 Preferred Stock. During the three months ended September 30, 2021 and 2020, we paid dividends in-kind in additional shares of Series B1 Preferred Stock of $0 and $171,380, respectively. Because such preferred stock was not redeemed on June 24, 2020, the preferred stock accrued a 10% per annum dividend (payable in-kind at the option of the Company), until such preferred stock was redeemed or converted into common stock, which preferred stock was automatically converted into common stock effective on June 24, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Derivative instruments, assets | | | | | | | |
| Commodity | $ | 1,219 | | | $ | — | | | $ | — | | | $ | 1,219 | |
| Derivative instruments, assets | 1,219 | | | — | | | — | | | 1,219 | |
| Derivative instruments, liabilities | | | | | | | |
| Derivative warrants | — | | | — | | | 14,303 | | | 14,303 | |
| Derivative warrants, liabilities | — | | | — | | | 14,303 | | | 14,303 | |
| Total | $ | 1,219 | | | $ | — | | | $ | (14,303) | | | $ | (13,084) | |
| | | | | | | |
| As of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Derivative instruments, assets | | | | | | | |
| Commodity | $ | 96 | | | $ | — | | | $ | — | | | $ | 96 | |
| Derivative instruments, assets | 96 | | | — | | | — | | | 96 | |
| Derivative instruments, liabilities | | | | | | | |
| Derivative warrants | — | | | — | | | 75,211 | | | 75,211 | |
| Derivative warrants, liabilities | — | | | — | | | 75,211 | | | 75,211 | |
| Total | $ | 96 | | | $ | — | | | $ | (75,211) | | | $ | (75,115) | |
The Series B1Level 3 instruments include Initial Warrants wereand Additional Warrants granted in connection with the Loan and Security Agreement, see Note 15 "Long-Term Debt". We revalued the 2,835 thousand warrants granted and outstanding at September 30, 2021 and December 31, 20202022 using the Dynamic Black ScholesBlack-Scholes model that computes the impact of a possible change in control transaction upon the exercise of the warrant shares at approximately $1,072,620 and $330,412, respectively.shares. The Dynamic Black ScholesBlack-Scholes Merton unobservable inputs used were: expected dividend rate of 0%, expected volatility of 66%-202%, risk free interest rate of 4.50% and expected term of 0.25 years. Thewere as follows:
Series B Warrants expired pursuant to their terms on December 24, 2020. The Series B1 Warrants will expire pursuant to their terms on November 13, 2021. | | | | | | | | | | | | | | |
| Dynamic Black-Scholes Merton Unobservable Inputs | | | | |
| | Initial Warrants | | Additional Warrants |
| Expected dividend rate | | — | % | | — | % |
| Expected volatility | | 104.52 | % | | 101 | % |
| Risk free interest rate | | 4.06 | % | | 4.06 | % |
| Expected term | | 5 | | 5.5 |
The following is an analysis of changes in the derivative liability classified as level 3 in the fair value hierarchy for the nine months ended September 30:
| | | | | | | | | | | |
| Level Three Roll-Forward | | | |
| | 2021 | 2020 |
| | | |
| | | |
| | | |
| Balance at beginning of period | | $ | 330,412 | | $ | 1,969,216 | |
| Value of warrants exercised | | (10,637,914) | | — | |
| Change in valuation of warrants | | 11,380,122 | | (1,844,369) | |
| Balance at end of period | | $ | 1,072,620 | | $ | 124,847 | |
| | | |
| | | |
NOTE 10. SEGMENT REPORTING
The Company’s reportable segments include the (1) Black Oil, (2) Refining and Marketing, and (3) Recovery segments.
(1) The Black Oil segment consists primarily 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. | | | | | | | | | |
| Level Three Roll-Forward | | | |
| | 2022 | |
| Balance at beginning of period | | $ | 75,211 | | |
| April 1 warrants granted | | 22,795 | | |
| May 26 warrants granted | | 2,874 | | |
| Equity component of the convertible senior not | | (78,789) | | |
| Change in valuation of warrants included in net income | | (7,788) | | |
| Balance at end of period | | $ | 14,303 | | |
(2) The Refining and Marketing segment consists primarilySee Note 20 "Commodity Derivative Instruments", below for information on the impact on results of the sale of pygas; industrial fuels, which are produced at a third-party facility; and distillates.
(3) 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.
We also disaggregate our revenue by product category for eachoperations of our segments, as we believe such disaggregation helps depict how our revenue and cash flows are affected by economic factors.
Segment information for the three and nine months ended September 30, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2021 |
| | | Black Oil | | Refining &
Marketing | | Recovery | | Total |
| Revenues: | | | | | | | | |
| | | | | | | | |
| Pygas | | $ | — | | | $ | 3,736,534 | | | $ | — | | | $ | 3,736,534 | |
| Industrial fuel | | — | | | 417,096 | | | — | | | 417,096 | |
Distillates (1) | | — | | | 20,418,760 | | | — | | | 20,418,760 | |
| Oil collection services | | 158,676 | | | — | | | | | 158,676 | |
Metals (2) | | — | | | — | | | 3,669,411 | | | 3,669,411 | |
Other re-refinery products (3) | | — | | | — | | | 285,994 | | | 285,994 | |
| VGO/Marine fuel sales | | 288,000 | | | — | | | — | | | 288,000 | |
| Total revenues | | 446,676 | | | 24,572,390 | | | 3,955,405 | | | 28,974,471 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 402,988 | | | 23,897,264 | | | 3,761,246 | | | 28,061,498 | |
| Depreciation and amortization attributable to costs of revenues | | 18,420 | | | 29,844 | | | 78,531 | | | 126,795 | |
| Gross profit (loss) | | 25,268 | | | 645,282 | | | 115,628 | | | 786,178 | |
| Selling, general and administrative expenses | | 3,675,190 | | | 1,034,024 | | | 235,505 | | | 4,944,719 | |
| Depreciation and amortization attributable to operating expenses | | 26,916 | | | — | | | — | | | 26,916 | |
| Loss from operations | | $ | (3,676,838) | | | $ | (388,742) | | | $ | (119,877) | | | $ | (4,185,457) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2020 |
| | | Black Oil | | Refining &
Marketing | | Recovery | | Total |
| Revenues: | | | | | | | | |
| | | | | | | | |
| Pygas | | $ | — | | | $ | 1,184,434 | | | $ | — | | | $ | 1,184,434 | |
| Industrial fuel | | — | | | 82,644 | | | — | | | 82,644 | |
Distillates (1) | | — | | | 12,234,673 | | | — | | | 12,234,673 | |
| Oil collection services | | — | | | — | | | — | | | — | |
Metals (2) | | — | | | — | | | 2,459,561 | | | 2,459,561 | |
Other re-refinery products (3) | | — | | | — | | | — | | | — | |
| VGO/Marine fuel sales | | 288,000 | | | — | | | — | | | 288,000 | |
| Total revenues | | 288,000 | | | 13,501,751 | | | 2,459,561 | | | 16,249,312 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 189,947 | | | 13,217,757 | | | 1,917,210 | | | 15,324,914 | |
| Depreciation and amortization attributable to costs of revenues | | 3,985 | | | 31,829 | | | 79,748 | | | 115,562 | |
| Gross profit | | 94,068 | | | 252,165 | | | 462,603 | | | 808,836 | |
| Selling, general and administrative expenses | | 987,424 | | | 696,611 | | | 148,032 | | | 1,832,067 | |
| Depreciation and amortization attributable to operating expenses | | 26,916 | | | 1,086 | | | — | | | 28,002 | |
| Income (loss) from operations | | $ | (920,272) | | | $ | (445,532) | | | $ | 314,571 | | | $ | (1,051,233) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2021 |
| | Black Oil | | Refining &
Marketing | | Recovery | | Total |
| Revenues: | | | | | | | | |
| | | | | | | | |
| Pygas | | $ | — | | | $ | 10,570,907 | | | $ | — | | | $ | 10,570,907 | |
| Industrial fuel | | — | | | 1,138,311 | | | — | | | 1,138,311 | |
Distillates (1) | | — | | | 55,973,816 | | | — | | | 55,973,816 | |
| Oil collection services | | 436,220 | | | — | | | 3,423 | | | 439,643 | |
Metals (2) | | — | | | — | | | 15,464,375 | | | 15,464,375 | |
Other re-refinery products (3) | | — | | | — | | | 372,424 | | | 372,424 | |
| VGO/Marine fuel sales | | 864,000 | | | — | | | — | | | 864,000 | |
| Total revenues | | 1,300,220 | | | 67,683,034 | | | 15,840,222 | | | 84,823,476 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 1,045,608 | | | 64,503,727 | | | 13,770,343 | | | 79,319,678 | |
| Depreciation and amortization attributable to costs of revenues | | 56,983 | | | 97,658 | | | 204,264 | | | 358,905 | |
| Gross profit (loss) | | 197,629 | | | 3,081,649 | | | 1,865,615 | | | 5,144,893 | |
| Selling, general and administrative expenses | | 9,030,142 | | | 2,481,541 | | | 600,268 | | | 12,111,951 | |
| Depreciation and amortization attributable to operating expenses | | 80,748 | | | — | | | — | | | 80,748 | |
| Income (loss) from operations | | $ | (8,913,261) | | | $ | 600,108 | | | $ | 1,265,347 | | | $ | (7,047,806) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2020 |
| | Black Oil | | Refining &
Marketing | | Recovery | | Total |
| Revenues: | | | | | | | | |
| | | | | | | | |
| Pygas | | $ | — | | | $ | 4,815,040 | | | $ | — | | | $ | 4,815,040 | |
| Industrial fuel | | — | | | 135,396 | | | — | | | 135,396 | |
Distillates (1) | | — | | | 17,359,234 | | | — | | | 17,359,234 | |
| Oil collection services | | — | | | — | | | — | | | — | |
Metals (2) | | — | | | — | | | 7,286,936 | | | 7,286,936 | |
Other re-refinery products (3) | | — | | | — | | | 0 | | — | |
| VGO/Marine fuel sales | | 864,000 | | | — | | | — | | | 864,000 | |
| Total revenues | | 864,000 | | | 22,309,670 | | | 7,286,936 | | | 30,460,606 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | $ | 567,898 | | | $ | 21,750,686 | | | $ | 6,280,290 | | | 28,598,874 | |
| Depreciation and amortization attributable to costs of revenues | | 3,985 | | | 101,152 | | | 222,535 | | | 327,672 | |
| Gross profit | | 292,117 | | | 457,832 | | | 784,111 | | | 1,534,060 | |
| Selling, general and administrative expenses | | 3,780,366 | | | 1,867,028 | | | 396,656 | | | 6,044,050 | |
| Depreciation and amortization attributable to operating expenses | | 44,860 | | | 3,258 | | | — | | | 48,118 | |
| Income (loss) from operations | | $ | (3,533,109) | | | $ | (1,412,454) | | | $ | 387,455 | | | $ | (4,558,108) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) Distillates are finished fuel products such as gasoline and diesel fuels.
(2) 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.
(3) Other re-refinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.
NOTE 11. INCOME TAXES
Our effective tax rate of 0% on pretax income differs from the U.S. federal income tax rate of 21% because of the change in our valuation allowance.
The year to date loss at September 30, 2021 puts the Company in an accumulated loss position for the cumulative 12 quarters then ended. For tax reporting purposes, we have net operating losses (“NOLs”) of approximately $38.9 million as of September 30, 2021 that are available to reduce future taxable income. In determining the carrying value of our net deferred tax asset, the Company considered all negative and positive evidence. The Company has generated pre-tax loss of approximately $2.3 million from January 1, 2021 through September 30, 2021.
NOTE 12.20. COMMODITY DERIVATIVE INSTRUMENTS
The Company utilizes derivative instruments to manage its exposure to fluctuations in the underlying commodity prices of its inventory. The Company’s management sets and implements hedging policies, including volumes, types of instruments and counterparties, to support oil prices at targeted levels and manage its exposure to fluctuating prices.
The Company’s derivative instruments consist of swapoption and futures arrangements for oil. In a commodity swap agreement, if the agreed-upon published third-party index price (“index price”) is lower than the swap fixed price, the Company receives the difference between the index priceFor option and the swap fixed price. If the index price is higher than the swap fixed price, the Company pays the difference. For futures arrangements, the Company receives the difference positive or negative between an agreed-upon strike price and the market price.
The mark-to-market effects of these contracts as of September 30, 20212022 and December 31, 2020,2021, are summarized in the following table. The notional amount is equal to the total net volumetric derivative position during the period indicated. The fair value of the crude oil futures agreements is based on the difference between the strike price and the New York Mercantile Exchange and Brent Complex futures price for the applicable trading months.
| | | | | | | | | | | | | | | | |
| As of September 30, 2021 |
| Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | | Remaining Volume (Barrels) | Fair Value |
| | | | | | |
| | | | | | |
| | | | | | |
| Futures | Sep. 2021- Oct. 2021 | $ | 98.22 | | | | 35,000 | | $ | (155,929) | |
| | | | | | |
| | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | | Remaining Volume (Barrels) | Fair Value |
| | | | | | |
| | | | | | |
| | | | | | |
| Futures | Dec. 2020-Mar. 2021 | $ | 62.33 | | | | 55,000 | | $ | (94,214) | |
| | | | | | |
| | | | | | | | | | | | | | | | |
| As of September 30, 2022 |
| Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | | Remaining Volume (Barrels) | Fair Value |
| | | | | (in thousands) | (in thousands) |
| Swap | Sept. 2022 - Nov. 2022 | $ | 4.51 | | | | 12 | | $ | 54 | |
| Swap | Sept. 2022 - Nov. 2022 | $ | 2.39 | | | | 6 | | $ | 14 | |
| Option | Sept. 2022 - Nov. 2022 | $ | 10.75 | | | | 42 | | $ | 1,075 | |
| Swap | Sept. 2022 - Nov. 2022 | $ | 1.52 | | | | 50 | | $ | 76 | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | | Remaining Volume (Barrels) | Fair Value |
| | | | | (in thousands) | (in thousands) |
| Options | Dec. 2021-Mar. 2022 | $ | 3.18 | | | | 18 | | $ | 136 | |
| Futures | Dec. 2021-Mar. 2022 | $ | 31.59 | | | | 20 | | $ | 71 | |
| Futures | Dec. 2021-Mar. 2022 | $ | 32.48 | | | | 50 | | $ | (111) | |
| | | | | | |
The carrying values of the Company’s derivatives positions and their locations on the consolidated balance sheets as of September 30, 20212022 and December 31, 20202021 are presented in the table below.
| | | | | | | | | | | |
| Balance Sheet Classification | Contract Type | 2021 | 2020 |
| | | |
| | | |
| | | |
| | | |
| Derivative commodity liability | Futures | $ | (155,929) | | $ | (94,214) | |
| | | | | | | | | | | |
| Balance Sheet Classification | Contract Type | 2022 | 2021 |
| | | |
| Crude oil options | $ | 1,075 | | $ | 136 | |
| Crude oil swaps | 144 | | — | |
| Crude oil futures | — | | (40) | |
| Derivative commodity assets | | $ | 1,219 | | $ | 96 | |
For the three months ended September 30, 20212022 and 2020,2021, we recognized a $277,419 loss$11.0 million and a $4,557 gain, respectively, on commodity derivative contracts on the consolidated statements$0.3 million of operations as part of our cost of revenues. For the nine months ended September 30, 2021 and 2020, we recognized a $2,204,606 loss and a $4,489,355 gain, respectively, on commodity derivative contracts on the consolidated statements of operations as part of our cost of revenues.
NOTE 13. LEASES
Finance Leases
Finance leases are included in finance lease right-of-use lease assets and finance lease liability current and long-term liabilities on the unaudited consolidated balance sheets. The associated amortization expenses for the three months ended September 30, 2021 and 2020 were $3,258 and $3,258, respectively, and are included in depreciation and amortization on the unaudited consolidated statements of operations. The associated interest expense for the three months ended September 30, 2021 and 2020 were $0 and $74, respectively, and are included in interest expense on the unaudited consolidated statements of operations. The associated amortization expenses forFor the nine months ended September 30, 2022 and 2021, we recognized $87.2 million and 2020 were $9,774 and $9,774,$2.2 million of loss, respectively, and are included in depreciation and amortizationon commodity derivative contracts on the unaudited consolidated statements of operations. The associated interest expense for the nine months ended September 30, 2021 and 2020 were $16 and $359, respectively, and are included in interest expense on the unaudited consolidated statements of operations. Please see “Note 6. Line of Credit and Long-Term Debt” for more details.Operating Leases
Operating leases are included in operating lease right-of-use lease assets, and operating current and long-term lease liabilities on the consolidated balance sheets. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Lease expense for equipment is included in cost of revenues and other rents are included in selling, general and administrative expense on the unaudited consolidated statements of operations and are reported net of lease income. Lease income is not material to the results of operations for the three and nine months ended September 30, 2021 and 2020. Total operating lease costs for both the three months ended September 30, 2021 and 2020 were $218,176 and $203,969, respectively. Total operating lease costs for both the nine months ended September 30, 2021 and 2020 were $646,310 and $596,449, respectively.
Cash Flows
Cash paid for amounts included in operating lease liabilities, including some small leases with initial terms less than twelve months was $0.4 million and $1.6 million during the nine months ended September 30, 2021 and 2020, and is included in operating cash flows. Cash paid for amounts included in finance lease was $91,893 and $93,438 during the nine months ended September 30, 2021 and 2020, respectively, and is included in financing cash flows.
Maturitiesas part of our lease liabilities for all operating leases are as follows ascost of September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| Facilities | | Equipment | | Plant | | | | Total |
| Year 1 | $ | 214,937 | | | $ | 7,500 | | | $ | 650,257 | | | | | $ | 872,694 | |
| Year 2 | 195,017 | | | 7,500 | | | 650,257 | | | | | 852,774 | |
| Year 3 | 38,400 | | | 7,500 | | | 650,257 | | | | | 696,157 | |
| Year 4 | 38,400 | | | 4,375 | | | 650,257 | | | | | 693,032 | |
| Year 5 | 12,800 | | | — | | | 650,257 | | | | | 663,057 | |
| Thereafter | — | | | — | | | 3,684,844 | | | | | 3,684,844 | |
| Total lease payments | $ | 499,554 | | | $ | 26,875 | | | $ | 6,936,129 | | | | | $ | 7,462,558 | |
| Less: interest | (58,160) | | | (2,626) | | | (2,551,660) | | | | | (2,612,446) | |
| Present value of operating lease liabilities | $ | 441,394 | | | $ | 24,249 | | | $ | 4,384,469 | | | | | $ | 4,850,112 | |
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of September 30, 2021:
| | | | | | | | |
Remaining lease term and discount rate: | | September 30, 2021 |
Weighted average remaining lease terms (years) | | |
Lease facilities | | 5.20 |
Lease equipment | | 0.60 |
Lease plant | | 11.50 |
| | |
Weighted average discount rate | | |
Lease facilities | | 9.05 | % |
Lease equipment | | 8.00 | % |
Lease plant | | 9.37 | % |
| | |
NOTE 21. INCOME TAXESSignificant Judgments
Significant judgments includeOur effective tax rate of 0% on pretax income differs from the discount rates applied,U.S. federal income tax rate of 21% because of the expected lease terms, lease renewal options and residual value guarantees. There are several leases with renewal options or purchase options.change in our valuation allowance.
The purchase optionsyear to date loss at September 30, 2022 puts the Company in an accumulated loss position for the cumulative 12 quarters then ended. For tax reporting purposes, we have net operating losses (“NOLs”) of approximately $106 million as of September 30, 2022 that are not expectedavailable to have a material impact onreduce future taxable income. In determining the lease obligation. There are several facilitycarrying value of our net deferred tax asset, the Company considered all negative and plant leases which have lease renewal optionspositive evidence. The Company has generated pre-tax loss of approximately $29.1 million from January 1, 2022 through September 30, 2022.
one to twenty years.
The largest facility lease hasyear to date loss at September 30, 2021 puts the Company in an initial term through 2032. That lease does notaccumulated loss position for the cumulative 12 quarters then ended. For tax reporting purposes, we have an extension option. The 2 plant leases both have multiple 5-year extension options for a totalNOLs of 20 years. NaN extension options have been included inapproximately $38.9 million as of September 30, 2021 that are available to reduce future taxable income. In determining the lease right-of-usecarrying value of our net deferred tax asset, the Company considered all negative and lease obligation.
positive evidence. The Company will reassess the lease terms and purchase options when there is a significant change in circumstances or when the Company elects to exercise an option that had previously been determined that it was not reasonably certain to do so.generated pre-tax loss of approximately $2.3 million from January 1, 2021 through September 30, 2021.
NOTE 14. SHARE PURCHASE AND SUBSCRIPTION AGREEMENTS22. NON-CONTROLLING INTERESTS
Myrtle Grove Share Purchase and Subscription AgreementFacility
Amounts received by On April 1, 2022, the Company, through Vertex Splitter Corporation (“Vertex Splitter”), a wholly-owned subsidiary of the Company, acquired the 15% noncontrolling interest of Vertex Refining Myrtle Grove LLC (“MG SPV from its direct sale of Class B Units to”) held by Tensile-Myrtle Grove Acquisition Corporation (“Tensile-MG”Tensile-MG”), an affiliate of Tensile Capital Partners Master Fund LP, an investment fund based in San Francisco, California (“Tensile”Tensile”) may only be usedfrom Tensile-Vertex for additional investments$7.2 million, which was based on the value of the Class B Unit preference of MG SPV held by Tensile-MG, plus capital invested by Tensile-MG in MG SPV (which had not been returned as of the date of payment), plus cash and cash equivalents held by Tensile-MG as of the closing date. As a result, the Company acquired 100% of MG SPV, which in turn owns the Company’s former Belle Chasse, Louisiana, re-refining complex (the “MG Refinery”) or for day to day operations at the MG Refinery. At September 30, 2021, $0.05 million reported as cash and cash equivalents on the balance sheet is restricted to MG Refinery investments or operating expenses.
The Class B Unit holders may force MG SPV to redeem the outstanding Class B Units at any time on or after the earlier of (a) the fifth anniversary of July 26, 2019 (the “MG Closing Date”) and (ii) the occurrence of a Triggering Event (defined below)(an “MG Redemption”). The cash purchase price for such redeemed Class B Units 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 Redemption and Vertex Operating (provided that Vertex Operating still owns Class A Units on such date) and (z) the original per-unit price for such Class B Units plus any unpaid Class B preference. The preference is defined as the greater of (A) the aggregate unpaid “Class B 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 Unit holders. The Company did not pay the preferential yield during the nine months ended September 30, 2021. “Triggering Events” mean (a) any dissolution, winding up or liquidation of the Company, Vertex Operating or any significant subsidiary of Vertex Operating, (b) any sale, lease, license or disposition of any material assets of the Company, Vertex Operating or any significant subsidiary of Vertex Operating, (c) any transaction or series of related transactions (whether by merger, exchange, contribution, recapitalization, consolidation, reorganization, combination or otherwise) involving the Company, Vertex Operating or any significant subsidiary of Vertex Operating, the result of which is that the holders of the voting securities of the relevant entity as of the Closing Date are no longer the beneficial owners, in the aggregate, after giving effect to such transaction or series of transactions, directly or indirectly, of more than fifty percent (50%) of the voting power of the outstanding voting securities of the entity, subject to certain other requirements set forth in the MG Company Agreement, (d) the failure to consummate the Heartland Closing (defined below) by June 30, 2020 (a “Failure to Close”), provided that such Heartland Closing was consummated by June 30, 2020, (e) the failure of Vertex Operating to operate MG SPV in good faith with appropriatecomplex.
resources, or (f) the material failure of the Company and its affiliates to comply with the terms of the contribution agreement, whereby the Company contributed assets and operations to MG SPV. No triggering events occurred during the nine months ended September 30, 2021.
Myrtle Grove Redeemable Noncontrolling Interest
As a result of the Share Purchase and Subscription Agreement (the “Interest.MG Share Purchase”), Tensile, through Tensile-Myrtle Grove Acquisition Corporation, acquired an approximate 15.58% ownership interest in Vertex Refining Myrtle Grove LLC, a Delaware limited liability company, which entity was formed as a special purpose vehicle in connection with the transactions. This is considered a redeemable noncontrolling equity interest, as it is redeemable in the future and not solely within our control.
After initial recognition, in In accordance with ASC 480-10-S99-3A, the Company applied a two-step approach to measure noncontrolling interests associated with MG SPV at the balance sheet date. First, the Company applied the measurement guidance in ASC 810-10 by attributing a portion of the subsidiary’s net loss of $200,218$38 thousand to the noncontrolling interest. Second, the Company applied the subsequent measurement guidance in ASC 480-10-S99-3A, which indicates that the noncontrolling interest’s carrying amount is the higher of (1) the cumulative amount that would result from applying the measurement guidance in ASC 810-10 in the first step or (2) the redemption value. Pursuant to ASC 480-10-S99-3A, for a security that is probable of becoming redeemable in the future, the Company adjusted the carrying amount of the redeemable noncontrolling interests to what would be the redemption value assuming the security was redeemable at the balance sheet date. This accretion adjustment of $1,176,683$0.4 million increased the carrying amount of redeemable noncontrolling interests to the redemption value as of September 30, 2021April 1, 2022 of $6,449,306.$7.2 million. Adjustments to the carrying amount of redeemable noncontrolling interests to redemption value are reflected in retained earnings.
The table below presents the reconciliation of changes in redeemable noncontrolling interest relating to MG SPV as of September 30, 2022 and 2021 and 2020.(in thousands):
| | | September 30, 2021 | September 30, 2020 | | | September 30, 2022 | September 30, 2021 | |
| Beginning balance | Beginning balance | $ | 5,472,841 | | $ | 4,396,894 | | | Beginning balance | $ | 6,812 | | $ | 5,473 | | |
| | Net loss attributable to redeemable non-controlling interest | Net loss attributable to redeemable non-controlling interest | (200,218) | | (120,031) | | | Net loss attributable to redeemable non-controlling interest | (38) | | (200) | | |
| Change in ownership | — | | 71,171 | | | |
| | Accretion of non-controlling interest to redemption value | Accretion of non-controlling interest to redemption value | 1,176,683 | | 833,354 | | | Accretion of non-controlling interest to redemption value | 428 | | 1,176 | | |
| Redemption of non-controlling interest | | Redemption of non-controlling interest | (7,202) | | — | | |
| Ending balance | Ending balance | $ | 6,449,306 | | $ | 5,181,388 | | | Ending balance | $ | — | | $ | 6,449 | | |
Heartland Share Purchase and Subscription AgreementRe-refining Complex
On January 17, 2020 (the “Heartland Closing Date”),May 26, 2022, the Company, through Vertex Operating,Splitter acquired the 65% noncontrolling interest of Heartland SPV held by Tensile-Heartland Acquisition Corporationfrom Tensile-Vertex Holdings LLC (“Tensile-Heartland”Tensile-Vertex”), an affiliate of Tensile and solely for $43.5 million, which was based on the purposes of a guaranty, the Company, and Heartland SPV, entered into a Share Purchase and Subscription Agreement (the “Heartland Share Purchase”).
Prior to entering into the Heartland Share Purchase, the Company transferred 100%value of the ownership of Vertex Refining OH, LLC, its indirect wholly-owned subsidiary to Heartland SPV in consideration for 13,500 Class A Units, 13,500 Class A-1 Preferred Units and 11,300 Class B UnitsUnit preference of Heartland SPV and immediately thereafter contributed 248 Class B Units to the Company’s wholly-owned subsidiary, Vertex Splitter Corporation, a Delaware corporation (“Vertex Splitter”), as a contribution to capital.
Vertex OH owns the Company’s Columbus, Ohio, Heartland facility, which produces a base oil product that is sold to lubricant packagers and distributors.
Pursuant to the Heartland Share Purchase, Vertex Operating soldheld by Tensile-Heartland, the 13,500 Class A Units and 13,500 Class A-1 Preferred Units ofplus capital invested by Tensile-Heartland in Heartland SPV in consideration for $13.5 million. Also, on(which had not been returned as of the Heartland Closing Date, Tensile-Heartland purchased 7,500 Class A Unitsdate of payment), plus cash and 7,500 Class A-1 Units in consideration for $7.5 million (less the expenses of Tensile-Heartland in connection with the transaction) directly from Heartland SPV.
Concurrently withTensile-Heartland as of the closing of the transactions described above, and pursuant to the terms of the Heartland Share Purchase, the Company, through Vertex Operating, purchased 1,000 newly issued Class A Units from MG SPV at a cost of $1,000 per unit ($1 million in aggregate).date. As a result, of this transaction, MG SPV is owned 85.00% by Vertex Operating and 15.00% by Tensile-MG.
The Heartland Share Purchase provides Tensile-Heartland an option, exercisable at its election, at any time, subject to the terms of the Heartland Share Purchase, to purchase up to an additional 7,000 Class A-2 Preferred Units at a cost of $1,000 per Class A-2 Preferred Unit from Heartland SPV.
The Heartland SPV is currently owned 35% by Vertex Operating and 65% by Tensile-Heartland. Heartland SPV is managed by a 5-member Board of Managers, of which 3 members are appointed by Tensile-Heartland and 2 are appointed by the Company. The Class A Units held by Tensile-Heartland are convertible into Class B Units as provided in the Limited Liability Company Agreementacquired 100% of Heartland SPV, (the “Heartland Company Agreement”), based on a conversion price (initially 1-for-one) which may be reduced from time to time if new Units of Heartland SPV are issued and will automatically convert into Series B Units upon certain events described in the Heartland Company Agreement.
The Class A-1 and A-2 Preferred Units (“Class A Preferred Units”), which are 100% owned by Tensile-Heartland, accrue a 22.5% per annum preferred return subject to terms of the Heartland Company Agreement (the “Class A Yield”).
Additionally, the Class A Unit holders (common and preferred) may force Heartland SPV to redeem the outstanding Class A Units at any time on or after the earlier of (a) the fifth anniversary of the Heartland Closing Date and (b) the occurrence of a Heartland Triggering Event (defined below)(a “Heartland Redemption”). The cash purchase price for such redeemed Class A Unit will be 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 Heartland Redemption and Vertex Operating (provided that Vertex Operating stillturn owns Class B Units on such date) and (z) the original per-unit price for such Class A Units plus any unpaid Class A preference. The Class A preference is defined as the greater of (A) the aggregate unpaid Class A yield and (B) an amount equal to fifty percent (50%) of the aggregate capital invested by the Class A Unit holders through such Heartland Redemption date. “Heartland Triggering Events” include (a) any termination of an Administrative Services Agreement entered into with Tensile, pursuant to its terms and/or any material breach by us of the environmental remediation and indemnity agreement entered into with Tensile, (b) any dissolution, winding up or liquidation of the Company, Vertex Operating or any significant subsidiary of Vertex Operating, (c) any sale, lease, license or disposition of any material assets of the Company, Vertex Operating or any significant subsidiary of Vertex Operating, or (d) any transaction or series of related transactions (whether by merger, exchange, contribution, recapitalization, consolidation, reorganization, combination or otherwise) involving the Company, Vertex Operating or any significant subsidiary of Vertex Operating, the result of which is that the holders of the voting securities of the relevant entity as of the Heartland Closing Date are no longer the beneficial owners, in the aggregate, after giving effect to such transaction or series of transactions, directly or indirectly, of more than fifty percent (50%) of the voting power of the outstanding voting securities of the entity, subject to certain other requirements set forth in the Heartland Company Agreement.
In the event that Heartland SPV fails to redeem such Class A Units within 180 days after a redemption is triggered, the Class A Yield is increased to 25% until such time as such redemption is completed (with such increase being effective back to the original date of a notice of redemption). In addition, in such event, the Class A Unit holders may cause Heartland SPV to initiate a process intended to result in a sale of Heartland SPV.
Distributions of available cash of Heartland SPV pursuant to the Heartland Company Agreement (including pursuant to liquidations of Heartland SPV), subject to certain exceptions set forth therein, are to be made (a) first, to the holders of the Class A Preferred Units, in an amount equal to the Class A preference; (b) second, the Class A Preferred Unit holders, together as a separate and distinct class, are entitled to receive an amount equal to the aggregate Heartland Invested Capital; (c) third, the Class B Unitholders (other than Class B Unitholders which received Class B Units upon conversion of Class A Preferred Units), together as a separate and distinct class, are entitled to receive all or a portion of any distribution equal to the sum of all distributions made under sections (a) and (b) above; and (d) fourth, to the holders of Units who are eligible to receive such distributions in proportion to the number of Units held by such holders.
Heartland Variable interest entity
The Company has assessed the Heartland SPV under the variable interest guidance in ASC 810. The Company determined that the Class A Units are not at risk due to a 22.5% preferred return and a redemption provision that, if elected, would require Heartland SPV to repurchase the Class A Units at their original cost plus the preferred return. The Company further determined that as a minority shareholder, holding only 35% of the voting rights, the Company does not have the ability to direct the
activities of Heartland SPV that most significantly impact the entity’s performance. Based on this assessment, the Company concluded that Heartland SPV is a variable interest entity.
In assessing if the Company is the primary beneficiary of Heartland SPV, the Company determined that certain provisions of the Heartland Company Agreement prohibiting the transfer of its Class B Units result in the Class A Unit holders being related parties under the de facto agents criteria in ASC 810. The Company and the Class A Unit holders, as a group, have the power to direct the significant activities of Heartland SPV and the obligations to absorb the losses and the right to receive the benefits that could potentially be significant to Heartland SPV. The Company concluded that substantially all of the activities of Heartland SPV are conducted on its behalf, and not on behalf of the Class A Unit holders, the decision maker, thus the Company is the primary beneficiary and required to consolidate Heartland SPV in accordance with ASC 810.
The Company’s consolidated financial statements include the assets, liabilities and results of operations of Heartland SPV for which the Company is the primary beneficiary. The other equity holders’ interests are reflected in net loss attributable to noncontrolling interests and redeemable noncontrolling interest in the consolidated statements of income and noncontrolling interests in the consolidated balance sheets.
The following table summarizes the carrying amounts of Heartland SPV’s assets and liabilities included in the Company’s consolidated balance sheets at September 30, 2021 and December 31, 2020:
| | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Cash and cash equivalents | $ | 7,229,786 | | $ | 7,890,886 | |
| Accounts receivable, net | 7,601,929 | | 3,591,468 | |
| | |
| Inventory | 927,810 | | 629,667 | |
| Prepaid expense and other current assets | 1,567,763 | | 926,203 | |
| Total current assets | 17,327,288 | | 13,038,224 | |
| | |
| Fixed assets, net | 7,290,467 | | 6,549,139 | |
| Finance lease right-of-use assets | 805,313 | | 1,031,353 | |
| Operating lease right-of-use assets | 237,217 | | 299,758 | |
| Intangible assets, net | 876,440 | | 1,064,624 | |
| Other assets | 106,643 | | 108,643 | |
| Total assets | $ | 26,643,368 | | $ | 22,091,741 | |
| | |
| Accounts payable | $ | 2,290,245 | | $ | 1,753,160 | |
| Accrued expenses | 630,442 | | 307,340 | |
| Finance lease liability-current | 692,274 | | 346,029 | |
| Operating lease liability-current | 181,644 | | 251,037 | |
| Total current liabilities | 3,794,605 | | 2,657,566 | |
| | |
| Finance lease liability-long term | — | | 643,446 | |
| Operating lease liability-long term | 55,573 | | 48,721 | |
| Total liabilities | $ | 3,850,178 | | $ | 3,349,733 | |
The assets of Heartland SPV may only be used to settle the obligations of Heartland SPV, and may not be used for other consolidated entities. The liabilities of Heartland SPV are non-recourse to the general credit of the Company’s other consolidated entities.
Heartland Redeemable Noncontrolling Interest
As a result of the Heartland Share Purchase (as defined and discussed above), Tensile, through Tensile-Heartland, acquired an approximate 65.00% ownership interest in Heartland SPV, a Delaware limited liability company, which entity was formed as a special purpose vehicle in connection with the transactions. This is considered a redeemable noncontrolling equity interest, as it is redeemable in the future and not solely within our control.
The initial carrying amount that is recognized in temporary equity for redeemable noncontrolling interests is the initial carrying amount determined in accordance with the accounting requirements for noncontrolling interests in ASC 810-10.. In accordance with ASC 810-10-45-23, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary are accounted for as equity transactions. Therefore, the Company recognized no gain or loss in consolidated net income and the carrying amount of the noncontrolling interest was adjusted to reflect the change in our ownership interest of the subsidiary. The difference of $9,091,068 between the fair value of the consideration received of $21,000,000 and the carrying amount of the noncontrolling interest determined in accordance with ASC 810-10 of $11,908,932, was recognized in additional paid in capital.
After initial recognition, in accordance with ASC 480-10-S99-3A, the Company applied a two-step approach to measure noncontrolling interests associated with Heartland SPV at the balance sheet date. First, the Company applied the measurement guidance in ASC 810-10 by attributing a portion of the subsidiary’s net income of $7,183,268$6.8 million to the noncontrolling interest. Second, the Company applied the subsequent measurement guidance in ASC 480-10-S99-3A, which indicates that the noncontrolling interest’s carrying amount is the higher of (1) the cumulative amount that would result from applying the measurement guidance in ASC 810-10 in the first step or (2) the redemption value. At September 30, 2021,May 26, 2022, the cumulative amount resulting from the application of the measurement guidance in ASC 810-10 exceededwas $43.5 million. On May 26, 2022, the redemption value of $30,802,527.Company acquired a 65% interest in Heartland SPV from Tensile for $43.5 million.
The table below presents the reconciliation of changes in redeemable noncontrolling interest relating to Heartland SPV as of September 30, 2022 and 2021 and 2020.(in thousands):
| | | September 30, 2021 | September 30, 2020 | | September 30, 2022 | September 30, 2021 |
| Beginning balance | Beginning balance | $ | 26,138,833 | | $ | — | | Beginning balance | $ | 36,635 | | $ | 26,139 | |
| | Initial adjustment of carrying amount of non-controlling interest | — | | 11,908,932 | | |
| | Net income attributable to redeemable non-controlling interest | Net income attributable to redeemable non-controlling interest | 7,183,268 | | 35,449 | | Net income attributable to redeemable non-controlling interest | 6,829 | | 7,183 | |
| Accretion of non-controlling interest to redemption value | — | | 12,802,442 | | |
| Redemption of non-controlling interest | | Redemption of non-controlling interest | (43,464) | | — | |
| Ending balance | Ending balance | $ | 33,322,101 | | $ | 24,746,823 | | Ending balance | $ | — | | $ | 33,322 | |
The amount of accretion of redeemable noncontrolling interest to redemption value of $1,176,683 is$0.4 million and $1.1 million are presented as an adjustment to net income (loss) attributable to Vertex Energy, Inc., to arrive at net income available(loss) attributable to common shareholders on the consolidated statements of operations which represent the MG SPV and Heartland SPV accretion of redeemable noncontrolling interest to redemption value combined for the nine months ended September 30, 2021.
Vertex currently plans to use the proceeds from the sale of UMO Business to pay amounts required to be paid to Tensile in connection with the Company’s planned acquisition of the ownership interests of Tensile held indirectly in two special purpose entities as described above.
Tensile Transactions
On July 1,2022 and 2021, the Operating Agreement of MG SPV was amended to provide that from the date of such agreement until December 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 (after December 31, 2021), at $1,000 per unit (the “MG SPV Amendment”).
On July 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 described below (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 above.
NOTE 15.23. DISCONTINUED OPERATIONS
During the third quarter of 2021, the Company initiated and began executing a strategic plan to sell its UMO Business. An investment banking advisory services firm was engaged and actively marketed this segment. On September 28, 2021, the shareholders approved the proposed sale of its portfolio of used motor oil collection and recycling assets to Safety-Kleen.Safety-Kleen pursuant to the UMO Sale Agreement discussed below.
On January 25, 2022, the Company entered into a mutual agreement with Safety-Kleen to terminate the UMO Sale Agreement. In connection with the termination agreement, the Company paid Safety-Kleen a break-up fee of $3 million.
The Company met allVertex is continuing to explore opportunities for the sale of the criteriaUMO Business. Subsequent to classify the April 1, 2022 acquisition of the Mobile Refinery, our UMO Business’sBusiness operations no longer consist of ‘all or substantially all’ of our assets and liabilities as heldsuch, we have determined that the sale of such operations does not reach a level that would require shareholder approval if sold under Nevada law. As such, the requirement to obtain shareholder approval for any subsequent sale in the third quarter 2021. The Company has classified the assets, liabilities, and results of operations for this business as “Discontinued Operations” for all periods presented.
Disposal of the UMO Business representedis no longer necessary.
The Company is still exploring opportunities to sell the UMO Business and believes it will sell such assets within a strategic shift that will haveyear. As of the day of this filing, the Company is in ongoing discussions with a major effect onthird party regarding a potential sale of the Company’sHeartland Business and has accordingly presented only this division as discontinued operations while reclassifying the other UMO Business operations out of assets held for sale, and all liabilities of the UMO Business out of liabilities held for sale, other than in connection with the Heartland Business. The following summarized financial results.information has been reclassified as continued operations for the six months ended June 30, 2022 and 2021 (in thousands):
On June 29, 2021, the Company announced that it had entered into a definitive agreement to sell its portfolio of used motor oil collection and recycling assets (the UMO business) to Safety-Kleen, a subsidiary of Clean Harbors, Inc. (“Clean Harbors”) for total cash consideration of $140 million, subject to working capital and other adjustments, and subject to certain closing conditions, including regulatory approvals and a shareholder vote. After retiring term debt, together with the payment of transaction-related fees and financial obligations, total net cash proceeds from the transaction to Vertex are expected to be approximately $90 million.
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Assets held for sale to assets held and used | $ | 81,616 | | | $ | 74,046 | |
| Liabilities held for sale to liabilities held and paid | $ | (35,507) | | | $ | (37,645) | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Net income from discontinued operations to continued operation | $ | 16,736 | | | $ | 1,284 | |
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the three months and nine months ended September 30, 2022, and 2021 and 2020.(in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | Revenues | $ | 36,950,919 | | | $ | 21,422,320 | | | $ | 104,956,817 | | | $ | 65,364,581 | | Revenues | $ | 22,153 | | | $ | 14,507 | | | $ | 63,534 | | | $ | 41,039 | |
| Cost of revenues (exclusive of depreciation shown separately below) | Cost of revenues (exclusive of depreciation shown separately below) | 26,867,718 | | | 15,861,769 | | | 71,860,804 | | | 51,622,468 | | Cost of revenues (exclusive of depreciation shown separately below) | 14,306 | | | 8,638 | | | 36,077 | | | 23,124 | |
| Depreciation and amortization attributable to costs of revenues | Depreciation and amortization attributable to costs of revenues | 1,294,157 | | | 971,258 | | | 3,803,216 | | | 3,175,134 | | Depreciation and amortization attributable to costs of revenues | 391 | | | 393 | | | 1,170 | | | 1,160 | |
| Gross profit | Gross profit | 8,789,044 | | | 4,589,293 | | | 29,292,797 | | | 10,566,979 | | Gross profit | 7,456 | | | 5,476 | | | 26,287 | | | 16,755 | |
| Operating expenses: | Operating expenses: | | Operating expenses: | |
Selling, general and administrative expenses
(exclusive of acquisition related expenses) | 4,938,494 | | | 4,697,503 | | | 15,099,782 | | | 13,792,598 | | |
| Selling, general and administrative expenses (exclusive of depreciation shown separately below) | | Selling, general and administrative expenses (exclusive of depreciation shown separately below) | 2,418 | | | 1,418 | | | 6,213 | | | 4,606 | |
| Depreciation and amortization expense attributable to operating expenses | Depreciation and amortization expense attributable to operating expenses | 455,953 | | | 681,209 | | | 1,367,859 | | | 1,593,115 | | Depreciation and amortization expense attributable to operating expenses | 63 | | | 63 | | | 188 | | | 188 | |
| Total Operating expenses | 5,394,447 | | | 5,378,712 | | | 16,467,641 | | | 15,385,713 | | |
| Income (loss) from operations | 3,394,597 | | | (789,419) | | | 12,825,156 | | | (4,818,734) | | |
| Other income (expense) | | |
| Total operating expenses | | Total operating expenses | 2,481 | | | 1,481 | | | 6,401 | | | 4,794 | |
| Income from operations | | Income from operations | 4,975 | | | 3,995 | | | 19,886 | | | 11,961 | |
| Other income (expense) | Other income (expense) | — | | | — | | | — | | | 101 | | Other income (expense) | |
| | | Interest expense | Interest expense | (116,099) | | | (137,514) | | | (360,711) | | | (504,997) | | Interest expense | — | | | (14) | | | (4) | | | (46) | |
| Total other income (expense) | (116,099) | | | (137,514) | | | (360,711) | | | (504,896) | | |
| Income (loss) before income tax | 3,278,498 | | | (926,933) | | | 12,464,445 | | | (5,323,630) | | |
| Total other expense | | Total other expense | — | | | (14) | | | (4) | | | (46) | |
| Income before income tax | | Income before income tax | 4,975 | | | 3,981 | | | 19,882 | | | 11,915 | |
| Income tax benefit (expense) | Income tax benefit (expense) | — | | | — | | | — | | | — | | Income tax benefit (expense) | — | | | — | | | — | | | — | |
| Income (loss) from discontinued operations, net of tax | 3,278,498 | | | $ | (926,933) | | | $ | 12,464,445 | | | $ | (5,323,630) | | |
| Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | $ | 4,975 | | | $ | 3,981 | | | $ | 19,882 | | | $ | 11,915 | |
The assets and liabilities held for sale on the Consolidated Balance Sheets as of September 30, 20212022 and December 31, 20202021 are as follows (in thousands):
| | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 | |
| ASSETS | | | | |
| Accounts receivable, net | $ | 10,756,838 | | | $ | 6,280,086 | | |
| Inventory | 6,119,150 | | | 2,981,551 | | |
| Prepaid expenses | 370,184 | | | 1,269,310 | | |
| Property and equipment, at cost | 32,188,708 | | | — | | |
| Finance lease right-of-use assets | 1,209,827 | | | — | | |
| Operating lease right-of use assets | 28,898,931 | | | — | | |
| Intangible assets, net | 7,563,036 | | | — | | |
| Other assets | 563,493 | | | — | | |
| Total current assets | 87,670,167 | | | 10,530,947 | | |
| | | | |
| Property and equipment, at cost | — | | | 32,517,979 | | |
| Finance lease right-of-use assets | — | | | 1,518,611 | | |
| Operating lease right-of use assets | — | | | 28,581,379 | | |
| Intangible assets, net | — | | | 8,930,895 | | |
| Other assets | — | | | 615,293 | | |
| Total noncurrent assets | — | | | 72,164,157 | | |
| | | | |
| Assets held for sale | $ | 87,670,167 | | | $ | 82,695,104 | | |
| | | | |
| LIABILITIES AND EQUITY | | | | |
| Current liabilities | | | | |
| Accounts payable | $ | 6,824,664 | | | $ | 8,065,368 | | |
| Accrued expenses | 2,355,719 | | | 1,072,873 | | |
| | | | |
| Finance lease liability-current | 686,402 | | | 373,529 | | |
| Operating lease liability-current | 28,898,931 | | | 4,831,038 | | |
| | | | |
| | | | |
| Total current liabilities | 38,765,716 | | | 14,342,808 | | |
| | | | |
| Finance lease liability-noncurrent | — | | | 630,099 | | |
| Operating lease liability-noncurrent | — | | | 23,750,341 | | |
| | | | |
| Total noncurrent liabilities | — | | | 24,380,440 | | |
| | | | |
| Liabilities held for sale | $ | 38,765,716 | | | $ | 38,723,248 | | |
| | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | |
| ASSETS | | | | |
| | | | |
| Inventory | $ | 2,190 | | | $ | 1,253 | | |
| Prepaid expenses | 317 | | | 163 | | |
| Total current assets | 2,507 | | | 1,416 | | |
| | | | |
| Fixed assets, at cost | 17,658 | | | 15,451 | | |
| Less accumulated depreciation | (9,140) | | | (8,047) | | |
| Fixed assets, net | 8,518 | | | 7,404 | | |
| Finance lease right-of-use assets | — | | | 436 | | |
| | | | |
| Intangible assets, net | 626 | | | 814 | | |
| | | | |
| Assets held for sale | $ | 11,651 | | | $ | 10,070 | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
The
NOTE 24. RELATED PARTY TRANSACTIONS
Related Parties
From time to time, the Company consults Ruddy Gregory, PLLC., a related party law firm of which James Gregory, a member of the Board of Directors, consideredserves as a numberpartner. During the nine months ended September 30, 2022 and 2021, we paid $0.5 million and $0.6 million, respectively, to such law firm for services rendered, which services include the drafting and negotiation of, factors before deciding to enter intoand due diligence associated with, the Sale Agreement including, among other factors, the price to be paid by Safety-Kleen for the UMO Business, the scope of the sale process with respect to the UMO Business that led to entering into the Saleand Refinery Purchase Agreement the future business prospects of the UMO Business,(defined and discussed above), and related transactions, including the costs to remain competitiveLoan and grow, the opinion of H.C. Wainwright & Co., LLC that the terms were fair, from a financial point of view, the planned acquisition of the Mobile Refinery,Security Agreement and the planned change in business focus associated therewith,Supply and the terms and conditions of the Sale Agreement.
The Company met all of the criteria to classify the UMO Business’s assets and liabilities as held for sale in the third quarter 2021. The Company has classified the assets, liabilities, and results of operations for this business as “Discontinued Operations” for all periods presented.
Disposal of the UMO business represented a strategic shift that would have a major effect on the Company’s operations and financial results.
NOTE 16.25. SUBSEQUENT EVENTS
Indenture and Convertible Notes
On NovemberOctober 1, 2021, we issued $155.02022, a total of $3 million aggregate principal amount at maturity of interest was paid on our 6.25%outstanding Convertible Senior Notes due 2027 (the “Convertible Notes”) pursuant to an Indenture (the “Indenture”), dated November 1,2021, between the Company and U.S. Bank National Association, as trustee (the “Trustee”), in a private offering (the “Note Offering”) to persons reasonably believed to be “qualified institutional buyers” and/or to “accredited investors” in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act, pursuant to Securities Purchase Agreements.
The net proceeds from the offering, after deducting placement agent fees and estimated offering costs and expenses payable by the Company, were approximately $133.9 million. The Company intends to use approximately (1) $33.7 million of the net proceeds from the offering to fund a portion of the funds payable in connection with the Refinery Purchase Agreement, (2) $13.0 million of the net proceeds from the offering for engineering services and for the initial payments of purchase orders for long lead-time equipment associated with a capital project designed to modify the Mobile Refinery’s hydrocracking unit to produce renewable diesel in advance of the purchase, (3) $10.9 million of the net proceeds from the offering to repay amounts owed by the Company under its credit facilities with Encina Business Credit, LLC and certain of its affiliates, and (4) $0.4 million of the net proceeds to repay certain secured equipment leases with certain affiliates of Wells Fargo Bank, National Association. The Company intends to use the remainder of the net proceeds for working capital and other general corporate purposes. which may include debt retirement and organic and inorganic growth initiative, provided that the Company has no current specific plans for such uses.
Key terms of the Convertible Notes are as follows:
•Issue price – 90% of the face amount of each Note.
•Interest rate of 6.25% – The Convertible Notes will bear interest at a rate of 6.25% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022.
•Conversion price of approximately $5.89 – The Convertible Notes will be convertible at an initial conversion rate of 169.9235 shares of Vertex Energy’s common stock, per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $5.89 per share, which represents a conversion premium of approximately 37.5% to the last reported sale price of $4.28 per share of the Company’s common stock on The Nasdaq Capital Market on October 26, 2021).
•Maturity date –The Convertible Notes will mature on October 1, 2027, unless earlier repurchased, redeemed or converted.
•Conversion – Prior to July 1, 2027, the Convertible Notes will be convertible at the option of the holders of the Convertible Notes only upon the satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.
•Cash settlement of principal amount in connection with conversions – Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election, provided that until such time as the Company’s stockholders have approved the issuance of more than 19.99% of our common stock issuable upon conversion of the Convertible Notes in accordance with the rules of The Nasdaq Capital Market, the Company is required to elect “cash settlement” for all conversions of the Convertible Notes.
•Limited investor put rights – Holders of the Convertible Notes will have the right to require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the accreted principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding the repurchase date, upon the occurrence of certain change of control transactions or liquidation, dissolution or common stock delisting events (collectively, a “fundamental change”), subject to certain conditions.
•Optional Redemption – Prior to October 6, 2024, the Convertible Notes will not be redeemable at the Company’s option. On a redemption date occurring on or after October 6, 2024 and on or before the 30 scheduled trading day before the maturity date, the Company may redeem for cash all or part of the Convertible Notes (subject to certain
restrictions), at its option, if the last reported sale price of our Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the redemption notice date at a redemption price equal to 100% of the accreted principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No “sinking fund” is provided for the Convertible Notes, which means that we are not required to redeem or retire the Convertible Notes periodically.
•Escrow of proceeds; special mandatory redemption. A total of seventy-five percent (75%) of the net proceeds from the offering were placed into an escrow account to be released to the Company, upon the satisfaction of certain conditions, including the satisfaction or waiver of all of the conditions precedent to the Company’s obligation to consummate the Mobile Acquisition (collectively, the “Escrow Release Conditions”). If the Mobile Acquisition is not consummated on or prior to April 1, 2022, if the Company has not certified to the escrow agent that all conditions precedent to the Company’s obligations to consummate the Mobile Acquisition have been satisfied, or if the Company notifies the trustee and the escrow agent in writing that the agreement relating to the purchase of the Mobile Refinery has been terminated, the Convertible Notes will be subject to a special mandatory redemption equal to 100% of the accreted principal amount of the Convertible Notes, plus accrued and unpaid interest to, but excluding, the special mandatory redemption date, plus interest that would have accrued on the Convertible Notes from the special mandatory redemption date to, and including, the date that is nine (9) months after the special mandatory redemption date. If the Escrow Release Conditions have been satisfied or waived, the Company can request that the escrowed funds be released to the Company.
•Conversion rate increase in certain customary circumstances – The Company will also be required to increase the conversion rate for holders who convert their Convertible Notes in connection with a fundamental change and certain other corporate events or convert their Convertible Notes called for optional redemption (or deemed called for redemption) following delivery by the Company of a notice of optional redemption, in either case, in certain circumstances.
The Convertible Notes are Vertex Energy’s senior unsecured obligations.
The Indenture contains additional customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Convertible Notes then outstanding may declare the entire principal amount of all the Convertible Notes plus accrued and unpaid interest, if any, to be immediately due and payable, provided that in the case of an event of default with respect to the Convertible Notes arising from specified events of bankruptcy or insolvency, 100% of the principal of and accrued and unpaid special interest, if any, on the Convertible Notes will automatically become due and payable.
The Company may elect that the sole remedy for an event of default relating to a failure by it to comply with certain reporting obligations set forth in the Indenture, will after the occurrence of such an event of default consist exclusively of the right to receive additional interest on the Convertible Notes at a rate equal to (i) 1.00% per annum of the principal amount of the Convertible Notes outstanding for each day during the period beginning on, and including, the date on which such event of default first occurred and ending on the earlier of (x) the date on which such event of default is cured or validly waived and (y) the 365th day immediately following, and including, the date on which such event of default first occurred. On the 366th day after such event of default (if the event of default relating to the reporting obligations is not cured or waived prior to such 366th day), the Trustee by notice to us, or the holders of at least 25% in principal amount of the outstanding Convertible Notes by notice to us and the Trustee, may declare 100% of the principal of and accrued and unpaid interest, if any, on all the Convertible Notes to be due and payable.
If on or after the date that is six months after the last original issue date of the Convertible Notes, the Company has not satisfied the reporting conditions (including, for the avoidance of doubt, the requirement for current Form 10 information) set forth in Rule 144(c) and (i)(2) under the Securities Act, or the Convertible Notes are not otherwise able to be traded pursuant to Rule 144 by holders other than the Company’s affiliates or holders that were affiliates of the Company at any time during the three months immediately preceding (as a result of restrictions pursuant to U.S. securities laws or the terms of the Indenture or the Convertible Notes), the Company will pay additional interest on the Convertible Notes at a rate equal to 1.00% per annum of the principal amount of the Convertible Notes outstanding, in each case for each day for which the Company’s failure to file has occurred and is continuing or the Convertible Notes are not otherwise able to be traded pursuant to Rule 144 as described above.
Initially, a maximum of 36,214,960 shares of common stock may be issued upon conversion of the Convertible Notes, based on the initial maximum conversion rate of 233.6449 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which is subject to customary and other adjustments described in the Indenture.
Wells Fargo Equipment Lease-Ohio
On October 29, 2021, the Company repaid in full the amounts owed to Wells Fargo for the equipment lease with the funds raised through the sale of the Convertible Notes described above.
EBC Lenders Paid Off
On November 1, 2021, the Company repaid in full the amounts owed to the EBC Lenders with the fund raised through the sale of the Convertible Notes described above.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
This informationOur 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 thereto on the basis of management’s assessment to assist readers in understanding our results of operations, financial condition, and cash flows. As such, it 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 ended December 31, 2020,2021, filed with the Securities and Exchange Commission on March 9, 202114, 2022 (the “Annual Report”). Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Vertex”, “Vertex Energy” and “Vertex Energy, Inc.” refer specifically to Vertex Energy, Inc. and its consolidated subsidiaries.
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 on December 31st. Interim results are presented on aWe file annual, quarterly, basis for the quarters ended March 31, June 30, and September 30th, the first quarter, second quartercurrent reports, proxy statements and third quarter, respectively,other information with the quarter ending December 31st being referenced herein asSecurities and Exchange Commission (“SEC”). Our SEC filings (reports, proxy and information statements, and other information) are available to the public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to the SEC, on the “Investor Relations,” “SEC Filings” page of our fourth quarter. Fiscal 2021 means the year ended December 31, 2021, fiscal 2020 means the year ended December 31, 2020,website at www.vertexenergy.com. Information on our website is not part of this Report, and fiscal 2019 means the year ended December 31, 2019.
Please see the “Glossary of Selected Terms” incorporatedwe do not desire to incorporate by reference hereto as Exhibit 99.1, for a listsuch information herein. Copies of abbreviationsdocuments filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and definitions used throughouttelephone number set forth on the cover page of this Report.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Vertex”, “Vertex Energy” and “Vertex Energy, Inc.” refer specifically to Vertex 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”● “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
“Feedstock” means a product or a combination of products derived from crude oil and destined for further processing in the refining or re-refining industries. It is transformed into one or more components and/or finished products;
“Gasoline Blendstock” means naphthas and various distillate products used for blending or compounding into finished motor gasoline. These components can include reformulated gasoline blendstock for oxygenate blending (RBOB) but exclude oxygenates (alcohols and ethers), butane, and pentanes (an organic compound with properties similar to a butane);
“Hydrotreating” means the process of reacting oil fractions with hydrogen in the presence of a catalyst to produce high-value clean products;
“IMO 2020” effective January 1, 2020, the International Maritime Organization (IMO) mandated a maximum sulphur content of 0.5% in marine fuels globally;
“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”● “SEC” or the “Commission”“Commission” refers to the United States Securities and Exchange Commission; and
“Securities Act”● “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 the Securities and Exchange Commission (“SEC”). Our SEC filings (reports, proxy and information statements, and other information) are available to the public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to the SEC, 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 the SEC 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
SummaryThis Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of The Information Containedthe federal securities laws, including the Private Securities Litigation Reform Act of 1995, regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in Management’s Discussionwhich the Company operates and Analysisthe beliefs and assumptions of Financial Conditionthe management of the Company. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and Resultswill not necessarily be accurate indications of Operations
Our Management’s Discussionthe times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and Analysis of Financial Conditioninvolve known and Results of Operations (MD&A) is provided in addition to the accompanying unaudited consolidated financial statementsunknown risks, uncertainties and notes to assist readers in understandingother factors that may cause our results, levels of operations, financial condition,activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Report. Factors that might cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Report, including under "Risk Factors", and cash flows. MD&A is organizedin other reports the Company files with the Securities and Exchange Commission (“SEC” or the “Commission”), including the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as follows:
filed with the SEC on March 14, 2022 (under the heading "
•Descriptionour need for additional funding and the availability of Business Activities. Discussionand terms 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 ofrisks associated with our financial results comparingoutstanding indebtedness, including our outstanding Convertible Senior Notes, including amounts owed, restrictive covenants and security interests in connection therewith, and our ability to repay such debts and amounts due thereon (including interest) when due, and mandatory and special redemption provisions thereof, and conversion rights associated therewith, including dilution caused thereby (in connection with the three and nine months ended September 30, 2021, and 2020.
•Liquiditysecurity interests, guarantees and Capital Resources. pledges associated with our outstanding Loan and Security Agreement and Supply and Offtake Agreement, and risks associated with such agreements in general;
•An analysisrisks associated with the capital project currently in process at our recently acquired Mobile, Alabama refinery, including costs, timing, delays and unanticipated problems associated therewith;
•health, safety, security and environment risks;
•risks associated with an offtake agreement which will only become effective upon the occurrence of certain events, including the completion of the capital project at the Mobile, Alabama refinery, which may not be completed timely;
•the level of competition in our industry and our ability to compete;
•our ability to respond to changes in our consolidated balance sheets and cash flows and discussion of our financial condition.
•Critical Accounting Policiesthe loss of key personnel or failure to attract, integrate 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.retain additional personnel;
•our ability to maintain supplier relationships and obtain adequate supplies of feedstocks;
•our ability to obtain and retain customers;
•our ability to produce our products at competitive rates;
•our ability to execute our business strategy in a very competitive environment;
•trends in, and the market for, the price of oil and gas and alternative energy sources;
Description•our ability to maintain our relationships with Bunker One (USA) Inc, Macquarie Energy North America Trading Inc., and Shell;
•the impact of competitive services and products;
•our ability to complete and integrate future acquisitions;
•our ability to maintain insurance;
•potential future litigation, judgments and settlements;
•rules and regulations making our operations more costly or restrictive;
•changes in environmental and other laws and regulations and risks associated with such laws and regulations;
•economic downturns both in the United States and globally;
•risk of increased regulation of our operations and products;
•negative publicity and public opposition to our operations;
•disruptions in the infrastructure that we and our partners rely on;
•an inability to identify attractive acquisition opportunities and successfully negotiate acquisition terms;
•liabilities associated with acquired companies, assets or businesses;
•interruptions at our facilities;
•losses under derivative and hedging contracts;
•unexpected changes in our anticipated capital expenditures resulting from unforeseen required maintenance, repairs, or upgrades;
•our ability to acquire and construct new facilities;
•prohibitions on borrowing and other covenants of our debt facilities;
•our ability to effectively manage our growth;
•decreases and/or volatility in global demand for, and the price of, oil;
•our ability to acquire sufficient amounts of used oil feedstock through our collection routes, to produce finished products, and in the absence of such internally collected feedstocks, our ability to acquire third-party feedstocks on commercially reasonable terms;
•repayment of and covenants in our current and future debt facilities;
•rising inflation, rising interest rates, governmental responses thereto and possible recessions caused thereby;
•the lack of capital available on acceptable terms to finance our continued growth; and
•other risk factors included under “Risk Factors“ in our latest Annual Report on Form 10-K and set forth below under “Risk Factors“.
In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements.
You should read the matters described in, and incorporated by reference in, "Risk Factors" and the other cautionary statements made in this Report, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. All forward-looking statements included herein speak only as of the date of the filing of this Report. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
Overview and Business Activities
We areVertex is an environmental servicesenergy transition company that recycles industrial waste streamsspecializing in refining and off-specification commercial chemical products. Our primary focus is recycling used motor oilmarketing high-value conventional and other petroleum by-products.lower-carbon alternative transportation fuels. We are engaged in operations across the entire petroleum recycling value chain, including refining, collection, aggregation, transportation, storage re-refinement, and sales of aggregated feedstock and re-refinedrefined 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 September 30, 2021, we aggregated approximately 83.2 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 74.2 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
Discontinued operations of Vertex include the Black Oil Segment, also referred to as the UMO Business, Refer to Note 15, "Discontinued Operations" in the Notes to Financial Statements for additional information.
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.
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 under International Maritime Organization (IMO) rules which went into effect on January 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 in Marrero, 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.end-users. 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,We currently provide our services in 15 states, primarily in 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 distilledGulf Coast, Midwest, and separated into its components, including benzene and other hydrocarbons.
Industrial Fuel
Industrial fuel is a distillate fuel oil which is typically a blendMid-Atlantic regions 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 salesUnited States. For the rolling twelve-month period ending September 30, 2022, we aggregated approximately 86.5 million gallons of used motor oil and products which includeother petroleum by-product feedstocks and managed the re-refining of approximately 80.1 million gallons of used motor oil (such aswith our proprietary vacuum gas oil filters)(“VGO”) and Base Oil processes.
Mobile Refinery acquisition.Effective April 1, 2022, we completed the acquisition of a 75,000 bpd crude oil refinery ten miles north of Mobile, in Saraland, Alabama (the “Mobile Refinery”) and related logistics assets, which are collected from our customers.
include
Metals
Metals consista deep-water draft, bulk loading terminal facility with 600,000 Bbls of recoverable ferrousstorage capacity for crude oil 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 primarily of the sale of (a)associated refined petroleum products which include base oillocated in Mobile, Alabama (the “Blakeley Island Terminal”). The terminal includes a dock for loading 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 atunloading vessels with a third-party facility (KMTEX); and distillates.
(3) As discussed in greater detail above under “Recovery Segment”, the Recovery segment consists primarily of revenues generated from the sale of ferrous and non-ferrous recyclable Metal(s) products that are recovered from manufacturing and consumption.It also includes revenues generated from trading/marketing of Group III Base Oils.
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 have mainly been terminated 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, second and third quarters 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 fourth quarter 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,pipeline tie-in, as well as the decline in U.S. travel caused by COVID-19, we sawrelated logistics infrastructure of 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 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 and boosters, further mutations of the virus, as well as the rate of transmission of new COVID-19 variants.
Recent Events
May 2021 Purchase Agreement
On May 26, 2021, Vertex Operating, entered into a definitive Sale and Purchase Agreementhigh-capacity truck rack with 3-4 loading heads per truck, each rated at 600 gallons per minute (the “Refinery Purchase Agreement”) with Equilon Enterprises LLC d/b/a Shell Oil Products US and/or Shell Chemical LP and/or Shell Oil Company (“Seller”), to purchase the Seller’s Mobile, 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 the Mobile refinery (collectively, the “Mobile Refinery” and the “Mobile Acquisition”Truck Rack”). The Mobile Refinery is located on an 800+ acre sitecurrently processes heavy and sour crude to produce heavy olefin feed, regular gasoline, premium gasoline, jet fuel, and diesel fuel.
The Company paid a total of $75.0 million (less $10 million previously paid) in consideration for the city and county of Mobile, Alabama. The 91,000 barrel-per-day nameplate capacity Mobile Refinery is capable of sourcing a flexible mix of cost-advantaged light-sweet domestic and international feedstocks. Approximately 70%acquisition of 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 southeastern United 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.Mobile Refinery. In addition, we will also paypaid $16.4 million for the hydrocarbon inventory located at the Mobile Refinery, as valued at closing, and the purchase price is subject to other customary purchase price adjustments and reimbursement for certainpreviously agreed upon capital expenditures, resulting inmiscellaneous prepaids and reimbursable items and an expected total purchase price of approximately $86.7 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$8.7 million (the “Deposit Note”), which has been fully funded to date.
In the event of the closing of the transactions contemplated by the Refinery Purchase Agreement, the funded portion of the Deposit Note (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 by May 26, 2022 (the “Refinery Purchase 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 Refinery Purchase 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 Refinery Purchase 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 Refinery Purchase Outside Date is automatically extended to May 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 in the first quarter of 2022, 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 recent sale in November 2021 of Convertible Notes (defined below) and the entry into a future debt facility. The Company has not entered into any definitive lending agreements regarding such debt fundings to date, and such debt funding may not be available on favorable terms, if at all. The Company may also generate cash through asset divestitures. The Company may also generate cash through asset divestitures. The conditions to the closing of the Mobile 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.
We plan to launch an $85 million capital project designed to modify the Mobile Refinery’s hydrocracking unit to produce renewable diesel fuel on a standalone basis (the “Conversion”). Certain engineering services and the initial payments
of purchase orders for long lead-time equipment associated with the Conversion are expected to be paid in advance of the closing of the Mobile Acquisition in the approximate amount of $13.0 million, and provided that our fundraising initiatives are successful, we plan to follow through with completion of the Conversion at an additional cost of approximately $72.0 million.
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 the Mobile Refinery after closingthe acquisition. The Company also purchased certain crude oil and finished products inventories for $130.2 million owned by Shell at the Mobile Refinery.
As a result of the Mobile Refinery purchase, Vertex Refining and Shell Trading (US) Company (“STUSCO”) entered into a Crude Oil & Hydrocarbon Feedstock Supply Agreement (the “Swapkit”“Crude Supply Agreement”), at a cost pursuant to which STUSCO agreed to sell to Vertex Refining, and Vertex Refining agreed to buy from STUSCO, all of $8.7 million, which is payable at closing (subjectthe crude oil and hydrocarbon feedstock requirements of the Mobile Refinery, subject to certain adjustments), or in certain circumstances, upon terminationexceptions set forth therein. The agreement provides that STUSCO is the exclusive supplier for the Mobile Refinery’s requirement for crude oil and hydrocarbon feedstock.
Additionally, as a result of the Mobile Refinery Purchase Agreement.
Series Bpurchase, we entered into several agreements with Macquarie Energy North America Trading Inc (“Macquarie”). Under these agreements (together, the “Inventory Financing Agreement”), Macquarie agrees to finance the Mobile Refinery’s crude supply and B1 Preferred Stock Automatic Conversion
Pursuantinventories, and Vertex agrees to
provide storage and terminalling services to Macquarie. At the
termstime of the
Series B Preferred Stock and Series B1 Preferred Stockacquisition, Macquarie agreed to finance $124.3 million of the $130.2 million of opening inventories. See Note 3 “Mobile Refinery Acquisition” of our Condensed Notes to Consolidated Financial Statements.Myrtle Grove Facility Purchase.On April 1, 2022, the Company, through Vertex Splitter Corporation (“Vertex Splitter”), a wholly-owned subsidiary of the Company acquired the 15% noncontrolling interest of Vertex Refining Myrtle Grove LLC (“MG SPV”) held by Tensile-Myrtle Grove Acquisition Corporation (“Tensile-MG”), an affiliate of Tensile Capital Partners Master Fund LP, an investment fund based in San Francisco, California (“Tensile”) from Tensile-Vertex for $7.2 million, which was based on the event that the closing sales pricevalue of the Company’s common stock was at least $6.20 (as to the SeriesClass B Preferred Stock) and $3.90 (as to the Series B1 Preferred Stock) per share for at least 20 consecutive trading days, such sharesUnit preference 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 on June 24, 2021 (as to the Series B1 Preferred Stock) and June 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 stockMG SPV held by Tensile-MG, plus capital invested by Tensile-MG in total).
As a result, there are no outstanding shares of Series B or B1 Preferred Stock as of September 30, 2021, orMG SPV (which had not been returned as of the date of this Report.
Safety-Kleen Sale Agreement
On June 29, 2021, we entered into an Asset Purchase Agreement (the “Sale Agreement”payment), plus cash 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”), and H & H Oil, L.P. (“H&H”), as sellers, and Safety-Kleen Systems, Inc., as purchaser (“Safety-Kleen”), datedcash equivalents held by Tensile-MG as of June 28, 2021.
Pursuant to the
Sale Agreement, Safety-Kleen agreed to acquireclosing date. As a result, the Company acquired 100% of MG SPV, which in turn owns the Company’s
Marrero used oil refinery inBelle Chasse, Louisiana,
(currently ownedre-refining complex. See Note 22 “Non-Controlling Interests” of our Condensed Notes to Consolidated Financial Statements.Heartland Re-refining Complex. On May 26, 2022, the Company, through Vertex Splitter acquired the 65% noncontrolling interest of HPRM LLC, a Delaware limited liability company (“Heartland SPV”) held by Vertex LA); our Heartland used oil refinery in Ohio (currently owned by Vertex OH); our H&H and Heartland used motor oilTensile-Heartland Acquisition Corporation, a Delaware corporation (“UMO”Tensile-Heartland”) collections business; our oil filters and absorbent materials recycling facility in East Texas; and the rights CMT holds to a lease on the Cedar Marine terminal in Baytown, Texas (the “UMO Business”from Tensile-Vertex Holdings LLC (“Tensile-Vertex”).
, an affiliate of Tensile
The initial base purchase price for the assets is $140$43.5 million, which is subject to customary adjustments to account for working capital, taxes and assumed liabilities.
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 endingwas based 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
sharesClass B Unit preference of
common stockHeartland SPV held
by Tensile-Heartland, plus capital invested by Tensile-Heartland in
escrow is calculated (based onHeartland SPV (which had not been returned as of the
10-Day VWAP, using the last daydate of
each quarterpayment), plus cash and cash equivalents held by Tensile-Heartland as
the ending trading day in lieu of the closing
date), and if such value is less than $7 million (less any valuedate. As a result, the Company acquired 100% 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 heldHeartland SPV, which 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% ofturn owns the Company’s
outstanding common stock on the date the Sale Agreement was entered into. Upon termination Columbus, Ohio, re-refining complex. See Note 22 “Non-Controlling Interests” of the Escrow Period, any shares remaining in escrow (subjectour Condensed Notes to pending claims) are to be returned to the Company for cancellation.
The Sale Agreement is subject to termination prior to closing under certain circumstances,We operate two business segments: the Refining and may be terminated: at any time prior toMarketing segment and the closing date by the mutual consentBlack Oil and Recovery segment. For further description of the parties; by Safety-Kleen in the event the closing has not occurred by December 31, 2021 (the “Sale Agreement Outside Date”business and products of our segments, see “Results of Operations”, subject to certain extensions as discussed in the Sale Agreement), in the event such failure to close is not a resultbelow.
Strategy and Plan 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 Sale Agreement 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 Sale Agreement 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.Operations
The Sale Agreement is expected to close in the first half of 2022, 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. We are currently responding to inquiries received from the Federal Trade Commission (the “FTC”), which is not required to rule on the matter until the expiration of 30 days following submissionprincipal elements of our responses which is not expected to occur before November 30, 2021, if then. The Sale Agreement also required us to hold a shareholders meeting to seek shareholder approval for the Sale Agreement, which shareholder approval was received in September 2021. 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 and H.C. Wainwright acted as financial advisors to the Company on the transaction. Vallum Advisors acted as financial communications counsel to the Company.
Tensile Transactions
On July 1, 2021, the Operating Agreement of MG SPV was amended to provide that from the date of such agreement until December 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 (after December 31, 2021), at $1,000 per unit (the “MG SPV Amendment”).
On July 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.
On July 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. On July 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 until July 25, 2024, without the prior written consent of the Company.
Encina Credit Agreement Term Loan
On November 1, 2021, the Company repaid in full the amounts owed to the EBC Lenders with the funds raised through the sale of the Convertible Notes.
Indenture and Convertible Notesstrategy include:
On Completion of Renewable Diesel Conversion ProjectNovember 1, 2021, . The renewable diesel conversion project is designed to modify the Mobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis. To date, we issued $155.0have technology, engineering and construction partners and construction of foundations and fabrication of piping has commenced. Initial renewable production volumes are expected to come on-stream in the second quarter of 2023. The Company expects the total project cost to be in the range of $90 to $100 million, aggregate principal amount at maturityfunded entirely through existing cash on-hand and cash flow from operations. As of our 6.25% Convertible Senior Notes due 2027 (the “Convertible Notes”) pursuant to an Indenture (the “Indenture”), dated November 1, 2021, betweenSeptember 30, 2022, the Company and U.S. Bank National Association, as trustee (the “Trustee”),had incurred $38.8 million in a private offering (the “Note Offering”) to persons reasonably believed to be “qualified institutional buyers” and/or to “accredited investors” in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act, pursuant to Securities Purchase Agreements.
The net proceeds from the offering, after deducting placement agent fees and estimated offering costs and expenses payable by the Company, were approximately $133.9 million. The Company intends to use approximately (1) $33.7 million of the net proceeds from the offering to fund a portion of the funds payable in connection with the Refinery Purchase Agreement, (2) $13.0 million of the net proceeds from the offeringcapital expenditures for engineering services and for the initial payments of purchase orders for long lead-time equipment associated with the Conversion, (3) $10.9 million of the net proceeds from the offering to repay amounts owed by the Company under its credit facilities with Encina Business Credit, LLC and certain of its affiliates, and (4) $0.4 million of the net proceeds to repay certain secured equipment leases with certain affiliates of Wells Fargo Bank, National Association. The Company intends to use the remainder of the net proceeds for working capital and other general corporate purposes, which may include debt retirement and organic and inorganic growth initiative, provided that the Company has no current specific plans for such uses.
Key terms of the Convertible Notes are as follows:
•Issue price – 90% of the face amount of each Note.this project.
•Expand Feedstock Supply Volume. Interest rateWe intend to expand our feedstock supply volume by growing our collection and aggregation operations. We plan to increase the volume of 6.25% – The Convertible Notesfeedstock we collect directly by developing new relationships with generators and working to displace incumbent collectors; increasing the number of collection personnel, vehicles, equipment, and geographical areas we serve; and acquiring collectors in new or existing territories. We intend to increase the volume of feedstock we aggregate from third-party collectors by expanding our existing relationships and developing new vendor relationships. We believe that our ability to acquire large feedstock volumes will bear interest athelp to cultivate new vendor relationships because collectors often prefer to work with a ratesingle, reliable customer rather than manage multiple relationships and the uncertainty of 6.25% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022.excess inventory.
•Broaden Existing Customer Relationships and Secure New Large AccountsConversion price. We intend to broaden our existing customer relationships by increasing sales of approximately $5.89 – The Convertible Notesused motor oil and re-refined products to these accounts. In some cases, we may also seek to serve as our customers’ primary or exclusive supplier. We also believe that as we increase our supply of feedstock and re-refined products that we will be convertible at an initial conversion rate of 169.9235 shares of the Company’s common stock, per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $5.89 per share, which representssecure larger customer accounts that require a conversion premium of approximately 37.5% to the last reported sale price of $4.28 per share of the Company’s common stock on The Nasdaq Capital Market on October 26, 2021).partner who can consistently deliver high volumes.
•Re-Refine Higher Value End Products.Maturity date –The Convertible Notes We intend to develop, lease, or acquire technologies to re-refine our feedstock supply into higher-value end products. We believe that the expansion of our facilities and our technology, and investments in additional technologies, will mature on October 1, 2027, unless earlier repurchased, redeemed or converted.enable us to upgrade feedstock into end products, such as lubricating base oil, that command higher market prices than the current re-refined products we produce.
•Pursue Selective Strategic Relationships or Acquisitions.Conversion – Prior We plan to July 1, 2027,grow market share by consolidating feedstock supply through partnering with or acquiring collection and aggregation assets. Such acquisitions and/or partnerships could increase our revenue and provide better control over the Convertible Notes will be convertible at the optionquality and quantity of the holders of the Convertible Notes only upon the satisfaction of certain conditionsfeedstock available for resale and/or upgrading as well as providing additional locations. In addition, we intend to pursue further vertical integration opportunities by acquiring complementary processing technologies where we can realize synergies by leveraging our customer and during certain periods,vendor relationships, infrastructure, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.
•Cash settlement of principal amount in connection with conversions – Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cashpersonnel, and shares of its common stock, at its election, provided that until such time as the Company’s stockholders have approved the issuance of more than 19.99% of our common stock issuable upon conversion of the Convertible Notes in accordance with the rules of The Nasdaq Capital Market, the Company is required to elect “cash settlement” for all conversions of the Convertible Notes.
•Limited investor put rights – Holders of the Convertible Notes will have the right to require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the accreted principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding the repurchase date, upon the occurrence of certain change of control transactions or liquidation, dissolution or common stock delisting events (collectively, a “fundamental change”), subject to certain conditions.by eliminating duplicative overhead costs.
•Optional Redemption – Prior to October 6, 2024, the Convertible Notes will not be redeemable at the Company’s option. On a redemption date occurring on or after October 6, 2024 and on or before the 30 scheduled trading day before the maturity date, the Company may redeem for cash all or part of the Convertible Notes (subject to certain restrictions), at its option, if the last reported sale price of our Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the redemption notice date at a redemption price equal to 100% of the accreted principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No “sinking fund” is provided for the Convertible Notes, which means that we are not required to redeem or retire the Convertible Notes periodically.
•Escrow of proceeds; special mandatory redemption. A total of seventy-five percent (75%) of the net proceeds from the offering (approximately $100 million) were placed into an escrow account to be released to the Company, upon the satisfaction of certain conditions, including the satisfaction or waiver of all of the conditions precedent to the Company’s obligation to consummate the Mobile Acquisition (collectively, the “Escrow Release Conditions”). If the Mobile Acquisition is not consummated on or prior to April 1, 2022, if the Company has not certified to the escrow agent that all conditions precedent to the Company’s obligations to consummate the Mobile Acquisition have been satisfied, or if the Company notifies the trustee and the escrow agent in writing that the agreement relating to the purchase of the Mobile Refinery has been terminated, the Convertible Notes will be subject to a special mandatory redemption equal to 100% of the accreted principal amount of the Convertible Notes, plus accrued and unpaid interest to, but excluding, the special mandatory redemption date, plus interest that would have accrued on the Convertible Notes from the special mandatory redemption date to, and including, the date that is nine (9) months after the special mandatory redemption date. If the Escrow Release Conditions have been satisfied or waived, the Company can request that the escrowed funds be released to the Company.
•Conversion rate increase in certain customary circumstances – The Company will also be required to increase the conversion rate for holders who convert their Convertible Notes in connection with a fundamental change and certain other corporate events or convert their Convertible Notes called for optional redemption (or deemed called for redemption) following delivery by the Company of a notice of optional redemption, in either case, in certain circumstances.
The Convertible Notes are Vertex Energy’s senior unsecured obligations.
The Indenture contains additional customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Convertible Notes then outstanding may declare the entire principal amount of all the Convertible Notes plus accrued and unpaid interest, if any, to be immediately due and payable, provided that in the case of an event of default with respect to the Convertible Notes arising from specified events of bankruptcy or insolvency, 100% of the principal of and accrued and unpaid special interest, if any, on the Convertible Notes will automatically become due and payable.
The following events are considered an “event of default,” which may result in acceleration of the maturity of the Convertible Notes: (1) default in any payment of interest on any Convertible Note when due and payable and the default continues for a period of 30 consecutive days; (2) default in the payment of the accreted principal amount of any Convertible Note when due and payable at its stated maturity, upon optional redemption, upon any required repurchase, upon declaration of acceleration or otherwise; (3) our failure to comply with our obligation to convert the Convertible Notes in accordance with the Indenture upon exercise of a holder’s conversion right and such failure continues for three business days; (4) our failure to give certain required notices under the Indenture, in each case when due and such failure continues for five business days; (5) our failure to comply with certain of our obligations under the Indenture; (6) our failure for 60 days after written notice from the Trustee or the holders of at least 25% in principal amount of the Convertible Notes then outstanding to comply with any of our other agreements contained in the Convertible Notes or Indenture; (7) default by us or any of our significant subsidiaries with respect to any mortgage, agreement or other instrument under which there may be outstanding, or by which there may be secured or evidenced, any indebtedness for borrowed money in excess of $15,000,000 (or its foreign currency equivalent) in an aggregate of us and/or any such significant subsidiary, whether such indebtedness now exists or shall hereafter be created (i) resulting in such indebtedness becoming or being declared due and payable prior to its stated maturity date or (ii) constituting a failure to pay the principal of any such indebtedness when due and payable (after the expiration of all applicable grace periods) at its stated maturity, upon required repurchase, upon declaration of acceleration or otherwise and in the cases of clauses (i) and (ii), such acceleration shall not have been rescinded or annulled or such failure to pay or default shall not have been cured or waived, or such indebtedness is not paid or discharged, as the case may be, within 30 days after written notice to us by the Trustee or to us and the Trustee by holders of at least 25% in aggregate principal amount of the Convertible Notes then
outstanding in accordance with the Indenture; (8) certain events of bankruptcy, insolvency, or reorganization of us or any of our significant subsidiaries; or (9) a final judgment or judgments for the payment of $15,000,000 (or its foreign currency equivalent) (excluding any amounts covered by insurance) or more (excluding any amounts covered by insurance) in the aggregate rendered against us or any of our Significant Subsidiaries, which judgment is not discharged, bonded, paid, waived or stayed within 60 days after (i) the date on which the right to appeal thereof has expired if no such appeal has commenced, or (ii) the date on which all rights to appeal have been extinguished.
The Company may elect that the sole remedy for an event of default relating to a failure by it to comply with certain reporting obligations set forth in the Indenture, will after the occurrence of such an event of default consist exclusively of the right to receive additional interest on the Convertible Notes at a rate equal to (i) 1.00% per annum of the principal amount of the Convertible Notes outstanding for each day during the period beginning on, and including, the date on which such event of default first occurred and ending on the earlier of (x) the date on which such event of default is cured or validly waived and (y) the 365th day immediately following, and including, the date on which such event of default first occurred. On the 366th day after such event of default (if the event of default relating to the reporting obligations is not cured or waived prior to such 366th day), the Trustee by notice to us, or the holders of at least 25% in principal amount of the outstanding Convertible Notes by notice to us and the Trustee, may declare 100% of the principal of and accrued and unpaid interest, if any, on all the Convertible Notes to be due and payable.
If on or after the date that is six months after the last original issue date of the Convertible Notes, the Company has not satisfied the reporting conditions (including, for the avoidance of doubt, the requirement for current Form 10 information) set forth in Rule 144(c) and (i)(2) under the Securities Act, or the Convertible Notes are not otherwise able to be traded pursuant to Rule 144 by holders other than the Company’s affiliates or holders that were affiliates of the Company at any time during the three months immediately preceding (as a result of restrictions pursuant to U.S. securities laws or the terms of the Indenture or the Convertible Notes), the Company will pay additional interest on the Convertible Notes at a rate equal to 1.00% per annum of the principal amount of the Convertible Notes outstanding, in each case for each day for which the Company’s failure to file has occurred and is continuing or the Convertible Notes are not otherwise able to be traded pursuant to Rule 144 as described above.
Initially, a maximum of 36,214,960 shares of common stock may be issued upon conversion of the Convertible Notes, based on the initial maximum conversion rate of 233.6449 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which is subject to customary and other adjustments described in the Indenture.
RESULTS OF OPERATIONSResults 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 forengaged in operations across 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.
Discontinued operations of Vertex include the Black Oil Segment, also referred to as the UMO Business, Refer to Note 15, "Discontinued Operations" in the Notes to Financial Statements for additional information.
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 pricesvalue chain, including crude oil natural gas, #6 oilrefining, collection, aggregation, transportation, storage, and metals.
Costsales 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, purchasingrefined and receiving costs, analytical assessments, brokerage fees and commissions, and surveying and storage costs.
Discontinued operations of Vertex include the Black Oil Segment, also referred to as the UMO Business, Refer to Note 15, "Discontinued Operations" in the Notes to Financial Statements for additional information.
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 oilre-refined products and fuel cost for transportation cost from third party providers will generally increase. Similarly, if the price of crude oil falls, these costs may also decline.
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries and other employee-related benefits for executive, administrative, legal, financial, and information technology personnel, as well as outsourced and professional services, rent, utilities, and related expenses at our headquarters, as well as certain taxes.
Depreciation and Amortization Expenses
Our depreciation and amortization expenses are primarily related to the 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2020 FROM CONTINUING OPERATIONS
Set forth below are our results of operations for the three months ended September 30, 2021 as compared to the same period in 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) |
| 2021 | | 2020 |
| Revenues | $ | 28,974,471 | | | $ | 16,249,312 | | | $ | 12,725,159 | | | 78 | % |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 28,061,498 | | | 15,324,914 | | | (12,736,584) | | | (83) | % |
| Depreciation and amortization attributable to costs of revenues | 126,795 | | | 115,562 | | | (11,233) | | | (10) | % |
| Gross profit | 786,178 | | | 808,836 | | | (22,658) | | | (3) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Operating expenses: | | | | | | | |
| Selling, general and administrative expenses | 4,944,719 | | | 1,832,067 | | | (3,112,652) | | | (170) | % |
| Depreciation and amortization attributable to operating expenses | 26,916 | | | 28,002 | | | 1,086 | | | 4 | % |
| | | | | | | |
| Total operating expenses | 4,971,635 | | | 1,860,069 | | | (3,111,566) | | | (167) | % |
| | | | | | | |
| | | | | | | |
| Loss from operations | (4,185,457) | | | (1,051,233) | | | (3,134,224) | | | (298) | % |
| | | | | | | |
| Other income (expense): | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Loss on asset sales | (3,351) | | | (136,434) | | | 133,083 | | | 98 | % |
| Gain on change in value of derivative liability | 11,907,413 | | | 256,587 | | | 11,650,826 | | | 4,541 | % |
| | | | | | | |
| Interest expense | (352,587) | | | (97,157) | | | (255,430) | | | (263) | % |
| Total other expense | 11,551,475 | | | 22,996 | | | 11,528,479 | | | 50,133 | % |
| | | | | | | |
| Income (loss) before income tax | 7,366,018 | | | (1,028,237) | | | 8,394,255 | | | 816 | % |
| | | | | | | |
| Income tax benefit (expense) | — | | | — | | | — | | | — | % |
| | | | | | | |
| Net income (loss) from continuing operations | 7,366,018 | | | (1,028,237) | | | 8,394,255 | | | 816 | % |
| Income (loss) from discontinued operations, net of tax (see Note 15) | 3,278,498 | | | (926,933) | | | 4,205,431 | | | 454 | % |
| Net income attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | (115,131) | | | 136,334 | | | (251,465) | | | (184) | % |
| Net income attributable to non-controlling interest and redeemable non-controlling from discontinued operations | 2,400,141 | | | 343,881 | | | 2,056,260 | | | 598 | % |
| Net income (loss) attributable to Vertex Energy, Inc. | $ | 8,359,506 | | | $ | (2,435,385) | | | $ | 10,794,891 | | | 443 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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. During the three months ended September 30, 2021, compared to the same period in 2020, we saw a 15% increase in the volume of products we managed through our facilities. In addition, we saw an increase in operating costs (inclusive of depreciation and amortization) on a per barrel basis for the third quarter of 2021 as compared to the same period in 2020.
Total revenues increased by 78% for the three months ended September 30, 2021, compared to the same period in 2020, due primarily to higher commodity prices (commodity prices reached near historic lows during 2020, as a result of the COVID-19 pandemic) and increased volumes at our facilities; including $20 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 September 30, 2021, compared to the same period in 2020. Total volume increased 15% during the three months ended September 30, 2021, compared to the same period in 2020. Volumes were impacted as a result of feedstock
availability 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 operate as a result of the COVID-19 pandemic, which directly impacted the generation of metals and petroleum products during the period ended 2020.
During the three months ended September 30, 2021, total cost of revenues (exclusive of depreciation and amortization) was $28,061,498 compared to $15,324,914 for the three months ended September 30, 2020, an increase of $12,736,584 or 83% 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. and other maintenance costs at our facilities.
We had selling, general and administrative expenses of $4,944,719 for the three months ended September 30, 2021, compared to $1,832,067 from the prior year’s period, an increase of $3,112,652 or 170% 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 and related expenses related to the transactions contemplated by the Sale Agreement and the Refinery Purchase Agreement and related transactions.
For the three months ended September 30, 2021, total depreciation and amortization expense attributable to cost of revenues was $126,795, compared to $115,562 for the three months ended September 30, 2020, an increase of $11,233 mainly due to additional investments in rolling stock and facility assets during the fourth quarter of 2020, which increased depreciation and amortization in 2021.
We had gross profit as a percentage of revenue of 2.7% for the three months ended September 30, 2021, compared to gross profit as a percentage of revenues of 5.0% for the three months ended September 30, 2020. The main reason for the decrease was the increase in commodity prices during the period.
Additionally, our per barrel margin was decreased 16% for the three months ended September 30, 2021, relative to the three months ended September 30, 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 ($786,178 for the 2021 period versus $808,836) for the 2020 period). This decrease was a result of the decrease in our product spreads related to increases in feedstock prices and increases in operating costs at our facilities, during the three months ended September 30, 2021, compared to the same period during 2020.
Overall, commodity prices were up for the three months ended September 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 September 30, 2021, increased $24.54 per barrel from a three-month average of $37.95 for the three months ended September 30, 2020 to $62.49 per barrel for the three months ended September 30, 2021. The average posting (U.S. Gulfcoast Unleaded 87 Waterborne) for the three months ended September 30, 2021 increased $33.81 per barrel from a three-month average of $44.82 for the three months ended September 30, 2020 to $78.63 per barrel for the three months ended September 30, 2021.
We had loss from operations of $4,185,457 for the three months ended September 30, 2021, compared to loss from operations of $1,051,233 for the three months ended September 30, 2020, an increase of $3,134,224 or 298% from the prior year’s three-month period. The increase in loss from operations was mostly due to the increases seen in commodity prices and overall margin impact from our bunker fuels business along with overall increase in operating expenses at our facilities.
We had interest expense of $352,587 for the three months ended September 30, 2021, compared to interest expense of $97,157 for the three months ended September 30, 2020, an increase in interest expense of $255,430 or 263% from the prior period, due to having a higher amount of term debt outstanding during the three months ended September 30, 2021, compared to the prior year’s period.
We had a $11,907,413 gain on change in value of derivative liability for the three months ended September 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 gain on change in the value of our derivative liability of $256,587 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 increase in the market price of our common stock during the current period, compared to the prior 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 net income from continuing operations of $7,366,018 for the three months ended September 30, 2021, compared to net loss from continuing operations of $1,028,237 for the three months ended September 30, 2020, an increase in net income of $8,394,255 or 816% from the prior period. The main reason for the increase in net income for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, was attributable to the increase in gain on change in value of derivative liability as discussed above, which is a non-cash adjustment, offset by the decrease in gross profit for the three months ended September 30, 2021, each as described in greater detail above.
Each of our segments’ income (loss) from operations during the three months ended September 30, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) |
| Black Oil Segment | 2021 | | 2020 |
| Revenues | $ | 446,676 | | | $ | 288,000 | | | $ | 158,676 | | | 55 | % |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 402,989 | | | 189,947 | | | (213,042) | | | (112) | % |
| Depreciation and amortization attributable to costs of revenues | 18,420 | | | 3,985 | | | (14,435) | | | (362) | % |
| | | | | | | |
| Gross profit (loss) | 25,267 | | | 94,068 | | | (68,801) | | | (73) | % |
| Selling general and administrative expense | 3,675,190 | | | 987,424 | | | (2,687,766) | | | (272) | % |
| Depreciation and amortization attributable to operating expenses | 26,916 | | | 26,916 | | | — | | | — | % |
| | | | | | | |
| Income (loss) from operations | $ | (3,676,839) | | | $ | (920,272) | | | $ | (2,756,567) | | | (300) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Refining and Marketing Segment | | | | | | | |
| Revenues | $ | 24,572,390 | | | $ | 13,501,751 | | | $ | 11,070,639 | | | 82 | % |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 23,897,263 | | | 13,217,757 | | | (10,679,506) | | | (81) | % |
| Depreciation and amortization attributable to costs of revenues | 29,844 | | | 31,829 | | | 1,985 | | | 6 | % |
| Gross profit | 645,283 | | | 252,165 | | | 393,118 | | | 156 | % |
| Selling general and administrative expense | 1,034,024 | | | 696,611 | | | (337,413) | | | (48) | % |
| Depreciation and amortization attributable to operating expenses | — | | | 1,086 | | | 1,086 | | | 100 | % |
| Income (loss) from operations | $ | (388,741) | | | $ | (445,532) | | | $ | 56,791 | | | 13 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Recovery Segment | | | | | | | |
| Revenues | $ | 3,955,405 | | | $ | 2,459,561 | | | $ | 1,495,844 | | | 61 | % |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 3,761,246 | | | 1,917,210 | | | (1,844,036) | | | (96) | % |
| Depreciation and amortization attributable to costs of revenues | 78,531 | | | 79,748 | | | 1,217 | | | 2 | % |
| Gross profit (loss) | 115,628 | | | 462,603 | | | (346,975) | | | (75) | % |
| Selling general and administrative expense | 235,505 | | | 148,032 | | | (87,473) | | | (59) | % |
| Depreciation and amortization attributable to operating expenses | — | | | — | | | — | | | — | % |
| Loss from operations | $ | (119,877) | | | $ | 314,571 | | | $ | (434,448) | | | (138) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Our Black Oil segment generated revenues of $446,676 for the three months ended September 30, 2021, with cost of revenues (exclusive of depreciation and amortization) of $402,989, and depreciation and amortization attributable to cost of revenues of $18,420. During the three months ended September 30, 2020, these revenues were $288,000 with cost of revenues (exclusive of depreciation and amortization) of $189,947 and depreciation and amortization attributable to cost of revenues of $3,985. Income from operations decreased for the three months ended September 30, 2021, compared to 2020, as a result of increases in commodity prices which resulted in higher costs, as well as negative spreads in the bunker fuel market which directly impacted our margins as well as higher operating expenses through our various facilities and increased SG&A expense.
During the three months ended September 30, 2021, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were $23,897,263, of which the processing costs for our Refining and Marketing business located at KMTEX were $448,647, and depreciation and amortization attributable to cost of revenues was $29,844. Revenues for the same period were $24,572,390. During the three months ended September 30, 2020, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were $13,217,757, which included the processing costs at KMTEX of $328,225, and depreciation and amortization attributable to cost of revenues was $31,829. Revenues for the same period were $13,501,751.
Our Refining segment includes the business operations of our Refining and Marketing operations, as well as Crystal which we acquired 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 82% during the three months ended September 30, 2021, as compared to the same period in 2020 mostly as a result of the added business line and increased commodity prices during the three months ended September 30, 2021. Overall volume for the Refining and Marketing segment was flat during the three months ended September 30, 2021, as compared to the same period in 2020. Our pygas volumes increased 33% for the three months ended September 30, 2021, as compared to the same period in 2020. Our fuel oil cutter volumes increased 13% for the three months ended September 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. Our Crystal volumes were down 5% for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. We have also had to assess the volume of fuel oil cutterstocks that we manage due to enhanced quality of products being demanded in the marketplace.
Our Recovery segment generated revenues of $3,955,405 for the three months ended September 30, 2021, with cost of revenues (exclusive of depreciation and amortization) of $3,761,246, and depreciation and amortization attributable to cost of revenues of $78,531. During the three months ended September 30, 2020, these revenues were $2,459,561 with cost of revenues (exclusive of depreciation and amortization) of $1,917,210, and depreciation and amortization attributable to cost of revenues of $79,748. Loss from operations increased for the three months ended September 30, 2021, compared to 2020, as a result of higher operating costs related to increases in volumes attributable to our Recovery segment and somewhat lower 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 61% as a result of an increase in volumes during the three months ended September 30, 2021, compared to the same period in 2020. Volumes were down in our metals segment during the three months ended September 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.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2020 FROM CONTINUING OPERATIONS
Set forth below are our results of operations for the nine months ended September 30, 2021 as compared to the same period in 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) | |
| | | 2021 | | 2020 |
| Revenues | | $ | 84,823,476 | | | $ | 30,460,606 | | | $ | 54,362,870 | | | 178 | % | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 79,319,678 | | | 28,598,874 | | | (50,720,804) | | | (177) | % | |
| Depreciation and amortization attributable to costs of revenues | | 358,905 | | | 327,672 | | | (31,233) | | | (10) | % | |
| Gross Profit | | 5,144,893 | | | 1,534,060 | | | 3,610,833 | | | 235 | % | |
| | | | | | | | | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | | |
| Selling, general and administrative expenses | | 12,111,951 | | | 6,044,050 | | | (6,067,901) | | | (100) | % | |
| Depreciation and amortization attributable to operating expenses | | 80,748 | | | 48,118 | | | (32,630) | | | (68) | % | |
| | | | | | | | | |
| Total operating expenses | | 12,192,699 | | | 6,092,168 | | | (6,100,531) | | | (100) | % | |
| Income (loss) from operations | | (7,047,806) | | | (4,558,108) | | | (2,489,698) | | | (55) | % | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other income (expense): | | | | | | | | | |
| Other Income | | 4,222,000 | | | — | | | 4,222,000 | | | 100 | % | |
| | | | | | | | | |
| Loss on sale of assets | | (1,927) | | | (124,090) | | | 122,163 | | | 98 | % | |
| Gain (loss) on change in value of derivative liability | | (11,380,122) | | | 1,844,369 | | | (13,224,491) | | | (717) | % | |
| | | | | | | | | |
| Interest expense | | (603,398) | | | (291,933) | | | (311,465) | | | (107) | % | |
| Total other income (expense) | | (7,763,447) | | | 1,428,346 | | | (9,191,793) | | | (644) | % | |
| | | | | | | | | |
| Loss before income taxes | | (14,811,253) | | | (3,129,762) | | | (11,681,491) | | | (373) | % | |
| | | | | | | | | |
| Income tax (expense) benefit | | — | | | — | | | — | | | — | % | |
| | | | | | | | | |
| Net loss from continuing operations | | (14,811,253) | | | (3,129,762) | | | (11,681,491) | | | (373) | % | |
| Income (loss) from discontinued operations (see Note 15) | | 12,464,445 | | | (5,323,630) | | | 25,221,927 | | | 303 | % | |
| Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest from continued operations | | 510,618 | | | 155,322 | | | 355,296 | | | 229 | % | |
| Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations | | 7,183,268 | | | 35,449 | | | 7,147,819 | | | 20,164 | % | |
| Net loss attributable to Vertex Energy, Inc. | | $ | (10,040,694) | | | $ | (8,644,163) | | | $ | 23,825,396 | | | 276 | % | |
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. 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 feedstock increases, the prices we are required to pay for such feedstock typically increases as well.
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 as well as how efficiently we operate our facilities, and other maintenance at our facilities.
Total revenues increased by 178% for the nine months ended September 30, 2021 compared to the same period in 2020, due primarily to higher commodity prices and increased volumes across our facilities, during the nine months ended September 30, 2021, compared to the prior year’s period. Total volume was up 3% during the nine months ended September 30, 2021, compared to the same period in 2020.
During the nine months ended September 30, 2021, total cost of revenues (exclusive of depreciation and amortization) was $79,319,678, compared to $28,598,874 for the nine months ended September 30, 2020, an increase of $50,720,804 or 177% from the prior period. The main reason for the increase was the addition of the Crystal business which we only had for the second half of 2020 and have now had the operations of for the full nine months of 2021, in addition to higher commodity prices, which impacted our feedstock pricing, and increases in volumes throughout the business.
Additionally, our per barrel margin increased 226% for the nine months ended September 30, 2021, relative to the nine months ended September 30, 2020, due to increased volumes, along with increases in commodity prices for the finished products we sell during the nine months ended September 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 ($5,144,893 for the 2021 period versus $1,534,060 for the 2020 period). The 177% increase in cost of revenues (exclusive of depreciation and amortization) for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, is mainly a result of the increase in commodity prices, and increased volumes at our facilities during the period, offset by increases in revenues.
For the nine months ended September 30, 2021, total depreciation and amortization expense attributable to cost of revenues was $358,905, compared to $327,672 for the nine months ended September 30, 2020, an increase of $31,233, mainly due to additional investments in rolling stock and facility assets during the fourth quarter of 2020, which increased depreciation and amortization in 2021.
We had gross profit as a percentage of revenue of 6.1% for the nine months ended September 30, 2021, compared to gross profit as a percentage of revenues of 5.0% for the nine months ended September 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 nine months ended September 30, 2021, compared to the same period in 2020. For example, the average posting (U.S. Gulfcoast No. 2 Waterbone) for the nine months ended September 30, 2021, increased $26.53 per barrel from a nine-month average of $45.96 for the nine months ended September 30, 2020, to $72.49 per barrel for the nine months ended September 30, 2021.
We had selling, general, and administrative expenses of $12,111,951 for the nine months ended September 30, 2021, compared to $6,044,050 of selling, general, and administrative expenses for the prior year’s period, an increase of $6,067,901 or 100%. 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 loss from operations of $7,047,806 for the nine months ended September 30, 2021, compared to a loss from operations of $4,558,108 for the nine months ended September 30, 2020, an increase of $2,489,698 or 55% from the prior year’s nine-month period. The increase in loss from operations was mostly due to the increases seen in commodity prices and overall margin impact from our bunker fuels business along with overall increase in operating expenses at our facilities. As market conditions change, the pay or charge for our oil collection services will fluctuate.
We had interest expense of $603,398 for the nine months ended September 30, 2021, compared to interest expense of $291,933 for the nine months ended September 30, 2020, an increase in interest expense of $311,465 or 107%, due to a higher amount of term debt outstanding during the nine months ended September 30, 2021, compared to the prior period. This was due to having a higher amount of term debt outstanding during the nine months ended September 30, 2021, compared to the prior year’s period.
We had other income of $4,222,000 for the nine months ended September 30, 2021, compared to $0 for the nine months ended September 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 loss on the sale of assets of $1,927 for the nine months ended September 30, 2021, compared to a loss on the sale of assets of $124,090 for the nine months ended September 30, 2020.
We had a $11,380,122 loss on change in value of derivative liability for the nine months ended September 30, 2021, in connection with certain warrants granted in June 2015 and May 2016, as described in greater detail in “Note 9. Preferred Stock and Detachable Warrants” to the unaudited consolidated financial statements included herein under “Part I”-“Item 1 Financial
Statements”, compared to a gain on change in the value of our derivative liability of $1,844,369 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 from continuing operations of $14,811,253 for the nine months ended September 30, 2021, compared to a net loss from continuing operations of $3,129,762 for the nine months ended September 30, 2020, an increase in net loss of $11,681,491 or 373% from the prior period due to the reasons described above. The majority of our net loss for the nine months ended September 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.
Each of our segments’ income (loss) from operations during the nine months ended September 30, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) | |
| Black Oil Segment | | 2021 | | 2020 |
| Revenues | | $ | 1,300,220 | | | $ | 864,000 | | | $ | 436,220 | | | 50 | % | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 1,045,608 | | | 567,898 | | | (477,710) | | | (84) | % | |
| Depreciation and amortization attributable to costs of revenues | | 56,983 | | | 3,985 | | | (52,998) | | | (1,330) | % | |
| Gross profit (loss) | | 197,629 | | | 292,117 | | | (94,488) | | | (32) | % | |
| | | | | | | | | |
| Selling, general and administrative expense | | 9,030,142 | | | 3,780,366 | | | (5,249,776) | | | (139) | % | |
| Depreciation and amortization attributable to operating expenses | | 80,748 | | | 44,860 | | | (35,888) | | | (80) | % | |
| | | | | | | | | |
| Loss from operations | | $ | (8,913,261) | | | $ | (3,533,109) | | | $ | (5,380,152) | | | (152) | % | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Refining Segment | | | | | | | | | |
| Revenues | | $ | 67,683,035 | | | $ | 22,309,671 | | | $ | 45,373,364 | | | 203 | % | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 64,503,727 | | | 21,750,687 | | | (42,753,040) | | | (197) | % | |
| Depreciation and amortization attributable to costs of revenues | | 97,658 | | | 101,152 | | | 3,494 | | | 3 | % | |
| Gross profit | | 3,081,650 | | | 457,832 | | | 2,623,818 | | | 573 | % | |
| Selling, general and administrative expense | | 2,481,542 | | 1,867,027 | | (614,515) | | (33)% | |
| Depreciation and amortization attributable to operating expenses | | — | | 3,258 | | 3,258 | | 100% | |
| Income (loss) from operations | | $ | 600,108 | | $ | (1,412,453) | | $ | 2,012,561 | | 142% | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Recovery Segment | | | | | | | | | |
| Revenues | | $ | 15,840,222 | | $ | 7,286,935 | | $ | 8,553,287 | | 117% | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 13,770,343 | | 6,280,290 | | (7,490,053) | | (119)% | |
| Depreciation and amortization attributable to costs of revenues | | 204,264 | | 222,535 | | 18,271 | | 8% | |
| Gross profit | | 1,865,615 | | 784,110 | | 1,081,505 | | 138% | |
| Selling, general and administrative expense | | 600,268 | | 396,656 | | (203,612) | | (51)% | |
| Depreciation and amortization attributable to operating expenses | | — | | — | | — | | —% | |
| Income from operations | | $ | 1,265,347 | | $ | 387,454 | | $ | 877,893 | | 227% | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Our Black Oil segment generated revenues of $1,300,220 for the nine months ended September 30, 2021, with cost of revenues (exclusive of depreciation and amortization) of $1,045,608, and depreciation and amortization attributable to cost of revenues of $56,983. During the nine months ended September 30, 2020, these revenues were $864,000 with cost of revenues (exclusive of depreciation and amortization) of $567,898, and depreciation and amortization attributable to cost of revenues of
$3,985. Loss from operations increased for the nine months ended September 30, 2021, compared to 2020, as a result of higher commodity prices, increased operating expenses, as well as the fact that, as discussed above, during the nine months ended September 30, 2021.
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 nine months ended September 30, 2021, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were $64,503,727, of which the processing costs for our Refining and Marketing business located at KMTEX were $1,304,672, and depreciation and amortization attributable to cost of revenues of $97,658. Revenues for the same period were $67,683,035. During the nine months ended September 30, 2020, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were $21,750,687, which included the processing costs at KMTEX of $1,202,050, and depreciation and amortization attributable to cost of revenues of $101,152. Revenues for the same period were $22,309,671.
Overall volume for the Refining and Marketing division increased 123% during the nine months ended September 30, 2021, as compared to the same period in 2020. Our fuel oil cutter volumes increased 46% for the nine months ended September 30, 2021, compared to the same period in 2020. Our pygas volumes were up 9% for the nine months ended September 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.
Our Recovery segment generated revenues of $15,840,222 for the nine months ended September 30, 2021, with cost of revenues (exclusive of depreciation and amortization) of $13,770,343, and depreciation and amortization attributable to cost of revenues of $204,264. During the nine months ended September 30, 2020, these revenues were $7,286,935 with cost of revenues (exclusive of depreciation and amortization) of $6,280,290, and depreciation and amortization attributable to cost of revenues of $222,535. Income from operations increased for the nine months ended September 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 117% 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 nine months ended September 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 following table sets forth the high and low spot prices during the nine months ended September 30, 2021, for our key benchmarks.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | | | | | | | |
| Benchmark | | High | | Date | | Low | | Date |
| U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | | $ | 2.15 | | | September 30 | | $ | 1.32 | | | January 4 |
| U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | | $ | 2.30 | | | July 30 | | $ | 1.36 | | | January 4 |
| U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | | $ | 69.64 | | | September 30 | | $ | 45.08 | | | January 4 |
| NYMEX Crude oil (dollars per barrel) | | $ | 75.29 | | | September 28 | | $ | 47.62 | | | January 4 |
| Reported in Platt’s US Marketscan (Gulf Coast) | | | | | | |
The following table sets forth the high and low spot prices during the nine months ended September 30, 2020, for our key benchmarks.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | | | | | | | |
| Benchmark | | High | | Date | | Low | | Date |
| U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | | $ | 1.95 | | | January 3 | | $ | 0.42 | | | April 27 |
| U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | | $ | 1.75 | | | January 3 | | $ | 0.40 | | | March 23 |
| U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | | $ | 47.34 | | | January 29 | | $ | 12.00 | | | April 21 |
| NYMEX Crude oil (dollars per barrel) | | $ | 63.27 | | | January 6 | | $ | (37.63) | | | April 20 |
| Reported in Platt’s US Marketscan (Gulf Coast) | | | | | | |
We saw an increase in the second 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 the Organization of Petroleum Exporting Countries (“OPEC”) and other non-OPEC producer nations (collectively with OPEC members, “OPEC+”) during the first quarter of 2020 and global storage considerations. Moving into the fourth quarter 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.
aggregated feedstock. 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 the New 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. These factors include the supply of, and demand for, crude oil, and refined products, which in turn depend on changes in domestic and foreign economies; weather conditions; domestic and foreign political affairs; production levels; the marketing of competitive fuels; and government regulation. 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.
Refining margins have experienced significant increases during the first nine months of 2022 in each of the benchmark commodities we track compared to the same period in 2021. The ongoing conflict between Russia and Ukraine, which began in the first quarter of 2022, and the economic sanctions imposed on Russia have decreased the global supply of crude oil affecting global prices. This conflict coupled with disruptions in supply chain that began with the COVID-19 pandemic in 2020, have resulted in increased inflation and higher market prices in crude oil and refined products. During the twelve months ended September 30, 2022, the Consumer Price Energy Index in the United States increased 19.7% impacting our gross margins. The Consumer Price All Items Index increased 8.2% for the same period impacting our operating expenses and slowing economic growth.
The following table sets forth the high and low spot prices during the nine months ended September 30, 2022, for our key benchmarks.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | | | | | | | |
| Benchmark | | High | | Date | | Low | | Date |
| Crackspread 2-1-1 (dollars per barrel) (1) | | $ | 56.47 | | | June 22 | | $ | 25.50 | | | August 8 |
| U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | | $ | 4.36 | | | March 8 | | $ | 2.15 | | | January 3 |
| U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | | $ | 4.35 | | | June 3 | | $ | 2.26 | | | January 3 |
| U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | | $ | 112.93 | | | March 8 | | $ | 54.30 | | | September 30 |
| NYMEX Crude oil (dollars per barrel) | | $ | 123.70 | | | March 8 | | $ | 76.08 | | | January 3 |
| Reported in Platt’s US Marketscan (Gulf Coast) | | | | | | |
(1) Period reported from April 1 through September 30. The Gulf Coast 2-1-1 crack spread is calculated using two barrels of LLS (Louisiana Light Sweet crude oil) producing one barrel of USGC CBOB gasoline and one barrel of USGC ultra-low sulfur diesel. |
The following table sets forth the high and low spot prices during the nine months ended September 30, 2021, for our key benchmarks.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | | | | | | | |
| Benchmark | | High | | Date | | Low | | Date |
| U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | | $ | 2.15 | | | September 30 | | $ | 1.32 | | | January 4 |
| U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | | $ | 2.30 | | | July 30 | | $ | 1.36 | | | January 4 |
| U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | | $ | 69.64 | | | September 30 | | $ | 45.08 | | | January 4 |
| NYMEX Crude oil (dollars per barrel) | | $ | 75.29 | | | September 28 | | $ | 47.62 | | | January 4 |
| Reported in Platt’s US Marketscan (Gulf Coast) | | | | | | |
Our production and sales of lower value products such as LPGs, VGO and sulfur also impact our results of operations, especially when crude prices are high. Our results of operations are also significantly affected by our direct operating expenses, especially our labor costs. Safety, reliability and the environmental performance of our refineries’ operations are critical to our financial performance.
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 havebe willing 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.
Our results of operations for the three and nine months ended September 30, 2022, were significantly impacted by the acquisition of the Mobile Refinery on April 1, 2022. There are no comparable amounts presented for the same periods in 2021. See the summary of the Mobile Refinery operating results under Results of Operations – Refining and Marketing, below.
We operate two business segments: the Refining and Marketing segment and the Black Oil and Recovery segment. The table below shows our product categories by segment. For further description of individual products, please refer to the Glossary of terms at the beginning of this document.
| | | | | | | | | |
| Black Oil(1) and Recovery (2) | Refining and Marketing(3) | |
| Gasolines | | X | |
| Jet Fuels | | X | |
| Diesel | | X | |
| Base oil | X | | |
| VGO/Marine fuel sales | X | X | |
Other refinery products (4) | X | X | |
| Pygas | | X | |
Metals (5) | X | | |
Other re-refined products (6) | X | X | |
| Terminalling | | X | |
| Oil collection services | X | | |
(1) The Black Oil segment continued operations consist primary of the sale of (a) other re-refinery products, recovered products, and used motor oil; (b) specialty blending and packaging of lubricants, (c) transportation revenues; and (d) the sale of VGO (vacuum gas oil)/marine fuel; (e) petroleum products which include base oil and industrial fuels—which consist of used motor oils, cutterstock and fuel oil generated by our facilities; (f) oil collection services—which consist of used oil sales, burner fuel sales, antifreeze sales and service charges; (g) the sale of other re-refinery products including asphalt, condensate, recovered products, and used motor oil. As of the date of this filing, the Company is in ongoing discussions with a third party regarding a potential sale of the Company’s Heartland refinery in Ohio (which forms a part of the Black Oil segment), and as such, has determined to present only the Company’s Heartland refinery options as discontinued operations (“Heartland Business”).
(2) As discussed in greater detail below under “Black Oil and 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.
(3) As discussed in greater detail below 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 (Monument Chemical); and distillates.
(4) Other refinery products include the sales of base oil, cutterstock and hydrotreated VGO, LPGs, sulfur and vacuum tower bottoms (VTB).
(5)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.
(6) Other re-refinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.
Results of Operations
The following discussion includes comments and analysis relating to our results of operations. This discussion should be read in conjunction with Item 1. Financial Statements and is intended to provide investors with a reasonable basis for assessing our historical operations, however, it should not serve as the only criteria for predicting our future performance.
Consolidated Results of Operations
Set forth below are our results of operations for the three and nine months ended September 30, 2022 as compared to the same periods in 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | Variance* | 2022 | | 2021 | | Variance* |
| Revenues | $ | 810,208 | | | $ | 50,982 | | | $ | 759,226 | | | $ | 1,915,423 | | | $ | 147,807 | | | $ | 1,767,616 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 750,463 | | | 46,142 | | | (704,321) | | | 1,819,757 | | | 127,986 | | | (1,691,771) | |
| Depreciation and amortization attributable to costs of revenues | 4,050 | | | 1,028 | | | (3,022) | | | 9,144 | | | 3,002 | | | (6,142) | |
| Gross profit | 55,695 | | | 3,812 | | | 51,883 | | | 86,522 | | | 16,819 | | | 69,703 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Selling, general and administrative expenses | 36,978 | | | 8,177 | | | (28,801) | | | 89,934 | | | 21,742 | | | (68,192) | |
| Depreciation and amortization attributable to operating expenses | 1,120 | | | 420 | | | (700) | | | 2,656 | | | 1,260 | | | (1,396) | |
| | | | | | | | | | | |
| Total operating expenses | 38,098 | | | 8,597 | | | (29,501) | | | 92,590 | | | 23,002 | | | (69,588) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Income (loss) from operations | 17,597 | | | (4,785) | | | 22,382 | | | (6,068) | | | (6,183) | | | 115 | |
| | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other income | 417 | | | (3) | | | 420 | | | 1,060 | | | 4,220 | | | (3,160) | |
| | | | | | | | | | | |
| Income (loss) on change in value of derivative warrant liability | 12,312 | | | 11,907 | | | 405 | | | 7,788 | | | (11,380) | | | 19,168 | |
| | | | | | | | | | | |
| Interest expense | (13,131) | | | (455) | | | (12,676) | | | (65,083) | | | (919) | | | (64,164) | |
| Total other income (expense) | (402) | | | 11,449 | | | (11,851) | | | (56,235) | | | (8,079) | | | (48,156) | |
| | | | | | | | | | | |
| Income (loss) from continuing operation before income tax | 17,195 | | | 6,664 | | | 10,531 | | | (62,303) | | | (14,262) | | | (48,041) | |
| | | | | | | | | | | |
| Income tax benefit (expense) | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Income (loss) from continuing operations | 17,195 | | | 6,664 | | | 10,531 | | | (62,303) | | | (14,262) | | | (48,041) | |
| Income from discontinued operations, net of tax | 4,975 | | | 3,981 | | | 994 | | | 19,882 | | | 11,915 | | | 7,967 | |
| Net income (loss) | 22,170 | | | 10,645 | | | 11,525 | | | (42,421) | | | (2,347) | | | (40,074) | |
| Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | (64) | | | (115) | | | 51 | | | 33 | | | 511 | | | (478) | |
| Net income attributable to non-controlling interest and redeemable non-controlling from discontinued operations | — | | | 2,400 | | | (2,400) | | | 6,829 | | | 7,183 | | | (354) | |
| Net income (loss) attributable to Vertex Energy, Inc. | $ | 22,234 | | | $ | 8,360 | | | $ | 13,874 | | | $ | (49,283) | | | $ | (10,041) | | | $ | (39,242) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
* Favorable variances are represented by positive numbers and unfavorable variances are represented by negative numbers.
Our revenues and cost of revenues are significantly impacted by the recently acquired Mobile Refinery on April 1, 2022, and fluctuations in commodity prices. Increases in commodity prices typically result in increases in revenue and cost of revenues (i.e., feedstock costs). Additionally, we have used hedging instruments to manage our exposure to underlying commodity prices.
Third Quarter 2022 Compared to Third Quarter 2021 Discussion
During the three months ended September 30, 2022, compared to the same period in 2021, we saw a 204% increase in the volume of products we manage through our facilities (mainly as a result of the Mobile Refinery acquisition and increased volumes processed through such facility). In addition, we saw an increase in operating costs (inclusive of depreciation and amortization) on a per barrel basis for the third quarter of 2022 as compared to the same period in 2021 due to the increased price of direct material and indirect costs. Management of operating costs is critical to our ability to remain competitive in the marketplace, we continue to experience inflationary pressures across numerous cost categories. The key areas of impact are around transportation, labor, as well as fuel and energy related expenses.
During the three months ended September 30, 2022, total revenues increased approximately $759.2 million compared to the same period in 2021, of which $733.5 million was from the Mobile Refinery. The remaining variance of $25.7 million was from our legacy business. This increase from our legacy business was due primarily to higher commodity prices and increased volumes at our facilities. Volumes improved as a result of additional feedstock availability in the overall marketplace.
During the three months ended September 30, 2022, total cost of revenues (exclusive of depreciation and amortization) increased approximately $704.3 million, of which $681.7 million was from the Mobile Refinery and $22.7 million was from other business compared to same period ended September 30, 2021. The main reason for the $22.7 million increase from other business was the result of the increase in commodity prices during 2022 compared to 2021, which impacted our feedstock pricing and certain operational expenses. Our cost of revenues is a function of the ultimate price we are required to pay to acquire feedstocks, principally crude oil, inventory financing costs, and other maintenance costs at our facilities.
The total operating expenses (excluding depreciation and amortization) increased approximately $28.8 million for the three months ended September 30, 2022, compared to the same prior year’s period, of which $26.2 million was associated with the Mobile Refinery.
For the three months ended September 30, 2022, total depreciation and amortization expense attributable to cost of revenues was $4.1 million, compared to $1.0 million for the three months ended September 30, 2021, an increase of $3.0 million, mainly due to Mobile Refinery assets acquired and additional investments in rolling stock and facility assets during the fourth quarter of 2021, which increased depreciation and amortization in 2022.
Additionally, our per barrel margin increased 496% for the three months ended September 30, 2022, relative to the three months ended September 30, 2021. Our per barrel margin is calculated by dividing the total volume of product sold (in bbls) by total gross profit for the applicable period ($55.7 million for the 2022 period versus $3.8 million for the 2021 period). This increase was a result of the increase in our product spreads related to increases in feedstock prices and increases in operating maintenance costs at our facilities, during the three months ended September 30, 2022, compared to the same period during 2021.
The Gulf Coast 2-1-1 crack spreads increased during the three months ended September 30, 2022 compared to the three months ended June 30, 2022. The crack spread averaged $34.82 per barrel during the three months ended September 30, 2022 compared to $45.06 during the three months ended June 30, 2022. We use crack spreads as a performance benchmark for our Mobile refining gross margin and as a comparison with other industry participants. The Gulf Coast 2-1-1 crack spread is calculated using two barrels of LLS (Louisiana Light Sweet crude oil) producing one barrel of USGC CBOB gasoline and one barrel of USGC ultra-low sulfur diesel.
Overall, commodity prices were up for the three months ended September 30, 2022, compared to the same period in 2021. For example, the average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the three months ended September 30, 2022, increased 22% per barrel from a three-month average of $62.46 for the three months ended September 30, 2021 to $76.25 per barrel for the three months ended September 30, 2022. The average posting (U.S. Gulfcoast Unleaded 87 Waterborne) for the three months ended September 30, 2022 increased $20.05 per barrel from a three-month average of $92.69 for the three months ended September 30, 2021 to $120.74 per barrel for the three months ended September 30, 2022.
We had interest expense of $13.1 million for the three months ended September 30, 2022, compared to interest expense of $0.5 million for the three months ended September 30, 2021, an increase of $12.6 million. This increase was due to the accretion of deferred loan costs and interest expenses associated with the issuance of $155 million in Convertible Senior Notes on November 1, 2021, and draws under our Term Loan of $125 million on April 1, 2022 and $40 million on May 26, 2022.
We had an approximately $12.3 million gain on change in value of derivative liability for the three months ended September 30, 2022, in connection with the warrants granted in connection with the Term Loan issued on April 1, 2022 (warrants to purchase 2.75 million shares) and May 26, 2022 (warrants to purchase 0.25 million shares), compared to a gain on change in the value of our derivative liability of $11.9 million in the prior year’s period, which was in connection with certain warrants granted in May 2016, which have either been exercised or expired to date. This change was mainly due to the fluctuation in the market price of our common stock (and more specifically the decrease in the market price of our common stock during the current period, compared to the prior period), warrant exercises, and non-cash accounting adjustments in connection therewith.
We had net income from continuing operations of approximately $17.2 million for the three months ended September 30, 2022, compared to net income from continuing operations of $6.7 million for the three months ended September 30, 2021, an increase in net income from continuing operations of $10.5 million. The main reason for the increase in net income from continuing operations for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was attributable to the profit on inventory hedging activities, and increased commodity prices which helped improve margins for the three months ended September 30, 2022, each as described in greater detail above.
Year to Date 2022 Compared to Year to Date 2021 Discussion
Total revenues increased $1,767.6 million for the nine months ended September 30, 2022 compared to the same period in 2021, due primarily to the Mobile Refinery acquisition, which Mobile Refinery generated $1,655.7 million in revenue and higher commodity prices and increased volumes across our facilities, during the nine months ended September 30, 2022, compared to the prior year’s period.
For the nine months ended September 30, 2022, total cost of revenues (exclusive of depreciation and amortization) was $1.8 billion, compared to $128.0 million for the nine months ended September 30, 2021, an increase of $1.7 billion from the prior period. The main reason for the increase was the addition of the Mobile Refinery business which was acquired on April 1, 2022, in addition to higher commodity prices, which impacted our feedstock pricing, and increases in volumes throughout the business.
For the nine months ended September 30, 2022, total depreciation and amortization expense attributable to cost of revenues was approximately $9.1 million, compared to $3.0 million for the nine months ended September 30, 2021, an increase of $6.1 million, mainly due to assets acquired with the Mobile Refinery purchase.
We had gross profit as a percentage of revenue of 4.5% for the nine months ended September 30, 2022, compared to gross profit as a percentage of revenues of 11.4% for the nine months ended September 30, 2021. The decrease was mainly due to our change in business strategy after we acquired the Mobile Refinery on April 1, 2022.
We had operating expenses (excluding depreciation and amortization) of approximately $89.9 million for the nine months ended September 30, 2022, compared to $21.7 million for the prior year’s period, an increase of $68.2 million. This increase is primarily due to $48.2 million of operating expenses relating to the Mobile Refinery and $13.6 million of Mobile Refinery acquisition costs and business development expenses related to the transactions contemplated by the UMO Sale Agreement (which was terminated as of January 25, 2022) and the Refinery Purchase Agreement and related transactions.
We had gross loss from operations of approximately $6.1 million for the nine months ended September 30, 2022, compared to a loss from operations of $6.2 million for the nine months ended September 30, 2021, an increase of $0.1 million in gross loss from operations from the prior year’s nine-month period. The increase in gross loss from operations was mostly due to the loss from commodity derivatives and the cost of the Mobile Refinery acquisition.
We had interest expense of approximately $65.1 millionfor the nine months ended September 30, 2022, compared to interest expense of $0.9 million for the same period in 2021, an increase in interest expense of $64.2 million due to a higher amount of term debt outstanding during the nine months ended September 30, 2022, compared to the prior period, the unamortized deferred loan costs related to the conversion of Convertible Senior Notes to common stock during the period and the interest associated with the Convertible Senior Notes, which were issued on November 1, 2021, and the Term Loan, which was issued on April 1, 2022 ($125 million) and May 26, 2022 ($40 million).
We had an approximately $7.8 million gain on change in value of derivative liability for the nine months ended September 30, 2022 in connection with certain warrants granted in April and May 2022, compared to a loss on change in the value of our derivative liability of $11.4 million in the prior year’s period, which related to warrants granted in June 2015 and May 2016 which expired during 2021. This change was mainly due to the fluctuation in the market price of our common stock (and more specifically the significant decrease 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 from continuing operations of approximately $62.3 millionfor the nine months ended September 30, 2022, compared to a net loss from continuing operations of $14.3 million for the nine months ended September 30, 2021, an increase in net loss from continuing operations of $48.0 million from the prior period due to the reasons described above. The majority of our net loss for the nine months ended September 30, 2022, was attributable to the loss on inventory hedging activities created by market conditions, and amortized deferred loan cost and discount, which was reported as interest expenses, related to the conversion of Convertible Senior Notes, which is a non-cash expense.
Refining and Marketing Segment
Effective on April 1, 2022, the Refining and Marketing segment generates most of its revenues from the sales of petroleum refined products processed at the Mobile Refinery. The Mobile Refinery processes crude oils into refined finished products which include gasolines, distillates including jet fuel, LPGs, and other residual fuels such as VTBs, VGO, olefins, reformate and sulfur. We market these finished products across the southeastern United States through a high-capacity truck rack, together with deep and shallow water distribution points capable of supplying waterborne vessels. Most of the Mobile Refinery production is sold to Macquarie under the Inventory Financing Agreement. The Refining and Marketing segment also includes revenues from gathering 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. Additionally, this segment includes the wholesale distribution of gasoline, blended gasoline, and diesel for use as engine fuel to operate automobiles, trucks, locomotives, and construction equipment.
Results from operations from the Mobile Refinery have substantially changed our overall revenue, cost of revenue, net income, and earnings before interest, taxes, depreciation, and amortization. During the three and nine months ended September 30, 2022, the Mobile Refinery generated 91% and 86%, respectively, of our total consolidated revenue. Set forth below are our results of operations and certain key performance indicators disaggregated to show the Mobile Refinery on a stand-alone basis to facilitate comparability between periods (in thousands, except key performance indicators):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
| Refining and Marketing Segment (in thousands) | Mobile Refinery | | Legacy Refining and Marketing | | Total Refining and Marketing | | Legacy Refining and Marketing |
| Revenues | $ | 733,521 | | | $ | 33,248 | | | $ | 766,769 | | | $ | 24,572 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 681,682 | | | 33,482 | | | 715,164 | | | 23,937 | |
| Depreciation and amortization attributable to costs of revenues | 2,957 | | | 154 | | | 3,111 | | | 127 | |
| Gross profit (loss) | 48,882 | | | (388) | | | 48,494 | | | 508 | |
| Operating expenses | | | | | | | |
| Selling general and administrative expense | 26,240 | | | 1,748 | | | 27,988 | | | 1,034 | |
| Depreciation and amortization attributable to operating expenses | 736 | | | 114 | | | 850 | | | 108 | |
| Total operating expenses | 26,976 | | | 1,862 | | | 28,838 | | | 1,142 | |
| Income (loss) from operations | 21,906 | | | (2,250) | | | 19,656 | | | (634) | |
| Other income (expenses) | | | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| Interest expense | (3,536) | | | — | | | (3,536) | | | — | |
| Net income (loss) | $ | 18,370 | | | $ | (2,250) | | | $ | 16,120 | | | $ | (634) | |
| Refining adjusted EBITDA * | (517) | | | (2,757) | | | (3,274) | | | (399) | |
| Key performance indicators: | | | | | | | |
| Refining gross margin | $ | 48,343 | | | n/a | | n/a | | n/a |
Refining gross margin per bbl of throughput (1)* | 7.73 | | | n/a | | n/a | | n/a |
USGC 2-1-1 Crack Spread Per Barrel (2) | 34.82 | | | n/a | | n/a | | n/a |
Operating expenses per bbl of throughput (3) | $ | 4.20 | | | n/a | | n/a | | n/a |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Refining and Marketing Segment (in thousands) | Mobile Refinery | | Legacy Refining and Marketing | | Total Refining and Marketing | | Legacy Refining and Marketing |
| Revenues | $ | 1,655,717 | | | $ | 112,161 | | | $ | 1,767,878 | | | $ | 67,683 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 1,598,924 | | | 109,093 | | | 1,708,017 | | | 64,555 | |
| Depreciation and amortization attributable to costs of revenues | 5,944 | | | 395 | | | 6,339 | | | 379 | |
| Gross profit | 50,849 | | | 2,673 | | | 53,522 | | | 2,749 | |
| Operating expenses | | | | | | | |
| Selling general and administrative expense | 48,201 | | | 4,508 | | | 52,709 | | | 2,482 | |
| Depreciation and amortization attributable to operating expenses | 1,472 | | | 313 | | | 1,785 | | | 325 | |
| Total operating expenses | 49,673 | | | 4,821 | | | 54,494 | | | 2,807 | |
| Income (loss) from operations | 1,176 | | | (2,148) | | | (972) | | | (58) | |
| Other income (expenses) | | | | | — | | | — | |
| | | | | | | |
| Interest expense | (6,786) | | | — | | | (6,786) | | | — | |
| Interest income | 18 | | | — | | | 18 | | | — | |
| Net income (loss) | $ | (5,592) | | | $ | (2,148) | | | $ | (7,740) | | | $ | (58) | |
| Refining adjusted EBITDA* | 63,063 | | | (1,509) | | | 61,554 | | | 646 | |
| Key performance indicators: | | | | | | | |
| Refining gross margin | $ | 140,952 | | | n/a | | n/a | | n/a |
Refining gross margin per bbl of throughput(1)* | 11.00 | | | n/a | | n/a | | n/a |
USGC 2-1-1 Crack Spread Per Barrel(2) | 39.95 | | | n/a | | n/a | | n/a |
Operating expenses per bbl of throughput (3) | $ | 3.76 | | | n/a | | n/a | | n/a |
* See “Non-GAAP Financial Measures” below.
(1) Refining gross margin per throughput barrel is calculated as refining gross margin divided by total throughput barrels for the period presented.
(2) Crack Spread USGC 2-1-1. The crack spread is a measure of the difference between market prices for refined products and crude oil, commonly used by the refining industry. We use crack spreads as a performance benchmark for our refining gross margin and as a comparison with other industry participants. Crack spreads can fluctuate significantly, particularly when prices of refined products do not move in the same direction as the cost of crude oil. To calculate the crack spread we believe most closely relates to the crude intakes and products at the Mobile Refinery, we use two barrels of Louisiana Light Sweet crude oil, producing one barrel of USGC CBOB gasoline and one barrel of USGC ULSD.
(3) Operating expenses per throughput barrel are calculated as operating expenses minus depreciation and amortization divided by total throughput barrels for the period presented.
The following table shows average throughput and product yield at the Mobile Refinery since we acquired it on April 1, 2022. During the third quarter of 2022, the Mobile Refinery underwent a turnaround at the crude unit and change of catalyst at the diesel hydrotreater and reformer units, impacting our throughput volumes for the quarter.
| | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Six Months Ended September 30, 2022 |
| Refinery Feedstocks (bpd) | | | |
| Crude oil | 67,954 | | | 70,032 | |
| Total feedstocks | 67,954 | | | 70,032 | |
| | | |
| Refinery Yields (bpd) | | | |
| Gasolines | 15,310 | | | 16,646 | |
| Distillates | 20,342 | | | 19,884 | |
| Jet fuel | 11,026 | | | 10,860 | |
Other (1) | 21,147 | | | 22,390 | |
| Total average barrel yields per day | 67,825 | | | 69,780 | |
(1) Other includes intermediates and LPGs.
Third Quarter 2022 Compared to Third Quarter 2021 Discussion
Our Refining segment includes the business operations of our Refining and Marketing operations, which includes our Mobile Refinery. Revenues of $766.8 million in the Refining segment were up 3,020% during the three months ended September 30, 2022, as compared to the same period in 2021 mostly as a result of the operations of the Mobile Refinery, which had $733.5 of revenue, and the increased commodity prices and volume during the three months ended September 30, 2022. Overall volume for the Refining and Marketing segment increased during the three months ended September 30, 2022, as compared to the same period in 2021.
Gross profit for the segment was $48.5 million, of which $48.9 million was related to the Mobile Refinery. Our Legacy Refining and Marketing business experienced an increase in revenues of $8.7 million from the third quarter 2021 compared to the third quarter 2022. The decreased gross profit of $0.9 million from the legacy Refining and Marketing business was primarily due to higher commodity prices.
The Mobile Refinery had $26.2 million in operational expenses for the period, representing 93.8% of the total segment.The increase of $0.7 million quarter over quarter from the legacy Refining and Marketing business was primarily due to the higher inflation in 2022, compared to the same period in 2021.
Interest expense of $3.5 million for the third quarter 2022 included $2.1 million related to our inventory financing agreement and $1.4 million related to a capitalized equipment lease.There was no comparable activity for the same period in 2021.
Year to Date 2022 Compared to Year to Date 2021 Discussion
Our Refining segment includes the business operations of our Refining and Marketing operations, as well as the Mobile Refinery acquired on April 1, 2022. During the nine months ended September 30, 2022, our Refining and Marketing revenues were approximately $1,767.9 million, of which $1,655.7 million were from the Mobile Refinery operations. Cost of revenues (exclusive of depreciation and amortization) for the same period were $1,708.0 million, of which $1,598.9 million related to the processing costs of the Mobile Refinery, and depreciation and amortization attributable to cost of revenues was $6.3 million. During the nine months ended September 30, 2021, our Refining and Marketing revenues for the same period were $67.7 million, cost of revenues (exclusive of depreciation and amortization) were $65 million, and depreciation and amortization attributable to cost of revenues were $379 thousand.
Gross profit for the segment was $54.5 million, of which $49.7 million was related to the Mobile Refinery. Our legacy Refining and Marketing business experienced an increase in revenues of $49.5 million year to date 2021 compared to year to date 2022. The increase in gross profit from our legacy Refining and Marketing business of $2.0 million was primarily due to higher commodity prices.
The Mobile Refinery had $48.2 million in operation expenses for the period, representing 91.4% of the total segment.The increase of $2.0 million year to date 2021, over the same period in 2022 from the legacy Refining and Marketing business was primarily due to higher inflation during 2022, compared to the same period in 2021.
Interest expense of $6.8 million for the nine months ended September 30, 2022, included $3.8 million related to our inventory financing agreement, $2.7 million related to a capitalized equipment lease, and $0.2 for insurance financing. There was no comparable activity for the same period in 2021.
Non-GAAP Financial Measures
In addition to our results calculated under generally accepted accounting principles in the United States (“GAAP”), in this Report we also present Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA, each as discussed in greater detail below. Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA are “non-GAAP financial measures” presented as supplemental measures of the Company’s performance. They are not presented in accordance with GAAP. We use Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA as supplements to GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to allocate resources and to compare our performance relative to our peers. Additionally, these measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework which management uses, in addition to historical operating results, as the basis for financial, operational and planning decisions and present measurements that third parties have indicated are useful in assessing the Company and its results of operations. Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA are presented because we believe they provide additional useful information to investors due to the various noncash items during the period. Non-GAAP financial information similar to Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA are unaudited, and have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations are: Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect cash expenditures, or future requirements for capital expenditures, or contractual commitments; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt or cash income tax payments; although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect any cash requirements for such replacements; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA, represent only a portion of our total operating results; and other companies in this industry may calculate Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA differently than we do, limiting their usefulness as a comparative measure.
You should not consider Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA in isolation, or as substitutes for analysis of the Company’s results as reported under GAAP. The Company’s presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items. We compensate for these limitations by providing a reconciliation of each of these non-GAAP measures to the most comparable GAAP measure below. We encourage investors and others to review our business, results of operations, and financial information in their entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measure.
Refining gross margin.
Refining gross margin is defined as gross profit (loss) plus operating expenses and depreciation attributable to cost of revenues and other non-operating items included in costs of revenues, including unrealized losses on hedging activities and loss on inventory intermediation agreement.
Refining gross margin per barrel of throughput.
Refining gross margin per throughput barrel is calculated as refining gross margin divided by total throughput barrels for the period presented.
Refining Adjusted EBITDA.
Refining Adjusted EBITDA represents net income (loss) from operations plus depreciation and amortization, unrealized gains and losses on hedging activities, gain and loss on intermediation agreement, and certain other unusual or non-recurring charges included in selling, general, and administrative expenses.
The following tables reconcile GAAP gross profit to refining gross margin and net loss to refining Adjusted EBITDA for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
| Mobile Refinery | | Legacy Refining and Marketing | | Total Refining and Marketing | | Legacy Refining and Marketing |
| Gross profit (loss) | $ | 48,882 | | | $ | (388) | | | $ | 48,494 | | | $ | 508 | |
| Operating expenses included in cost of revenues | 25,508 | | | — | | | 25,508 | | | — | |
| Depreciation and amortization attributable to costs of revenues | 2,957 | | | 154 | | | 3,111 | | | 127 | |
| Unrealized gain on hedging activities | (46,977) | | | (775) | | | (47,752) | | | — | |
| Loss on inventory intermediation agreement | 17,972 | | | — | | | 17,972 | | | — | |
| Refining gross margin | $ | 48,342 | | | $ | (1,009) | | | $ | 47,333 | | | $ | 635 | |
| | | | | | | |
| Net income (loss) | $ | 18,370 | | | $ | (2,250) | | | $ | 16,120 | | | $ | (634) | |
| Depreciation and amortization | 3,693 | | | 268 | | | 3,961 | | | 235 | |
| Interest expenses | 3,536 | | | — | | | 3,536 | | | — | |
| Unrealized gain on hedging activities | (46,977) | | | (775) | | | (47,752) | | | — | |
| Loss on intermediation agreement | 17,972 | | | — | | | 17,972 | | | — | |
| Acquisition costs | 2,889 | | | — | | | 2,889 | | | — | |
| | | | | | | |
| Refining adjusted EBITDA | $ | (517) | | | $ | (2,757) | | | $ | (3,274) | | | $ | (399) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Mobile Refinery | | Legacy Refining and Marketing | | Total Refining and Marketing | | Legacy Refining and Marketing |
| Gross profit | $ | 50,849 | | | $ | 2,673 | | | $ | 53,522 | | | $ | 2,749 | |
| Operating expenses included in cost of revenues | 43,083 | | | — | | | 43,083 | | | — | |
| Depreciation and amortization attributable to costs of revenues | 5,944 | | | 395 | | | 6,339 | | | 379 | |
| Unrealized gain on hedging activities | (76) | | | (68) | | | (144) | | | — | |
| Loss on inventory intermediation agreement | 41,152 | | | — | | | 41,152 | | | — | |
| Refining gross margin | $ | 140,952 | | | $ | 3,000 | | | $ | 143,952 | | | $ | 3,128 | |
| | | | | | | |
| Net income (loss) | $ | (5,592) | | | $ | (2,148) | | | $ | (7,740) | | | $ | (58) | |
| Depreciation and amortization | 7,416 | | | 707 | | | 8,123 | | | 704 | |
| Interest expenses | 6,768 | | | — | | | 6,768 | | | — | |
| Unrealized gain on hedging activities | (76) | | | (68) | | | (144) | | | — | |
| Loss on intermediation agreement | 41,152 | | | — | | | 41,152 | | | — | |
| Acquisition costs | 11,967 | | | — | | | 11,967 | | | — | |
| Environmental reserve | 1,428 | | | — | | | 1,428 | | | — | |
| Refining adjusted EBITDA | $ | 63,063 | | | $ | (1,509) | | | $ | 61,554 | | | $ | 646 | |
Black Oil and Recovery Segment
After the acquisition of the Mobile Refinery on April 1, 2022, the revenue of our Black Oil and Recovery segments are less than 10% of consolidated revenue. As a result, we have decided, beginning with the current quarter, to combine our Black Oil and Recovery segment into one segment which is engaged in operations across the entire used motor oil recycling value chain, including refinement, collection, aggregation, transportation, storage, recovery, 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, petrochemical manufacturing operations, and a diverse network of suppliers who operate similar collection businesses to ours. We own a fleet of collection vehicles, which routinely visit generators to collect and purchase used motor oil.
We operate a refining facility in Baytown, Texas that uses our proprietary Thermal Chemical Extraction Process (“TCEP”), and we also utilize third-party processing facilities. We use TCEP to pre-treat used oil feedstock; prior to shipping to our facility in Marrero, Louisiana, where we re-refine used motor oil and produce VGO, which is then sold via barge to crude refineries to be utilized as an intermediate feedstock in the refining process, as well as to the marine fuels market. We also operate a re-refining complex located in Belle Chasse, Louisiana (“the Myrtle Grove facility”). This facility includes ground storage tanks with over 8.6 million gallons of storage capacity. These assets are used by both the Black Oil and Refining and Marketing segments. In addition, we also utilize third parties for the transportation and storage of used oil feedstocks. 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.
We also operate a generator solutions company for the proper recovery and management of hydrocarbon streams and other petroleum-based products, together with the recovery , processing and sale of ferrous and non-ferrous recyclable metal(s) products that are recovered from manufacturing and consumption.
The Black Oil and Recovery Segment includes our used motor oil business (the "UMO Business"), which includes the Company's Heartland refinery options ("Heartland Business"), which is presented as discontinued operations. Refer to Note 23, "Discontinued Operations" in Notes to Financial Statements for additional information.
The table below represents the operating results of Black Oil and Recovery Segment for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2022 | | 2021 | | Variance* | | 2022 | | 2021 | | Variance* |
| Revenues | $ | 43,439 | | | $ | 26,410 | | | $ | 17,029 | | | $ | 147,545 | | | $ | 80,124 | | | $ | 67,421 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 35,299 | | | 22,205 | | | 13,094 | | | 111,740 | | | 63,431 | | | 48,309 | |
| Depreciation and amortization attributable to costs of revenues | 939 | | | 901 | | | 38 | | | 2,805 | | | 2,623 | | | 182 | |
| Gross profit | 7,201 | | | 3,304 | | | 3,897 | | | 33,000 | | | 14,070 | | | 18,930 | |
| Operating expenses | | | | | | | | | | | |
| Selling general and administrative expense | 4,919 | | | 3,618 | | | 1,301 | | | 13,383 | | | 10,841 | | | 2,542 | |
| Depreciation and amortization attributable to operating expenses | 39 | | | 59 | | | (20) | | | 142 | | | 176 | | | (34) | |
| Total operating expenses | 4,958 | | | 3,677 | | | 1,281 | | | 13,525 | | | 11,017 | | | 2,508 | |
| Income (loss) from operations | $ | 2,243 | | | $ | (373) | | | $ | 2,616 | | | $ | 19,475 | | | $ | 3,053 | | | $ | 16,422 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
* Favorable variances are represented by positive numbers and unfavorable variances are represented by negative numbers.
Third Quarter 2022 to Third Quarter 2021 Highlights:
Revenue from operations for our Black Oil and Recovery Segment increased $17.0 million for the three months ended September 30, 2022, compared to 2021, as a result of increases in commodity prices, improved margins and a new Marine Division which provided positive revenue and a profit for the period, which was created at the end of 2021 for blending bunker fuels into the Gulf Coast Market.
The total income from the Black Oil and Recovery Segment was $2.2 million for the three months ended September 30, 2022, which increased $2.6 million compared to the same period ended September 30, 2021, due to the increased commodity prices.
Year to Date 2022 to Year to Date 2021 Highlights:
Revenue from operations for our Black Oil and Recovery segment increased $67.4 million for the nine months ended September 30, 2022, compared to 2021, and the percentage of gross profit increased to 22% for the nine months ended September 30, 2022 from 18% for the same period in 2021, as a result of higher commodity prices during the nine months ended September 30, 2022.
The total income from operations for our Recovery segment was $19.5 million for the nine months ended September 30, 2022, which increased $16.4 million compared to the same period ended September 30, 2021, due to the increased commodity prices.
Liquidity and Capital Resources
Our primary sources of liquidity have historically included cash flow from operations, proceeds from notes offerings, bank borrowings, term loans, public equity offerings and other financial arrangements. Uses of cash have included capital expenditures, acquisitions and general working capital needs.
The success of our current business operations has becomebeen 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 (including Shell, Macquarie and others), 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 $144,685,626approximately $647.6 million as of September 30, 2021,2022, compared to $122,099,958$266.1 million at December 31, 2020.2021. The increase was mainly due to exercisesthe acquisition of options and warrants that provided cash, along withthe Mobile Refinery, increases in accounts receivable and inventory levels, due to the increases in commodity prices and volumes and the payment of the $10 million deposit to the Seller in connection with the Refinery Purchase Agreement, during the nine months ended September 30, 2021, compared to the prior year's period.2022, and an increase in cash generated from our operations.
We had total current liabilities of $62,398,086approximately $272.0 million as of September 30, 2021,2022, compared to $23,850,412$25.5 million at December 31, 2020.2021. We had total liabilities of $67,572,248$527.2 million as of September 30, 2021,2022, compared to total liabilities of $60,809,023$192.5 million as of December 31, 2020.2021. The increase in current liabilities and total liabilities was mainly due to the increaseour inventory financing liabilities, increases in accounts payable and accrued liabilities as a result of rises in commodity prices and volumes current portion of debt due in less than a year, and derivative warrant liabilityalong with the term loan balance, during the nine months ended September 30, 2021, compared to the prior year’s period.2022.
We had working capital of $50,746,282approximately $118.2 million as of September 30, 2021,2022, compared to working capital of $5,934,976$148.7 million as of December 31, 2020.2021. The increasedecrease in working capital from December 31, 20202021 to September 30, 20212022 is mainly due to the changeincrease in presentationinventory, accounts payable and accrued liabilities, obligations under our inventory financing agreement (discussed above), for which inventory was purchased in September 2022 to be used for products and sales in early October 2022, and $6 million of assets heldterm loan debt required to be repaid within the next 12 months. We also incurred a $3 million break fee paid for salethe termination of the Sales Agreement with Safety-Kleen, and $16.6 million of acquisition costs paid in current assets,connection with the generationMobile Refinery purchase on April 1, 2022, during the nine months ended September 30, 2022.
The ongoing conflict between Russia and Ukraine, which began in the first quarter of additional liquidity as a result2022, and the economic sanctions imposed on Russia have decreased the global supply of optioncrude oil affecting global prices. This conflict coupled with disruptions in supply chain that began with the COVID-19 pandemic in 2020, have resulted in increased inflation and warrant exerciseshigher market prices in crude oil and refined products. During the twelve months ended September 30, 2022, the Consumer Price Energy Index in the United States increased 19.7% impacting our gross margins. The Consumer Price All Items Index increased 8.2% for cashthe same period impacting our operating expenses and slowing economic growth. While market conditions have improved through the end of 2021 and into 2022, we are still seeing extreme volatility in commodity pricing. Generally, however, the increase in accounts receivablerefined product pricing has had a positive impact on our business and inventory offset by the increase in accounts payable, as explained above, and the increase in the debt owed to Encina Business Credit, LLC and Encina Business Credit SPV, LLC (as shown below), which is a current liability because it is due in less than a year from September 30, 2021, as described below.overall liquidity.
Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including the effects of inflation, increasing interest rates, 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 more capital expenditures related to new TCEP facilitiesthe Mobile Refinery in the future (provided that none are currently planned).future.
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. We believe that ourwe have sufficient liquid assets, cash on hand, internally generated cash flowsflow from operations, borrowing capacity and availability under the Revolving Credit Agreement and other borrowings will be sufficientadequate access to fund our operations and service our debt in the near term, notwithstanding the funding which will be required to complete the acquisition of the Mobile 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 the Mobile 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 September 30, 2021 and December 31, 2020 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Creditor | Loan Type | | Origination Date | | Maturity Date | | Loan Amount | | Balance on September 30, 2021 | Balance on December 31, 2020 |
| Encina Business Credit, LLC | Term Loan | | February 1, 2017 | | February 1, 2022 | | $ | 20,000,000 | | | $ | 9,758,000 | | $ | 5,433,000 | |
| Encina Business Credit SPV, LLC | Revolving Note | | February 1, 2017 | | February 1, 2022 | | $ | 10,000,000 | | | — | | 133,446 | |
| Encina Business Credit, LLC | Capex Loan | | August 7, 2020 | | February 1, 2022 | | $ | 2,000,000 | | | 1,102,170 | | 1,378,819 | |
| Wells Fargo Equipment Lease-Ohio | Finance Lease | | April-May, 2019 | | April-May, 2024 | | $ | 621,000 | | | 346,321 | | 436,411 | |
| | | | | | | | | | |
| | | | | | | | | | |
| John Deere Note | Note | | May 27, 2020 | | June 24, 2024 | | $ | 152,643 | | | 103,414 | | 131,303 | |
| | | | | | | | | | |
| 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 | |
| Various institutions | Insurance premiums financed | | Various | | < 1 year | | $ | 2,902,428 | | | 3,562,608 | | 1,183,543 | |
| Total | | | | | | | | | $ | 14,931,213 | | $ | 12,920,326 | |
| Deferred finance costs | | | | | | | | | (62,500) | | — | |
| Total, net of deferred finance costs | | | | | | | | | $ | 14,868,713 | | $ | 12,920,326 | |
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 | $ | 9,758,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| Encina Business Credit, LLC | 1,102,170 | | | — | | | — | | | — | | | — | | | — | |
| John Deere Note | 37,991 | | | 38,933 | | | 26,490 | | | — | | | — | | | — | |
| Well Fargo Equipment Lease- Ohio | 346,321 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Loan-Leverage Lubricants | — | | | 683 | | | 1,290 | | | 1,340 | | | 1,391 | | | 53,996 | |
| | | | | | | | | | | |
| Various institutions | 3,562,608 | | | — | | | — | | | — | | | — | | | — | |
| Totals | $ | 14,807,090 | | | $ | 39,616 | | | $ | 27,780 | | | $ | 1,340 | | | $ | 1,391 | | | $ | 53,996 | |
| Deferred finance costs, net | (62,500) | | | — | | | — | | | — | | | — | | | — | |
| Totals, net of deferred finance costs | $ | 14,744,590 | | | $ | 39,616 | | | $ | 27,780 | | | $ | 1,340 | | | $ | 1,391 | | | $ | 53,996 | |
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 Refinery Purchase Agreement.
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 ofmeet our financial commitments, debt or equities cannotservice obligations and anticipated capital expenditures for at least the next 12 months. We expect that our short-term liquidity needs which include debt service, working capital, and capital expenditures related to currently planned growth projects (including the ongoing renewable diesel conversion project designed to modify the Mobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis) will be assuredmet through projected cash flow from operations, borrowings under our various facilities (if necessary) 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.asset sales.
Our current near term plans include closing the transactions contemplated by the Purchase Agreement and the Sale Agreement and transitioningcontinuing to transition 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 plannedrecent acquisition of the Mobile Refinery. The refinery, which has a long track record of safe, reliable operations and consistent financial performance, is expected tohas, effective on April 1, 2022, upon the closing of the acquisition, become Vertex’sour flagship refining asset, upon the close of the transaction, positioning the Companywhich we believe positions us to become a pure-play producer of renewable and conventional products. The addition of renewable fuels production associated with the refinery upon completion of the ongoing capital project at the refinery is anticipated to accelerate Vertex’s strategic focus on "clean""clean" refining. By year-end 2022, assuming
As previously disclosed, we are currently working on completing a $90 - $100 million capital project designed to modify the Mobile Refinery’s existing hydrocracking unit to produce renewable diesel fuel on a standalone basis. Upon completion of the planned acquisition and our capitalconversion project, at the facility, the Mobile Refineryrefinery is projectedexpected to producecommence production of approximately 8,000 - 10,000 barrels per day (bpd) of renewable diesel, fuel and renewable byproducts. By mid-year 2023, basedwith production volumes anticipated to subsequently ramp up to approximately 14,000 bpd by the first quarter of 2024. This project seeks to capitalize on current projections, Vertex expectsthe rapidly growing demand for advanced sustainable fuels, while further expanding upon our commitment to increasesupply lower carbon fuels solutions.
Currently, mechanical completion of the Mobile Refinery’s renewable diesel conversion project is expected to be complete during the first quarter of 2023 with production anticipated to 14,000 bpd.begin in the second quarter of 2023. 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.
On November 1, 2021, the Company issued $155.0 million aggregate principal amountAdditionally, we or our affiliates may, at maturity of its 6.25%any time and from time to time, retire or repurchase our outstanding Convertible Senior Notes due 2027 in a private offering with persons believed to be "Qualified institutional buyers"open-market purchases, privately negotiated transactions, refinancing or otherwise, through cash purchases and/or "accredited investors" pursuant to a Private Placement Purchase Agreement.exchanges for equity or debt. Such repurchases, refinancings or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. Repurchases, if any, will be funded through available cash from operations. The net proceeds from the offering, after deducting placement agent fees and estimated offering costs and expenses payable by the Company, were approximately $133.9 million, more details on this offering canamounts involved may be found in our Recent Events section above.material.
The Company plans to use $10.9 million of the net proceeds from the offering to repay amounts owed by the Company under its credit facilities with Encina Business Credit, LLC and certain of its affiliates, as well as $0.4 million of the net proceeds to repay certain secured equipment leases with certain affiliates of Wells Fargo Bank, National Association.
We anticipate that the 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;divestitures and ongoing capital projects at our facilities; 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.
Cash flows for the nine months ended September 30, 2022 and 2021, compared to the nine months ended September 30, 2020:were as follows (in thousands):
| | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| Beginning cash, cash equivalents and restricted cash | Beginning cash, cash equivalents and restricted cash | | $ | 10,995,169 | | | $ | 4,199,825 | | Beginning cash, cash equivalents and restricted cash | | $ | 136,627 | | | $ | 10,995 | |
| Net cash provided by (used in): | Net cash provided by (used in): | | | | | Net cash provided by (used in): | | | | |
| Operating activities | Operating activities | | (7,694,777) | | | (2,980,926) | | Operating activities | | 7,361 | | | 3,320 | |
| Investing activities | Investing activities | | (10,982,990) | | | (2,477,640) | | Investing activities | | (264,035) | | | (14,152) | |
| Financing activities | Financing activities | | 12,367,155 | | | 16,296,932 | | Financing activities | | 242,440 | | | 12,050 | |
| Net increase in cash, cash equivalents and restricted cash | | 1,217,533 | | | 11,453,279 | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | | (14,234) | | | 1,218 | |
| Ending cash, cash equivalents and restricted cash | Ending cash, cash equivalents and restricted cash | | $ | 12,212,702 | | | $ | 15,653,104 | | Ending cash, cash equivalents and restricted cash | | $ | 122,393 | | | $ | 12,213 | |
The analysis of cash flow activities below and the table above, is combined for both continued and discontinued operations, whereas the consolidated statement of cash flows included in this report includes only cash flow information for our continued operations.
Our current primary sources of liquidity are cash generated from operations, cash flows from our operationsthe November 2021 sale of the Convertible Senior Notes and amounts borrowed under the availability to borrow funds under our creditTerm Loan on April 1, 2022 (approximately $124 million) and loan facilities. We also raised $6,492,759 from the exercise of options and warrants for common stock during the nine months ended September 30, 2021.May 26, 2022 ($40 million).
Net cash usedprovided by operating activities was $7,694,777approximately $7.4 million for the nine months ended September 30, 2021,2022, as compared to net cash usedprovided by operating activities of $2,980,926$3.3 million 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.2021. The primary reason for the increasedecrease in cash usedprovided by operating activities for the nine month period ended September 30, 2021,2022, compared to the same period in 2020,2021, was the fluctuation in market and commodity prices, a gain on forgivenessoperation of the PPP loan,Mobile Refinery, cash settlement of commodity derivative, and the increase in account receivablenet change of current asset and inventory, duringliabilities associated therewith, which had a net benefit on cash of around $11.5 million for the nine months ended on September 30, 2022, compared to the net cash used of $8.5 million during the same period end in 2021.
Investing activities used cash of $10,982,990approximately $264.0 million for the nine months ended September 30, 2021,2022, as compared to having used $2,477,640$14.2 million of cash used during the corresponding period in 2020,2021, due mainly to the purchaseacquisition of the Mobile Refinery and fixed assets and our deposit to Shell related topurchased during the potential acquisition.current period.
Financing activities provided cash of $12,367,155approximately $242.4 million for the nine months ended September 30, 2021,2022, as compared to providing cash of $16,296,932$12.1 million during the corresponding period in 2020.2021. Financing activities for the nine months ended September 30, 2022 were comprised of proceeds from the Term Loan $165.0 million and insurance premium finance of $173.3 million, from inventory financing of $135.7 million and from the exercise of options and warrants of $0.7 million offset by the payment on redemption of non-controlling interest of $50.7 million, distribution to noncontrolling interest of $0.4 million and payment on notes payable and capital leases of $14.1 million. Financing activities for the nine months ended September 30, 2021 were mainly comprised of proceeds from the exercise of options and warrants of $6,492,759$6.5 million and from proceeds from our line of credit totaling $5,178,117,long term note and insurance premium finance of $10.1 million offset by $2,826,939 used to pay down our long-term debt. Financing activities for the nine months ended September 30, 2020 were comprisedpayment on notes payable and capital leases of contributions the Company received from certain transactions undertaken with Tensile during January 2020 totaling $21,000,000, of which $1,650,746 was used to pay down our long-term debt, and $6,741,727 of proceeds on our line of credit.$3.8 million.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management regularly evaluates its estimates and judgments, including those related to revenue recognition, goodwill, intangible assets, long-lived assets valuation, variable interest entities, and legal matters. Actual results may differ from these estimates which may be material. Note 2, “Summary of Critical Accounting Policies and Estimates” in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “20202021 Form 10-K”), and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 20202021 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s financial statements. There have been no material changes to the Company’s critical accounting policies and estimates since the 20202021 Form 10-K, except as summarized below:
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 nine months ended September 30, 2021.
Leases
In February 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) effective January 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 Class B 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 Class B 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.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the period in which all of the following criteria are met: (1)management, having the authority to approve the action, commits to a plan to sell the disposal group; (2) the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; (3) an active program to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group have been initiated; (4) the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale, within one year, except if events of circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year; (5) the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A disposal group that is classified as held for sale is initially measured at the lower of its carrying amount or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met.
Subsequent changes in the fair value of a disposal group less any costs to sell are reported as an adjustment to the carrying amount of the disposal group, as long as the new carrying amount does not exceed the carrying amount of the asset at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group for all periods presented in the line items assets held for sale and liabilities held for sale, respectively, in the consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that can be clearly distinguished, operationally and for financial reporting purposes, that either has been disposed of or is classified as held for sale is reported in discontinued operations, if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.
Market Risk
Our revenues and cost of revenues are affected by fluctuations in the value of energy related products. We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly and by selling our products into markets where we believe we can achieve the greatest value.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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.
Interest Rate Risk
We are exposed to interest rate risks primarily through borrowings under various bank facilities. Interest on these facilities is based upon variable interest rates using LIBOR or Prime as the base rate.
Interest Rate Risk
At September 30, 2021, the Company had approximately $10.8 million of variable-rate term debt outstanding. At this borrowing level, a hypothetical relative increase of 10% in interest rates would have an unfavorable but insignificant impact on the Company’s pre-tax earnings and cash flows. The primary interest rate exposure on variable-rate debt is based on the LIBOR rate (0.08% at September 30, 2021) plus 6.50%-7.0% per year. On November 1, 2021, the Company repaid in full the amounts of variable-rate term debt outstanding at September 30, 2021.
Commodity Price Risk
We are exposed to market risks related to the volatility of crude oil and refined oil products. Our financial results can be significantly affected by changes in these prices which are driven by global economic and market conditions. We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly, and by selling our products into markets where we believe we can achieve the greatest value.
Inflation Risk
Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our results of operations. We believe that inflation has had an impact on our financial position and results of operations to date. We continue to monitor the impact of inflation in order to minimize its effects through price increases and cost reductions. A high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general, and administrative expenses as a percentage of net revenue if the selling prices of our products do not increase in proportion with these increased costs.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO)(principal executive officer) and Chief Financial Officer (CFO) (principal accounting/financial officer), as appropriate, to allow timely decisions regarding required disclosures.
Management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. As of September 30, 2021,2022, based on the evaluation of these disclosure controls and procedures, ourprocedures, and in light of the material weakness we found in our internal controls over financial reporting as of December 31, 2021 (as described in greater detail in our annual report on Form 10-K for the year ended December 31, 2021), our CEO and CFO have concluded that our disclosure controls and procedures were not effective to provide reasonablereasonable assurance that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Exchange Act, is recorded properly, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Remediation Efforts to Address Material Weaknesses
We believe the remedial measures described in Part II, “Item 9A, Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2021, and others that may be implemented, will remediate these material weaknesses. However, these material weaknesses will not be considered formally remediated until controls have operated effectively for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively.
Inherent Limitations over Internal Controls
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. ThereWith the exception of our Mobile acquisition, which we are in the process of evaluating, there were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Qthree months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As a result of the COVID-19 pandemic, certain employees of the Company began working remotely in March 2020, and continued to work remotely through September 30, 2021, but these changes to the working environment did not have a material effect on the Company’s internal control over financial reporting. We will continue to monitor the impact of COVID-19 on our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
Such current litigation or other legal proceedings are described in, and incorporated by reference in, this “Item 1. Legal Proceedings” of this Form 10-Q from, “Part I” -“Item 1. Financial Statements” in the Notes to Consolidated Financial Statements in “Note 3. Concentrations, Significant Customers, Commitments4. "Commitments and ContingenciesContingencies"”, under the heading “Litigation”. The Company believes that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on our financial condition or results of operations. However, assessment of the current litigation or other legal claims could change in light of the discovery of facts not presently known to the Company or by judges, juries or other finders of fact, which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or claims.
Additionally, the outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected.
Item 1A. Risk Factors
Summary Risk Factors
We face risks and uncertainties related to our business, many of which are beyond our control. In particular, risks associated with our business include:
• our need for additional funding, the availability of, and terms of, such funding;
• our ability to pay amounts due on outstanding indebtedness, covenants of such indebtedness and security interests in connection therewith;
• the terms of our agreements with Macquarie, including termination rights associated therewith, and our ability to find a replacement partner, in the event such agreements were terminated;
• risks associated with unanticipated problems at, or downtime effecting, our facilities and those operated by third parties on which we rely;
• risks associated with our hedging activities, or our failure to hedge production;
• risks associated with our outstanding Convertible Notes, including amounts owed, conversion rights associated therewith, dilution caused thereby, redemption obligations associated therewith and our ability to repay such facilities and amounts due thereon when due;
• risks associated with an offtake agreement which will only become effective upon the occurrence of certain events, including the planned completion of a capital project at the Mobile Refinery;
• risks associated with the ongoing capital project associated with the Mobile refinery, including the timing thereof, costs associated therewith and our ability to generate revenues while such project is pending;
• the level of competition in our industry and our ability to compete;
• the supply and demand for oil and used oil, as well as used oil feed stocks and the price of oil and the feedstocks we use in our operations, process and sell;
• the availability of used oil feedstocks;
• our economics of using TCEP for its intended purpose;
• the outcome of natural disasters, hurricanes, floods, war, terrorist attacks, fires and other events negatively impacting our facilities and operations;
• our ability to respond to changes in our industry;
• the loss of key personnel or failure to attract, integrate and retain additional personnel;
• our ability to protect our intellectual property and not infringe on others’ intellectual property;
• our ability to scale our business;
• our ability to maintain supplier relationships and obtain adequate supplies of feedstocks;
• our ability to obtain and retain customers;
• our ability to produce our products at competitive rates;
• our ability to execute our business strategy in a very competitive environment;
• trends in, and the market for, the price of oil and gas and alternative energy sources;
• our ability to maintain our relationship with Bunker One (USA) Inc., Shell and Macquarie;
• the impact of competitive services and products;
• our ability to integrate acquisitions;
• our ability to complete future acquisitions;
• our ability to maintain insurance;
• potential future litigation, judgments and settlements;
• risk of increased regulation of our operations and products and rules and regulations making our operations more costly or restrictive;
• changes in environmental and other laws and regulations and risks associated with such laws and regulations;
• economic downturns both in the United States and globally;
• negative publicity and public opposition to our operations;
• disruptions in the infrastructure that we and our partners rely on;
• an inability to identify attractive acquisition opportunities and successfully negotiate acquisition terms;
• our ability to effectively integrate acquired assets, companies, employees or businesses;
• liabilities associated with acquired companies, assets or businesses;
• unexpected changes in our anticipated capital expenditures resulting from unforeseen required maintenance, repairs, or upgrades;
• prohibitions on borrowing and other covenants of our debt facilities;
• our ability to effectively manage our growth;
• the costs of required insurance, our lack of insurance, or claims not covered by our insurance;
• the redemptive rights of our agreements with partners;
• our lack of effective disclosure controls and procedures and internal control over financial reporting;
• loss of our ability to use net operating loss carry-forwards;
• improvements in alternative energy sources and technologies;
• decreases in global demand for, and the price of, oil, due to COVID-19, state, federal and foreign responses thereto;
• our ability to acquire sufficient amounts of used oil feedstock through our collection routes, to produce finished products, and in the absence of such internally collected feedstocks, our ability to acquire third-party feedstocks on commercially reasonable terms;
• risks of downturns in the U.S. and global economies due to COVID-19, increase in inflation or interest rates, and/or the ongoing conflict in Ukraine;
• the volatile nature of the market for our common stock;
• our ability to meet earnings guidance;
• anti-take-over rights in our governing documents;
• our ability to maintain the listing of our common stock on The Nasdaq Capital Market; and
• dilution caused by new equity offerings, the exercise of warrants and/or the conversion of outstanding convertible notes.
Risk Factors
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, filed with the Commission on March 9, 202114, 2022 (the “Form 10-K”), under the heading “Risk Factors”, except as set forth below, and investors should review the risks provided in the Form 10-K (as modified as discussed below) and below, prior to making an investment in the Company. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below and in the Form 10-K for the year ended December 31, 2020,2021, under “Risk Factors”, which risk factors from the Form 10-K are incorporated by reference in this Item 1A. Risk Factors, subject to updates to such risk factors as provided below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price. Risk Factors designated by an asterisk (*) below represent Risk Factors which originally appeared in the December 31, 2021 Annual Report, which have been updated and supplemented below. Risk Factors not designated by an asterisk are new Risk Factors not included in the December 31, 2021 Annual Report.
The Heartland Company Agreement includes redemption rights.”; “The MG Company Agreement includes redemption rights.”; and all of the risk factors set forth under the subheading “Risks Related to the Planned Acquisition of the Mobile Refinery and Planned Acquisition of 100% of Heartland SPV and MG SPV”, except the risk factor fromtitled “The Offtake Agreement with Idemitsu remains subject to various conditions, the Form 10-K entitled “Epidemics, includingobligations of Idemitsu thereunder may not become effective, may be terminated prior to the recent outbreakend of the COVID-19 coronavirus,initial term thereof, and other crises have,we may face termination fees in connection therewith.”, which remains a risk applicable to the Company.
Risks Relating to Our Need for Future Funding and willCurrent Indebtedness
We will need to raise additional capital in the future negatively impactand our business and results of operations.”, fromability to obtain the Form 10-Knecessary funding is replaced and superseded byuncertain.*
We will need to raise additional funding to meet the following:
Epidemics, including the recent outbreakrequirements of the COVID-19 coronavirus,terms and other crises have,conditions of our outstanding Convertible Senior Notes, including to pay interest and willprincipal thereon and to repay the Term Loan, and we may need to raise additional funding in the future negatively impactto support our businessoperations, complete acquisitions and resultsgrow our operations. If we raise additional funds in the future, by issuing equity securities, dilution to existing stockholders will result, and such securities may have rights, preferences and privileges senior to those of operations.
Our revenuesour common stock. If funding is insufficient at any time in the future and cost of revenues are significantly impacted by fluctuations in commodity prices; decreases in commodity prices typically result in decreases in revenue and cost of revenues. Our revenue is to a large extent a function of the market discount we are ableunable to obtain in purchasing feedstock, as well as how efficiently management conducts operations. Additionally,generate sufficient revenue from new business arrangements, to repay our sales volumes, and as a result,outstanding debts, complete planned acquisitions or operations, our results of operations and the value of our securities could be adversely affected. Future funding may not be available on favorable terms, if at all.
We have substantial indebtedness and plan to acquire additional indebtedness in the future, which could adversely affect our financial flexibility and our competitive position. Our future failure to comply with financial covenants in our debt agreements could result in such debt agreements again being declared in default.*
Our substantial indebtedness could have important consequences and significant effects on our business. For example, it could:
•increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
•require us to dedicate a substantial portion of our cash flows, significantly dependflow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
•restrict us from taking advantage of business opportunities;
•make it more difficult to satisfy our financial obligations;
•place us at a competitive disadvantage compared to our competitors that have less debt obligations; and
•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes on satisfactory terms or at all.
We may need to raise additional funding in the future to repay or refinance the Convertible Senior Notes, the Term Loan, planned future borrowings and our accounts payable, and as such may need to seek additional debt or equity financing. Such additional financing may not be available on favorable terms, if at all. If debt financing is available and obtained, our interest expense may increase and we may be subject to the risk of default, depending on the U.S.terms of such financing. If equity financing is available and obtained it may result in our stockholders experiencing significant dilution. If such financing is unavailable, we may be forced to curtail our operations, which may cause the value of our securities to decline in value and/or become worthless.
The requirements, restrictions and covenants in our Loan and Security Agreement may restrict our ability to operate our business and might lead to a lesser extent, worldwide demanddefault under such agreement.
The Loan and Security Agreement includes customary representations and warranties, and affirmative and negative covenants of the Loan Parties for a facility of that size and type, including prohibiting the Loan Parties from creating any indebtedness without the consent of the Lenders, subject to certain exceptions, and requiring the Loan Parties to have no less than $17.5 million of unrestricted cash for more than three consecutive business days.
The Loan and Security Agreement includes customary events of default for transactions of that type, including failures to pay amounts due, bankruptcy proceedings, covenant defaults, attachment or seizure of a material portion of the collateral securing the Loan and Security Agreement, cross defaults, if there is a default in any agreement governing indebtedness in excess of $3,000,000, resulting in the right to accelerate such indebtedness, certain judgments against a Loan Party, misrepresentations by the Loan Parties in the transaction documents, insolvency, cross default of the Offtake and Supply Agreement, a Change of Control (discussed below), termination of certain intercreditor agreements, and the loss or termination of certain material contacts. Upon the occurrence of an event of default, the Agent may declare the entire amount of obligations owed under the Loan and Security Agreement immediately due and payable and take certain other actions provided for under the Loan and Security Agreement, including enforcing security interests and guarantees.
Additionally, in the event of any payment, repayment or prepayment (other than with respect to a sale of the Company’s used motor oil assets or a change of control, and other than in connection with prepayments required to be made with funds received from insurance settlements and recoveries which are not subject to a prepayment premium), including in the event of acceleration of the Term Loan, certain asset sales (other than the used oil. motor oil assets), certain equity issuances, and voluntary prepayments (a) during the first 18 months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 150% of the applicable interest rate, multiplied by the amount of such prepayment amount; (b) during the 19th through 24th months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 50% of the applicable interest rate, multiplied by the amount of such prepayment amount; and (c) at any time during the 25th month after the Closing Date, but prior to the date that is 90 days before the maturity date of amounts owed pursuant to the Loan and Security Agreement, Vertex Refining agreed to pay an additional amount to the Lenders equal to 25% of the applicable interest rate, multiplied by the amount of such prepayment amount. Upon the sale of the Company’s used motor oil assets (as discussed below), or the required repayment upon a change of control (also discussed below), Vertex Refining agreed to pay an additional amount to the Lenders equal to 1% of the aggregate principal amount of the amount prepaid (as applicable, the “Prepayment Premium”). The Prepayment Premium is also due upon a change of control, which includes the direct or indirect transfer of all or substantially all of the assets of the Loan Parties; the adoption of a plan of liquidation or dissolution relating to the Company; the acquisition in one or a series of transactions of 33% or more of the equity interests of the Company by a person or entity; the Company’s failure to own 100% of Vertex Refining and the other Loan Parties, unless permitted by the Lenders; during any period of twelve consecutive months commencing on or after the Closing Date, the occurrence of a change in the composition of the Board of Directors of the Company such that a majority of the members of
such Board of Directors are no longer directors; or a “change of control” or any comparable term under, and as defined in, any other indebtedness exceeding $2 million of the Loan Parties, shall have occurred (each a “Change of Control”).
As a result pandemics, epidemics,of these requirements, covenants and public health crises, which effect the U.S. and the world as a whole, and which resultlimitations, we may not be able to respond to changes in travel disruptions, reductions in shipping and therefore declines in the need for oil and used oil, will harm our business and cause our operating results to suffer. Similarly, the economic slowdownconditions and general market uncertainty caused by the COVID-19 coronavirus outbreak and the steps taken by local, state and federal governments to attempt to reduce the spread of, and effects of, such virus, significantly reduced the demand for, and price of oil (which reached all-time lows during 2020), but has more recently recovered to near pre-pandemic levels, and concurrent therewith, the slowdown in the U.S. economy caused by stay-at-home and similar orders during 2020, reduced the amount of feedstock being produced and as a result, our ability to obtain feedstocks,additional financing, if needed, and produce finished products, which had a material adverse effect on our year-over-year results of operations for 2020. While the majority of COVID-19 restrictions in the jurisdictions in which we operate have since expired or been terminated due to the availability of vaccines, the possibility of future variants and potential waning immunity of vaccinations, creates continued uncertainty as to the total length and effect of the pandemic and/or whether future government actions will result in further reduced economic activity or new ‘stay-at-home’ or similar orders.
A public health pandemic, including COVID-19, poses the risk that the Company or its affiliates, employees, suppliers, customers and others may be prevented from conducting business activities forengaging in transactions that might otherwise be beneficial to us. The breach of any of these requirements or covenants could result in a default under the Loan and Security Agreement or future credit facilities. Upon the occurrence of an indefinite periodevent of time,default, the lenders could elect to declare all amounts outstanding under such Loan and Security Agreement or future debt facilities, including accrued interest or other obligations, to be immediately due and payable. If amounts outstanding under such Loan and Security Agreement or future debt facilities were to be accelerated, our assets might not be sufficient to repay in full that indebtedness and our other indebtedness.
Our Loan and Security Agreement and Supply and Offtake Agreement also contain cross-default and cross-acceleration provisions as may our future debt facilities. Under these provisions, a result of shutdowns, travel restrictions and other actions that may be requesteddefault or mandated by governmental authorities. Such actions may preventacceleration under one instrument governing our debt will in the Company from accessing or operating its facilities, delivering products or continuing to obtain feedstocks. While a substantial portioncase of the Company’s businesses have been classified as an essential business in jurisdictions in which facility closures have been mandated, the Company can give no assurance that this will not changeLoan and Security Agreement and Supply and Offtake Agreement and may in the case of future indebtedness, constitute a default under our other debt instruments that contain cross-default and cross-acceleration provisions, which could result in the related debt and the debt issued under such other instruments becoming immediately due and payable. In such event, we would need to raise funds from alternative sources, which funds might not be available to us on favorable terms, on a timely basis or that the Company’s businesses will be classified as essential in eachat all. Alternatively, such a default could require us to sell assets and otherwise curtail operations to pay our creditors. The proceeds of the jurisdictions in which it operates.such a sale of assets, or curtailment of operations, might not enable us to pay all of our liabilities.
It is also possible that the current outbreak or continued spread of COVID-19 will cause a global recession, or continued shortages in supplies of certain materials and equipment.
A continued 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(including our recently sold Convertible Notes). Current and current global and market conditions have increased the potential for that difficulty.
Our ability to make payments on our current (including our Convertible Senior Notes and Term Loan) and future indebtedness will depend on our ability to generate cash in the future. Our ability to generate cash is subject to general economic and market conditions and financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not generate sufficient cash to fund our working capital requirements, capital expenditures, debt service and other liquidity needs, which could result in our inability to comply with financial and other covenants contained in our debt agreements, our being unable to repay or pay interest on our indebtedness, and our inability to fund our other liquidity needs. If we are unable to service our debt obligations, fund our other liquidity needs and maintain compliance with our financial and other covenants, we could be forced to curtail our operations, our creditors could accelerate our indebtedness and exercise other remedies and we could be required to pursue one or more alternative strategies, such as selling assets or refinancing or restructuring our indebtedness. However, such alternatives may not be feasible or adequate.
Our obligations under the Loan and Security Agreement and Supply and Offtake Agreement are secured by a first priority security interest in substantially all of our assets and various Company guarantees.
The amounts borrowed pursuant to the terms of the Loan and Security Agreement are secured by substantially all of the present and after-acquired assets of the Company and its subsidiaries. Additionally, certainVertex Refining’s obligations under the Loan and Security Agreement are jointly and severally guaranteed by substantially all of the Company’s employees have been working from home, eithersubsidiaries and the Company. The amounts owed under the Loan and Security Agreement are also secured by various deeds of trusts and mortgages for the real property(s) described therein, over the Mobile Refinery and substantially all other material owned and leased real property of the Guarantors including properties in Texas and Louisiana. In connection with the entry into the Loan and Security Agreement, Vertex Operating, entered into an Intellectual Property Security Agreement in favor of the Agent, pursuant to avoidwhich it granted a security interest in substantially all of its intellectual property (including patents and trademarks) in favor of the riskLenders to secure the obligations of catching the COVID-19 coronavirus,Loan Parties under the Loan and Security Agreement. In connection with the entry into the Loan and Security Agreement, the Company, Vertex Refining and each of the Guarantors, entered into a Collateral Pledge Agreement in favor of the Agent, pursuant to which they granted the Agent a security interest in all now owned or duehereafter acquired promissory notes and instruments evidencing indebtedness to stay-at-home orders issuedany Guarantor and all now owned or hereafter acquired equity interests owned by local governments where they live or work,such Guarantor.
The obligations of Vertex Refining and asany of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are guaranteed by the Company. The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are also secured by a result, productivity may drop, which could impact revenuesPledge and profitability.
Whileof Macquarie, executed by Vertex Refining. In addition, the overall impactSupply and Offtake Agreement also requires that Vertex Refining post and maintain cash collateral (in the form of an independent amount) as security for Vertex Refining’s obligations under the Supply and Offtake Agreement and the related transaction documents. The amount of cash collateral is subject to adjustments during the term.
As a result of the COVID-19 coronavirusabove, our creditors and Macquarie, in the event of the occurrence of a default under the Loan and Security Agreement or Supply and Offtake Agreement, respectively, may enforce their security interests over our assets and/or our subsidiaries which secure such obligations, take control of our assets and operations, force us to seek bankruptcy protection, or force us to curtail or abandon our current business plans and operations. If that were to happen, any investment in the Company (including, but not limited to any investment in our common stock) could become worthless.
Our arrangement with Macquarie exposes us to Macquarie-related credit and performance risk as well as potential refinancing risks.
In April 2022, we entered into several agreements with Macquarie to support the operations of the Mobile Refinery, including a Supply and Offtake Agreement. Pursuant to the Supply and Offtake Agreement, Macquarie has agreed to intermediate crude oil supplies and refined product inventories at the Mobile Refinery. Macquarie will own all of the crude oil in our tanks and substantially all of our refined product inventories prior to our sale of the inventories.
Should Macquarie terminate the Supply and Offtake Agreement with 180 days written notice, we would need to seek alternative sources of financing, including the requirement upon termination to repurchase the inventory at then current market prices. In addition, the cost of repurchasing the inventory may be at higher prices than we sold the inventory. If the price of crude oil is well above the price at which we sold the inventory, we would have to pay more for the inventory than the price we sold the inventory for. If this is the case at the time of termination, we could suffer significant reductions in liquidity when Macquarie terminates the Supply and Offtake Agreement and we have to repurchase the inventories. We may also be unable to enter into a similar relationship with a third party which may impair our ability to operate the Mobile Refinery and purchase inventory therefore, which could have a material adverse effect on our operations and cash flows.
If we are unable to obtain crude oil supplies for our Mobile Refinery without the benefit of certain intermediation agreements, the capital required to finance our crude oil supply could negatively impact our liquidity.
All of the crude oil delivered at our Mobile Refinery is subject to our Supply and Offtake Agreements with Macquarie. If we are unable to obtain our crude oil supply for our refinery under these agreements, our exposure to crude oil pricing risks may increase as the number of days between when we pay for the crude oil and when the crude oil is delivered to us increases. Such increased exposure could negatively impact our liquidity position due to the increase in working capital used to acquire crude oil inventory for our refineries.
The Intermediation Agreements expose us to counterparty credit and performance risk.
We have Supply and Offtake Agreements with Macquarie, pursuant to which Macquarie will intermediate crude oil supplies and refined product inventories at our Mobile Refinery. Macquarie will own all of the crude oil in our tanks and substantially all of our refined product inventories prior to our sale of the inventories. Upon termination of the Supply and Offtake Agreements, unless extended by mutual agreement for an additional one year term, we are obligated to repurchase all crude oil and refined product inventories then owned by Macquarie and located at the specified storage facilities at then current market prices. This repurchase obligation could have a material adverse effect on our business, results of operations, or financial condition. An adverse change in the business, results of operations, liquidity, or financial condition of our intermediation counterparties could adversely affect the ability of such counterparties to perform their obligations, which could consequently have a material adverse effect on our business, results of operations, or liquidity and, as a result, our business and operating results.
Continued increases in interest rates will cause our debt service obligations to increase.
The amounts borrowed under the Loan and Security Agreement bear interest at a rate per annum equal to the sum of (i) the greater of (x) the per annum rate publicly quoted from time to time by The Wall Street Journal as the “Prime Rate” in the United States minus 1.50% as in effect on such day and (y) the Federal Funds rate for such day plus 0.50%, subject in the case of this clause (i), to a floor of 1.0%, plus (ii) 9.25%, which rate is currently 14%. Interest rates have recently been increasing and any continued increase in the interest rates associated with our floating-rate debt would increase our debt service costs and affect our results of operations. In addition, a future increase in interest rates could adversely affect our future ability to obtain financing or materially increase the cost of any additional financing.
Economic uncertainty may affect our access to capital and/or increase the costs of such capital.
Global economic conditions continue to be volatile and uncertain due to, among other things, consumer confidence in future economic conditions, fears of recession and trade wars, global conflicts, including the ongoing conflict between Russia and Ukraine, the price of energy, increasing interest rates, the availability and cost of consumer credit, the availability and timing of government stimulus programs, levels of unemployment, increased inflation, and tax rates. These conditions remain unpredictable and create uncertainties about our ability to raise capital in the future. In the event required capital becomes unavailable in the future, or more costly, it could have a material adverse effect on our business, results of operations, and financial condition.
Risks Relating to Our Operations, Business and Industry
Unanticipated problems at, or downtime effecting, our facilities and those operated by third parties on which we rely, could have a material adverse effect on our results of operations at this point remains uncertain, we anticipate that the factors discussed above and others, which have had a negative effectoperations.*
Our ability to process feedstocks depends on our 2020ability to operate our refining/processing operations and 2021 first, secondfacilities, including our Mobile Refinery, and those operated by third quarter operations, will continueparties on which we rely, including, but not limited to Monument Chemical, and the total time that such facilities are online and operational. The occurrence of significant unforeseen conditions or events in connection with the operation or maintenance of such facilities, such as the need to refurbish such facilities, complete capital projects at such facilities, shortages of workers or materials, adverse weather, including, but not limited to lightning strikes, floods, hurricanes, tornadoes and earthquakes, equipment failures, fires, explosions, oil or other leaks, damage to or destruction of property and equipment associated therewith, environmental releases and/or damage, government regulation changes affecting the use of such facilities, terrorist attacks, mechanical or physical failures of equipment, acts of God, or other conditions or events, could prevent us from operating our facilities, or prevent such third parties from operating their facilities, or could force us or such third parties to shut such facilities down for repairs, maintenance, refurbishment or upgrades for a significant period of time. In the event any of our facilities or those of third parties on which we rely are offline for an extended period of time, it could have a negativematerial adverse effect on our results of operations for the remainder of the 2021 year, depending on how long the global slowdown associated with the virus and its after-effects last. Any one or more of the events described above could cause the value of our securities to decline in value.
The risk factor from the Form 10-K entitled “We may not qualify for forgiveness of our PPP Loan. We face risks associated with such PPP Loan.”, is no longer relevant since our PPP Loan has been forgiven in full.
The risk factors from the Form 10-K entitled “We do not anticipate redeeming our Series B and B1 Preferred Stock in the near future.”, “The issuance of common stock upon conversion of the Series B Preferred Stock and Series B1 Preferred Stock will cause immediate and substantial dilution to existing shareholders.”, “Our outstanding Series B Preferred Stock and Series B1 Preferred Stock accrue a dividend.” and “We may be required to issue additional shares of Series B Preferred Stock and Series B1 Preferred Stock upon the occurrence of certain events.”, are no longer relevant since we do not currently have any Series B Preferred Stock or Series B1 Preferred Stock outstanding.
The risk factor from the Form 10-K entitled “Our outstanding options, warrants and convertible securities may adversely affect the trading price of our common stock.”, from the Form 10-K is replaced and superseded by the following:
Our outstanding options, warrants and convertible securities may adversely affect the trading price of our common stock.
As of September 30, 2021, we had (i) outstanding stock options to purchase an aggregate of 4,195,168 shares of common stock at a weighted average exercise price of $1.57 per share; (ii) outstanding warrants to purchase an aggregate of 288,458 shares of common stock at a weighted average exercise price of $1.53 per share; and (iii) 385,601 outstanding shares of Series A Convertible Preferred Stock (which convert on a one-for-one basis (subject to adjustments for stock splits and recapitalizations) into common stock). For the life of the options and warrants, the holders have the opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership. The issuance of shares upon the exercise of outstanding securities will also dilute the ownership interests of our existing stockholders.
The availability of these shares for public resale, as well as any actual resales of these shares, could adversely affect the trading price of our common stock. We cannot predict the size of future issuances of our common stock pursuant to the exercise of outstanding options or warrants or conversion of other securities, or the effect, if any, that future issuances and sales of shares of our common stock may have on the market price of our common stock. Sales or distributions of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the market price of our common stock to decline.
In addition, the common stock issuable upon exercise/conversion of outstanding convertible securities may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happensconsequently the price of our stock will decrease,securities. For example, on October 7, 2020, we had a fire at our Marrero refinery which took the facility offline for repairs for about two weeks. The refinery suffered some minor structural damage along with piping, valves and any additional shares which stockholders attempt to sellinstrumentation in the market will only further decreaseimmediate area of the share price. Iffire, the share volumelargest impact was the damage to the electrical conduit that feeds the power to the refinery equipment and was back up October 26, 2020. Additionally, during August and September 2020, two hurricanes brought severe flooding and high winds that adversely impacted operations in the Gulf Coast and, specifically at the Company’s Marrero, Louisiana refinery, while also limiting outbound shipments of our common stock cannot absorb shares sold by holdersfinished product along adjacent waterways between Houston and New Orleans for approximately two weeks. Additionally, during August 2021, Hurricane Ida made landfall in southeast Louisiana, approximately 30 miles directly south and west of our outstanding convertible securities, then the valueMyrtle Grove facility, which resulted in the entire 42 acre Myrtle Grove site to be covered with 4-6 feet of our common stock will likely decrease.
storm surge and thus damages of assets and equipment. The risk factorCompany reviewed the inspection report and related information from insurance companies and a third party engineer, and determined that there is no 100% certainty around the Form 10-K entitled “We have established preferred stock which can be designated byrecoverability of some Construction-In-Progress assets such as fire heaters and pumps and instrumentation. The Company recorded $2.1 million of loss on assets impairment on the BoardConsolidated Statements of Directors without shareholder approval and have established Series A Preferred Stock, Series B Preferred Stock and Series B1 Preferred Stock, which giveOperations in the holders thereof a liquidation preference.”, from the Form 10-K is replaced and superseded by the following:
We have established preferred stock which can be designated by the Boardfourth quarter of Directors without shareholder approval and have Series A Preferred Stock outstanding, which give the holders thereof a liquidation preference.
We have 50 million shares of preferred stock authorized, which includes 5 million shares of designated Series A Preferred Stock2021, of which 385,601 sharesthe entire amount is related to our Black Oil segment. Subsequent downtime at our facilities, including our newly acquired Mobile Refinery, losses of equipment or use of such facilities may have a material adverse effect on our operations, cash flows or assets. The Company believes that it maintains adequate insurance coverage.
Unanticipated problems or delays, or increases in costs, in connection with the ongoing capital project at the Mobile Refinery may harm our business and viability.
We are issuedin the process of completing a $90-100 million capital project designed to modify the Mobile Refinery’s hydrocracking unit to produce renewable diesel fuel on a standalone basis (the “Conversion”). The occurrence of significant unforeseen conditions or events in connection with the Conversion may make the Conversion more expensive, prevent us from completing the Conversion, delay the completion of the Conversion or require us to reexamine our business model. Any change to our business model or management’s evaluation of the viability of the Conversion or timing associated therewith may adversely affect our business. Construction costs for the Conversion may also increase to a level that would make such Conversion too expensive to complete or unprofitable to operate, due to increases in material, labor, inflation or otherwise. Contractors, engineering firms, construction firms and outstanding, 10 million designated shares of Series B Preferred Stock, of which no shares are issuedequipment suppliers also receive requests and outstanding,orders from other companies and, 17 million designated shares of Series B1 Preferred Stock, of which no shares are issued and outstanding. The Series A Preferred Stock hastherefore, we may not be able to secure their services or products on a liquidation preference of $1.49 per share. Astimely basis or on acceptable financial terms. We may suffer significant delays or cost overruns as a result if we wereof a variety of factors, such as increases in the prices of raw materials, shortages of workers or materials, transportation constraints, adverse weather, equipment failures, fires, damage to dissolve, liquidate or sell our assets, the holders of our Series A Preferred Stock would have the right to receive up to the first approximately $0.6 million in proceeds from any such transaction. The payment of the liquidation preferences could
destruction of property and equipment, environmental damage, unforeseen difficulties or labor issues, or issues associated with planned capital projects, including cost overruns and unforeseen delays, and have already delayed the completion of the project once due to supply constraints, any of which could prevent us from timely completing the Conversion.
We may be unable to sell our UMO Business and no do not anticipate seeking shareholder approval for such sale.*
Our agreement with Safety-Kleen to acquire our UMO Business was terminated in January 2022. We are continuing to seek sales opportunities relating to such UMO Business, but we may be unable to find a purchaser to purchase such UMO Business on as favorable terms as Safety-Kleen had previously agreed to acquire such assets, such sale may be unable to be completed due to required conditions to closing, including governmental regulations, and the knowledge that we are actively trying to sell our UMO Business may result in common stock stockholdersdepressed prices. As a result, we may not receivingbe able to sell our UMO Business on favorable terms, if at all and/or may face termination and other fees in connection with any consideration ifplanned sale which is subsequently abandoned. Additionally, as a result of the acquisition of the Mobile Refinery, we no longer anticipate needing, or obtaining, shareholder approval for the future sale of our UMO Business or our Heartland Business.
Claims above our insurance limits, or significant increases in our insurance premiums, may reduce our profitability.*
We currently employ approximately 95 full-time drivers. From time to time, some of these employee drivers are involved in automobile accidents. We currently carry liability insurance of $1,000,000 for our drivers, subject to applicable deductibles, and carry umbrella coverage up to $25,000,000. We currently employ over 500 employees. Claims against us may exceed the amounts of available insurance coverage. If we were to liquidate, dissolve or wind up, either voluntarily or involuntarily. Additionally, the existence of the liquidation preference may reduce the value of our common stock, make it harder for us to sell shares of common stock in offeringsexperience a material increase in the future,frequency or preventseverity of accidents, liability claims or delay a changeworkers’ compensation claims or unfavorable resolutions of control. Becauseclaims, our board of directors is entitled to designate the powers and preferences of the preferred stock without a vote of our stockholders, subject to Nasdaq rules and regulations, our stockholders will have no control over what designations and preferences our future preferred stock, if any, will have.
The following are new risk factors that supplement the risk factors included in the Form 10-K:
Our hedging activities have in the past and may in the future prevent us from benefiting fully from increases in oil prices and may expose us to other risks, including counterparty risk.
The Company utilizesWe use derivative instruments to manage its exposure tohedge the impact of fluctuations in oil and other prices on our results of operations and cash flows and are also required to use such hedges pursuant to the underlying commodity pricesterms of its inventory. The Company's management setsthe Loan and implements hedging policies, including volumes, types of instrumentsSecurity Agreement. We have in the past, and counterparties, to support oil prices at targeted levels and manage its exposure to fluctuating prices. The Company’s derivative instruments consist of swap and futures arrangements for oil. In a commodity swap agreement, if the agreed-upon published third-party index price (“index price”) is lower than the swap fixed price, the Company receives the difference between the index price and the swap fixed price. If the index price is higher than the swap fixed price, the Company pays the difference. For futures arrangements, the Company receives the difference positive or negative between an agreed-upon strike price and the market price.
To the extent that we continue to engage in hedging activities to protect ourselves against commodity price declines, we may be prevented from fully realizing the benefits of increases in oil prices above the prices established by our hedging contracts. In addition,contracts and/or may result in us paying more for oil feedstocks then we receive upon the sale of finished products as we hedge finished product sales and not feedstock purchases. For example, as of September 30, 2022, our outstanding oil hedges had a fair value of positive $1.2 million. Our hedging activities may expose us to the risk of financial loss in certain circumstances, including instances in which the counterparties to our hedging contracts fail to perform under the contracts. Finally, we are subject to risks associated with the adoption of derivatives legislation and regulations related to derivative contracts which if adopted, could have an adverse impact on our ability to hedge risks associated with our business. If regulations adopted in the future require that we post margin for our hedging activities or require our counterparties to hold margin or maintain capital levels, the cost of which could be passed through to us, or impose other requirements that are more burdensome than current regulations, hedging transactions in the future would become more expensive than we experienced in the past. Our hedges have in the past and may in the future result in significant losses and reduce the amount of revenue we would otherwise obtain upon the sale of finished products and may also increase our margins and decrease our net revenues.
We depend on certain third-party pipelines for transportation of feedstocks and products, and if these pipelines become unavailable to us, our revenues and cash available for payment of our debt obligations could decline.
Our Mobile Refinery is interconnected to a pipeline that supplies a portion of its crude oil feedstock. Since we do not own or operate this pipeline, its continuing operation is not within our control. The unavailability of any third-party pipelines for the transportation of crude oil or finished products, because of acts of God, accidents, earthquakes or hurricanes, government regulation, terrorism or other third-party events, could lead to disputes or litigation with certain of our suppliers or a decline in our sales, net income and cash available for payments of our debt obligations.
We make capital expenditures in our facilities to maintain their reliability and efficiency. If we are unable to complete capital projects at their expected costs and/or in a timely manner, or if the market conditions assumed in our projected economics deteriorate, results of operations or cash flows could be adversely affected.
Delays or cost increases related to the engineering, procurement and construction of new facilities, or improvements and repairs to our existing facilities and equipment, could have a material adverse effect on our business, financial condition,
results of operations or our ability to make payments on our debt obligations. Such delays or cost increases may arise as a result of unpredictable factors in the marketplace, many of which are beyond our control, including:
• denial or delay in obtaining regulatory approvals and/or permits;
• changes in government regulations, including environmental and safety regulations;
• unplanned increases in the cost of equipment, materials or labor;
• disruptions in transportation of equipment and materials;
• severe adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of our vendors and suppliers;
• shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages;
• market-related increases in a project’s debt or equity financing costs; and/or
• nonperformance or declarations of force majeure by, or disputes with, our vendors, suppliers, contractors or sub-contractors.
Equipment, even if properly maintained, may require significant capital expenditures and expenses to keep it operating at optimum efficiency.
Any one or more of these occurrences noted above could have a significant impact on our business or subject us to significant cost overruns. If we were unable to make up the delays or to recover the related costs, or if market conditions change, we may not realize the anticipated benefits of our capital projects and it could materially and adversely affect our financial position, results of operations or cash flows and, as a result, our ability to make payments of our debt obligations.
From time to time, we may seek to divest portions of our business, which could materially affect our results of operations and result in disruption to other parts of the business.
We may dispose of portions of our current business or assets (including, but not limited to our UMO Business, which we are actively seeking to divest), based on a variety of factors and strategic considerations, consistent with our strategy of preserving liquidity and streamlining our business to better focus on the advancement of our core business. We expect that any potential divestitures of assets will also provide us with cash to reinvest in our business and repay indebtedness. These dispositions, together with any other future dispositions we make, may involve risks and uncertainties, including disruption to other parts of our business, potential loss of employees, customers or revenue, exposure to unanticipated liabilities or result in ongoing obligations and liabilities to us following any such divestiture. In addition, any such divestitures may not yield the targeted improvements in our business. Any of the foregoing could adversely affect our financial condition and results of operations or cash flows and, as a result, our ability to make payments of our debt obligations.
The prices of crude oil and refined and finished lubricant products materially affect our profitability, and are dependent upon many factors that are beyond our control, including general market demand and economic conditions, seasonal and weather-related factors, regional and grade differentials and governmental regulations and policies.
Among these factors is the demand for crude oil and refined and finished lubricant products, which is largely driven by the conditions of local and worldwide economies, as well as by weather patterns, changes in consumer preferences and the taxation of these products relative to other energy sources. Governmental regulations and policies, particularly in the areas of taxation, energy and the environment, and more recently in response to the COVID-19 pandemic, also have a significant impact on our activities. Operating results can be affected by these industry factors, product and crude pipeline capacities, crude oil differentials (including regional and grade differentials), changes in transportation costs, accidents or interruptions in transportation, competition in the particular geographic areas that we serve, global market conditions, actions by foreign nations and factors that are specific to us, such as the efficiency of our refinery operations. The demand for crude oil and refined and finished lubricant products can also be reduced due to a local or national recession or other adverse economic condition, which results in lower spending by businesses and consumers on gasoline and diesel fuel, higher gasoline prices due to higher crude oil prices, a shift by consumers to more fuel-efficient vehicles or alternative fuel vehicles (such as ethanol or wider adoption of gas/electric hybrid vehicles), or an increase in vehicle fuel economy, whether as a result of technological advances by manufacturers, legislation mandating or encouraging higher fuel economy or the use of alternative fuel.
We do not produce crude oil and must purchase all our crude oil, the price of which fluctuates based upon worldwide and local market conditions. Our profitability depends largely on the spread between market prices for refined petroleum products and crude oil prices. This margin is continually changing and may fluctuate significantly from time to time. Crude oil and refined products are commodities whose price levels are determined by market forces beyond our control. For example, the reversal of certain existing pipelines or the construction of certain new pipelines transporting additional crude oil or refined products to markets that serve competing refineries could affect the market dynamic that has allowed us to take advantage of favorable pricing. A deterioration of crack spreads or price differentials between domestic and foreign crude oils could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Additionally, due to the seasonality of refined products markets and refinery maintenance schedules, results of operations for any particular quarter of a fiscal year are not necessarily indicative of results for the full year and can vary year to year in the event of unseasonably cool weather in the summer months and/or unseasonably warm weather in the winter months in the markets in which we sell our petroleum products. In general, prices for refined products are influenced by the price of crude oil. Although an increase or decrease in the price for crude oil may result in a similar increase or decrease in prices for refined products, there may be a time lag in the realization of the similar increase or decrease in prices for refined products. The effect of changes in crude oil prices on operating results, therefore, depends in part on how quickly refined product prices adjust to reflect these changes. A substantial or prolonged increase in crude oil prices without a corresponding increase in refined product prices, a substantial or prolonged decrease in refined product prices without a corresponding decrease in crude oil prices, or a substantial or prolonged decrease in demand for refined products could have a significant negative effect on our earnings and cash flow. Also, our crude oil and refined products inventories are valued at the lower of cost or market under the last-in, first-out (“LIFO”) inventory valuation methodology, excluding commodity inventories at the Mobile Refinery which use the weighted average inventory accounting method. If the market value of our inventory were to decline to an amount less than our LIFO cost, we would record a write-down of inventory and a non-cash charge to cost of products sold even when there is no underlying economic impact at that point in time. Continued volatility in crude oil and refined products prices could result in lower of cost or market inventory charges in the future, or in reversals reducing cost of products sold in subsequent periods should prices recover.
To successfully operate our facilities, we are required to expend significant amounts for capital outlays and operating expenditures. If we are unable to complete capital projects at their expected costs or in a timely manner, or if the market conditions assumed in our project economics deteriorate, our financial condition, results of operations, or cash flows could be materially and adversely affected.
Our facilities consist of many processing units, a number of which have been in operation for many years. One or more of the units may require unscheduled downtime for unanticipated maintenance or repairs that are more frequent than our scheduled turnaround for such units. Scheduled and unscheduled maintenance could reduce our revenues during the period of time that the units are not operating. The installation and redesign of key equipment at our facilities, including the ongoing renewable diesel capital project at the Mobile Refinery, involves significant uncertainties, including the following: our upgraded equipment may not perform at expected levels; operating costs of the upgraded equipment may be higher than expected; the yield and product quality of new equipment may differ from design and/or specifications and redesign, modification or replacement of the equipment may be required to correct equipment that does not perform as expected, which could require facility shutdowns until the equipment has been redesigned or modified. Any of these risks associated with new equipment, redesigned older equipment, or repaired equipment could lead to lower revenues or higher costs or otherwise have a negative impact on our future financial condition and results of operations.
One of the ways we may grow our business is through the construction of new refinery processing units (or the purchase and refurbishment of used units from another refinery) and the conversion or expansion of existing ones, such as the ongoing conversion at the Mobile Refinery to produce renewable biodiesel. Projects are generally initiated to increase the yields of higher-value products, increase the amount of lower cost crude oils that can be processed, increase refinery production capacity, meet new governmental requirements or take advantage of new government incentive programs, or maintain the operations of our existing assets. Additionally, our growth strategy includes projects that permit access to new and/or more profitable markets, including the growing demand for renewable diesel. The construction process involves numerous regulatory, environmental, political, and legal uncertainties, most of which are not fully within our control, including:
•third party challenges to, denials, or delays with respect to the issuance of requisite regulatory approvals and/or obtaining or renewing permits, licenses, registrations and other authorizations;
•societal and political pressures and other forms of opposition;
•compliance with or liability under environmental regulations;
•unplanned increases in the cost of construction materials or labor;
•disruptions in transportation of modular components and/or construction materials;
•severe adverse weather conditions, natural disasters, terror or cyberattacks, vandalism or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors and suppliers;
•shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages;
•market-related increases in a project’s debt or equity financing costs; and/or
•nonperformance or force majeure by, or disputes with, vendors, suppliers, contractors, or sub-contractors involved with a project.
If we are unable to complete capital projects at their expected costs or in a timely manner our financial condition, results of operations, or cash flows could be materially and adversely affected.Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to supply certain products we make. In addition, our revenues may not increase immediately upon the expenditure of funds on a particular project. For instance, the construction of our previously announced renewable diesel capital project at the Mobile Refinery will occur over an extended period of time and we will not receive any material increases in revenues until after completion of the project. Moreover, we may construct facilities to capture anticipated future growth in demand for refined products or renewable diesel in a region in which such growth does not materialize. As a result, new capital investments may not achieve our expected investment return, which could adversely affect our financial condition or results of operations.
In addition, from time to time, we have, and expect in the future to execute turnarounds at our refineries, which involve numerous risks and uncertainties. These risks include delays and incurrence of additional and unforeseen costs. The turnarounds allow us to perform maintenance, upgrades, overhaul and repair of process equipment and materials, during which time all or a portion of the refinery will be under scheduled downtime.
Our forecasted internal rates of return are also based upon our projections of future market fundamentals which are not within our control, including changes in general economic conditions, available alternative supply, global market conditions, actions by foreign nations and customer demand.
Competition in the refining industry is intense, and an increase in competition in the markets in which we sell our products could adversely affect our earnings and profitability.
We compete with a broad range of refining companies, including certain multinational oil companies. Because of their geographic diversity, larger and more complex refineries, integrated operations and greater resources, some of our competitors may be better able to withstand volatile market conditions, to obtain crude oil in times of shortage and to bear the economic risks inherent in all areas of the refining industry.
We are not engaged in petroleum exploration and production activities and do not produce any of the crude oil feedstocks used at our refineries. We do not have a retail business and therefore are dependent upon others for outlets for our refined products. Certain of our competitors, however, obtain a portion of their feedstocks from company-owned production and have retail outlets. Competitors that have their own production or extensive retail outlets, with brand-name recognition, are at times able to offset losses from refining operations with profits from producing or retailing operations, and may be better positioned to withstand periods of depressed refining margins or feedstock shortages.
In recent years there have been several refining and marketing consolidations or acquisitions between entities competing in our geographic market. These transactions could increase the future competitive pressures on us.
The markets in which we compete may be impacted by competitors’ plans for expansion projects and refinery improvements that could increase the production of refined products in our areas of operation and significantly affect our profitability.
Also, the potential operation of new or expanded refined product transportation pipelines, or the conversion of existing pipelines into refined product transportation pipelines, could impact the supply of refined products to our existing markets and negatively affect our profitability.
In addition, we compete with other industries that provide alternative means to satisfy the energy and fuel requirements of our industrial, commercial and individual consumers. The more successful these alternatives become as a result of governmental regulations, technological advances, consumer demand, improved pricing or otherwise, the greater the impact on pricing and demand for our products and our profitability. There are presently significant governmental and consumer pressures to increase the use of alternative fuels in the United States.
The market for our lubricants is highly competitive and requires us to continuously develop and introduce new products and product enhancements.
Our ability to grow our lubricants depends, in part, on our ability to continuously develop, manufacture and introduce new products and product enhancements on a timely and cost-effective basis, in response to customers’ demands for higher performance process lubricants and other product offerings. Our competitors may develop new products or enhancements to their products that offer performance, features and lower prices that may render our products less competitive or obsolete, and, as a consequence, we may lose business and/or significant market share. Our efforts to respond to changes in consumer demand in a timely and cost-efficient manner to drive growth could be adversely affected by unfavorable margins or difficulties or delays in product development and service innovation, including the inability to identify viable new products, successfully complete research and development, obtain regulatory approvals, obtain intellectual property protection or gain market acceptance of new products or service techniques. The development and commercialization of new products requires significant expenditures over an extended period of time, and some products that we seek to develop may never become profitable, and we could be required to write-off our investments related to a new product that does not reach commercial viability.
A material decrease in the supply, or a material increase in the price, of crude oil or other raw materials or equipment available to our refineries and other facilities could significantly reduce our production levels and negatively affect our operations.
To maintain or increase production levels at our refineries, we must continually contract for crude oil supplies from third parties. There are a limited number of crude oil suppliers in certain geographic regions, and in such cases, we may be required to source from more than one supplier. If we are unable to maintain or extend our existing contracts with any such crude oil suppliers, or enter into new agreements on similar terms, the supply of crude oil could be adversely impacted, or we may incur a higher cost. A material decrease in crude oil production from the fields that supply our refineries, as a result of depressed commodity prices, decreased demand, lack of drilling activity, natural production declines, catastrophic events or otherwise, could result in a decline in the volume of crude oil available to our refineries. In addition, any prolonged disruption of a significant pipeline that is used in supplying crude oil to our refineries or the potential operation of a new, converted or expanded crude oil pipeline that transports crude oil to other markets could result in a decline in the volume of crude oil available to our refineries. Such an event could result in an overall decline in volumes of refined products processed at our refineries and therefore a corresponding reduction in our cash flow. If we are unable to secure additional crude oil supplies of sufficient quality or crude pipeline expansion to our refineries, we will be unable to take full advantage of current and future expansion of our refineries’ production capacities.
For certain raw materials and utilities used by our refineries and other facilities, there are a limited number of suppliers, and, in some cases, we source from a single supplier and/or suppliers in economies that have experienced instability or the supplies are specific to the particular geographic region in which a facility is located. Any significant disruption in supply could affect our ability to obtain raw materials, or increase the cost of such raw materials, which could significantly reduce our production levels or have a material adverse effect on our business, financial condition and results of operations. In addition, certain raw materials that we use are subject to various regulatory laws, and a change in the ability to legally use such raw materials may impact our liquidity, financial position and results of operations.
It is also common in the refining industry for a facility to have a sole, dedicated source for its utilities, such as steam, electricity, water and gas. Having a sole or limited number of suppliers may limit our negotiating power, particularly in the case of rising raw material costs. Any new supply agreements we enter into may not have terms as favorable as those contained in our current supply agreements. Additionally, there is growing concern over the reliability of water sources. The decreased availability or less favorable pricing for water as a result of population growth, drought or regulation could negatively impact our operations.
In addition, periods of disruption in the global supply chain, including as a result of COVID-19, have caused shortages in the equipment and parts necessary to operate our facilities and complete our capital projects. Certain suppliers have experienced, and may continue to experience, delays related to a variety of factors, including logistical delays and component shortages from vendors. We continue to monitor the situation and work closely with our suppliers to minimize disruption to our operations as a result of supply chain interruptions.
If our raw material, utility or water supplies or access to the equipment necessary to operate our facilities were disrupted, our businesses may incur increased costs to procure alternative supplies or equipment or incur excessive downtime, which would have a direct negative impact on our operations.
We depend upon Shell for a substantial portion of the crude supply and distribution network that serve our Mobile Refinery.
Currently Shell supplies all of the crude oil which we refine at the Mobile Refinery. Shell is subject to its own operating and regulatory risks and the occurrence of any of these risks could directly or indirectly affect Shell’s as well as our financial condition, results of operations and cash flows if Shell is unable to deliver us sufficient crude oil to operate the Mobile Refinery at full capacity. Additionally, these risks could affect Shell’s ability to continue operations which could affect its ability to serve our supply and distribution network needs.
We have been and may in the future be negatively impacted by inflation.
Increases in inflation have already, and may in the future, have an adverse effect on us. Current and future inflationary effects may be driven by, among other things, supply chain disruptions and governmental stimulus or fiscal policies. Continuing increases in inflation have already, and could in the future, impact the commodity markets generally, the overall demand for our products, our costs for feedstocks, labor, material and services and the margins we are able to realize on our products and services, all of which have already, and could in the future, have an adverse impact on our business, financial position, results of operations and cash flows. Inflation may and has already resulted in higher interest rates, which in turn results in higher interest expense related to our variable rate indebtedness and any borrowings we undertake to refinance existing fixed rate indebtedness.
Large capital projects can take many years to complete, and the political and regulatory environments or other market conditions may change or deteriorate over time, negatively impacting project returns.
We may engage in capital projects based on the forecasted project economics, political and regulatory environments, and the expected return on the capital to be employed in the project, including the in process Mobile Refinery renewal biodiesel capital project. Large-scale projects take many years to complete, during which time the political and regulatory environment or other market conditions may change from our forecast. As a result, we may not fully realize our expected returns, which could negatively impact our business, financial condition, results of operations, and liquidity.
Our industry and the broader US economy have experienced higher than expected inflationary pressures in the first three quarters of 2022, related to continued supply chain disruptions, labor shortages and geopolitical instability. Should these conditions persist our business, results of operations and cash flows could be materially and adversely affected.
The first three quarters of 2022 have seen significant increases in the costs of certain materials, including construction material required for our ongoing capital project at our Mobile Refinery and longer lead times for such materials, as a result of availability constraints, supply chain disruption, increased demand, labor shortages associated with a fully employed US labor force, high inflation and other factors. Supply and demand fundamentals have been further aggravated by disruptions in global energy supply caused by multiple geopolitical events, including the ongoing conflict between Russia and Ukraine. During 2022 and 2021, refining margins have experienced significant volatility, resulting in an increase in the first nine months of 2022, in each of the benchmark commodities we track compared to the same period in 2021. The increase in market prices was a result of the ongoing conflict between Russia and Ukraine and increased inflation. The Ukraine conflict coupled with disruptions in supply chain that began with the COVID-19 pandemic in 2020, have resulted in increased inflation and higher market prices in crude oil and refined products. During the twelve months ended September 30, 2022, the Consumer Price Energy Index in the United States increased 19.7% impacting our gross margins. The Consumer Price All Items Index increased 8.2% for the same period impacting our operating expenses and slowing economic growth. Recent supply chain constraints and inflationary pressures have in the past, and may in the future continue to, adversely impact our operating costs and timelines for capital projects and may negatively impact our ability to procure materials and equipment in a timely and cost-effective manner, if at all, which could result in delays in the completion of ongoing and future capital projects, delays in turn-arounds at our facilities, increased down-time, reduced margins and delays and, as a result, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
The conflict in Ukraine and related price volatility and geopolitical instability has negatively impacted and may continue to negatively impact our business.
In late February 2022, Russia launched significant military action against Ukraine. The conflict has caused, and could intensify, volatility in natural gas, oil and NGL prices, and the extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have a substantial negative impact on the global economy and/or our business for an unknown period of time. We believe that the increase in crude oil prices during the first three quarters of 2022 has partially been due to the impact of the conflict between Russia and Ukraine on the global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed on Russia. Any such volatility and disruptions may also magnify the impact of other risks described herein and in our Annual Report on Form 10-K.
Worsening economic recessions and economic conditions and trends and downturns in the business cycles of the industries we serve and which provide services to impact our business and operating results.*
A significant portion of our customer base is comprised of companies in the chemical manufacturing and hydrocarbon recovery industries. The overall levels of demand for our products, refining operations, and future planned re-refined oil products are driven by fluctuations in levels of end-user demand, which depend in large part on general macroeconomic conditions in the U.S., as well as regional economic conditions and many economists are now forecasting the U.S. to enter into a recession in the next several months. For example, many of our principal consumers are themselves heavily dependent on general economic conditions, including the price of fuel and energy, availability of affordable credit and capital, employment levels, interest rates, consumer confidence and housing demand. These cyclical shifts in our customers’ businesses may result in fluctuations in demand, volumes, pricing and operating margins for our services and products.
In addition to our customers, the suppliers of our feedstock are also affected by downturns in the economy and adverse changes in the price of feedstock. For example, we previously experienced difficulty obtaining feedstock from our suppliers who, because of prior sharp downturns in the price of oil (used and otherwise) in 2015-16 saw their margins decrease substantially, which in some cases made it uneconomical for such suppliers to purchase feedstock from their suppliers and/or sell to us at the rates set forth in their contracts. Similarly, the economic slowdown and general market uncertainty caused by the COVID-19 coronavirus outbreak and the steps taken by local, state and federal governments to attempt to reduce the spread of, and effects of, such virus, significantly reduced the demand for, and price of oil (which reached all-time lows during 2020), but has more recently recovered to pre-pandemic levels, and concurrent therewith, the slowdown in the U.S. economy caused by stay-at-home and similar orders during 2020, reduced the amount of feedstock being produced and as a result, our ability to obtain feedstocks, and produce finished products. Future recessions, economic downturns or reduced demand for oil are expected to have a material adverse effect on our results of operations, cash flows, and as a result the value of our securities.
Legal, Environmental, Governmental and Regulatory Risks
We are subject to numerous environmental and other laws and regulations and, to the extent we are found to be in violation of any such laws and regulations, or agree that we violated such laws and regulations, our business could be materially and adversely affected.*
We are subject to extensive federal, state, and local laws and regulations relating to the protection of the environment which, among other things:
•regulate the collection, transportation, handling, processing and disposal of hazardous and non-hazardous wastes;
•impose liability on persons involved in generating, handling, processing, transporting or disposing hazardous materials;
•impose joint and several liability for remediation and clean-up of environmental contamination;
•require us to prepare and maintain certain plans and guidelines; and
•require financial assurance that funds will be available for the closure and post-closure care of sites where hazardous wastes are stored, processed or disposed.
The breadth and complexity of all of these laws and regulations impacting us make consistent compliance extremely difficult and often result in increased operating and compliance costs, including requiring the implementation of new programs to promote compliance. Even with these programs, we and other companies in the industry are routinely faced with legal and administrative proceedings which can result in civil and criminal penalties, interruption of business operations, fines or other sanctions and require expenditures.
Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable environmental laws or regulations, it could significantly increase our cost of doing business.
Additionally, under current law, we may be held liable for damage caused by conditions that existed before we acquired our assets and/or before we took control of our leased properties or if we arranged for the transportation, disposal or treatment of hazardous substances that cause environmental contamination. In the future, we may be subject to monetary fines, civil or criminal penalties, remediation, clean-up or stop orders, injunctions, orders to cease or suspend certain practices or denial of permits required to operate our facilities and conduct our operations. The outcome of any proceeding and associated costs and expenses could have a material adverse impact on our operations and financial condition.
Our trucking operations are subject to a number of federal, state and local rules and regulations generally governing such activities as authorization to engage in motor carrier operations, safety compliance and reporting, contract compliance, insurance requirements, taxation and financial reporting. We could be subject to new or more restrictive regulations, such as regulations relating to engine emissions, drivers’ hours of service, occupational safety and health, ergonomics or cargo security. Compliance with such regulations could substantially reduce equipment productivity, and the costs of compliance could increase our operating expenses.
Environmental laws also govern the presence, maintenance and removal of asbestos-containing building materials, or ACBMs, and may impose fines and penalties for failure to comply with these requirements. Such laws require that owners or operators of buildings containing ACBM (and employers in such buildings) properly manage and maintain the asbestos, adequately notify or train those who may come into contact with asbestos, and undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building or plant. In addition, the presence of ACBM in our properties or plants may expose us to third-party liability (e.g., liability for personal injury associated with exposure to asbestos).
We may also be subject to claims from time to time that we have violated certain environmental laws and regulations. For example, during 2022, we entered into a Consent Agreement with the U.S. Environmental Protection Agency (EPA) to settle allegations that we failed to develop and implement an Spill Prevention Control & Countermeasure (SPCC) plan and/or a Facility Response Plan (FRP) for the Cedar Marine Terminal in violation of the Clean Water Act. Pursuant to the Consent Agreement, we agreed to pay $18,600 to the EPA as a penalty in connection therewith and to enter into a Final Order with the EPA. Environmental laws and regulations are subject to change and may become increasingly stringent or relaxed. Interpretation or enforcement of existing laws and regulations, or the adoption of new laws and regulations, may require us to modify or curtail our operations or replace or upgrade our facilities or equipment at substantial costs which we may not be able to pass on to our customers. On the other hand, if new laws and regulations are less stringent, then our customers or competitors may be able to compete with us more effectively, without reliance on our services, which could decrease the need for our services and/or increase competition which could adversely affect our revenues and profitability, if any. Our failure to comply with existing laws and regulations could result in penalties, fines, or injunctions, any of which could have a material adverse effect on our reputation, results of operations, or cash flows, and could further subject us to additional claims or litigation which may be material.
We are required to obtain and maintain permits, licenses and approvals to conduct our operations in compliance with such laws and regulations. If we are unable to maintain our currently held permits, licenses and approvals, we may not be able to continue certain of our operations. If we are unable to obtain any additional permits, licenses and approvals which may be required as we expand our operations, we may be forced to curtail or abandon our current and/or future planned business operations.
In addition, mandatory fuel standards have been adopted in many jurisdictions which can be costly to implement and maintain compliance. For example, the International Maritime Organization required, as of January 1, 2020, that ships must comply with new low sulfur fuel oil requirements (“IMO 2020”). Shipping companies were able to comply with this requirement by either using fuel with low sulfur content, which is more expensive than standard marine fuel, or by upgrading vessels to provide cleaner exhaust emissions, such as by installing “scrubbers” or retrofitting vessels to be powered by liquefied natural gas (“LNG”). The continued cost of compliance with these regulatory changes may be significant for shipping companies and it is uncertain how the availability and price of fuel globally will be affected by the implementation of the IMO 2020 regulations as refineries adjust their capacity to increase production of compliant fuels. These and future changes to applicable standards or other more stringent requirements in the industries we serve could reduce our ability to procure feedstocks, reduce our margins, increase our operational expenses, increase fuel prices, require us to incur additional handling costs and/or require the expenditure of capital. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of our products or we are unable to adequately source compliant fuels, our business and result of operations would be
adversely affected. Furthermore, IMO 2020 and/or other regulations may decrease demand for our products or force us to change the mix of products we offer. With the COVID-19 pandemic during 2020, it has been hard to see the real impact of IMO 2020 on our operations; however, so far, we are seeing strong demand for our finished products.
We may incur significant environmental remediation costs and liabilities in the operation of our refineries, facilities, terminals and related facilities.
The operation of our refineries, facilities, terminals, and related facilities subject us to the risk of incurring significant environmental remediation costs and liabilities due to our handling of petroleum hydrocarbons and other products, because of air emissions and water discharges related to our operations and activities, and as a result of historical operations and waste disposal practices at our facilities or in connection with our activities, some of which may have been conducted by prior owners or operators. We could incur significant remedial costs in the cleanup of any petroleum hydrocarbons or wastes or hazardous substances or wastes that may have been released on, under or from the properties owned or operated by us.
Some environmental laws may impose joint and several, strict liability for releases of petroleum hydrocarbons and wastes or hazardous substances or wastes, which means in some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Private parties, including the owners of properties adjacent to our operations and facilities where our petroleum hydrocarbons or wastes or hazardous substances or wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. We may not be able to recover some or any of these costs from insurance or other sources of indemnity. To the extent that the costs associated with meeting any or all of these requirements are significant and not adequately secured or indemnified for, there could be a material adverse effect on our business, financial condition and results of operations or cash flows and, as result, our ability to make payments of our debt obligations.
The nature of our operations exposes us, and the communities in which we work, to a wide range of health, safety, security and environment risks.
The health, safety, security and environment (HSSE) risks to which we and the communities in which we work are potentially exposed cover a wide spectrum, given the wide geographical area and diversity of our operations. These risks include the effects of natural disasters (including weather events), earthquakes, social unrest, pandemic diseases, criminal actions by external parties, and safety lapses. If a major risk materializes, such as an explosion or hydrocarbon leak or spill, this could result in injuries, loss of life, environmental harm, disruption of business activities, loss or suspension of permits, loss of our licenses to operate. Accordingly, this could have a material adverse effect on our earnings, cash flows and financial condition. Our operations are subject to extensive HSSE regulatory requirements that often change and are likely to become more stringent over time. We could incur significant extra costs in the future because of the need to comply with such requirements. We could also incur significant extra costs due to violations of or liabilities under laws and regulations that involve elements such as fines, penalties, clean-up costs and third-party claims. If HSSE risks materialize, they could have a material adverse effect on our earnings, cash flows and financial condition.
The availability and cost of renewable identification numbers could have an adverse effect on our financial condition and results of operations.
Pursuant to the Energy Policy Act of 2005, Congress established a Renewable Fuel Standard (“RFS”) program that requires annual volumes of renewable fuel be blended into domestic transportation fuel. A Renewable Identification Number (“RIN”) is assigned to each gallon of renewable fuel produced in, or imported into, the United States. We are exposed to the volatility in the market price of RINs. We cannot predict the future prices of RINs. RINs prices are dependent upon a variety of factors, including EPA regulations, the availability of RINs for purchase, and levels of transportation fuels produced, which can vary significantly from quarter to quarter. Additionally, the status of EPA RFS exemptions may impact the price of RINs. EPAs policy on granting certain RFS exemptions has changed under the Biden administration, and some previously granted exemptions have been the subject of legal proceedings that may ultimately result in the reversal of past exemptions. The occurrence of any one or more of these events may increase our operating expenses or make it more difficult for us to operate.
Risks Related to the Planned Sale TransactionOur Securities
The announcementOur outstanding options and pendency of the Sale, whether or not completed, may adversely affect the value of ourconvertible securities UMO Business and our continuing operations.
The announcement and pendency of the Sale may adversely affect the trading price of our common stock and securities, our business or our relationships with clients, customers, suppliers and employees. Third parties may be unwilling to enter into material agreements with respect to the UMO Business or our continuing operations after the Salestock.*
As of the UMO Business (the “Continuing Operations”). New or existing customers, suppliers and business partners may prefer to enter into agreements with our competitors who have not expressed an intention to sell their business because customers, suppliers and business partners may perceive that such new relationships are likely to be more stable. Additionally, employees working in the UMO Business or the Continuing Operations may become concerned about the futuredate of the UMO Business or the Continuing Operations, as applicable, and lose focus or seek other employment. In addition, while the completionfiling, we had (i) outstanding stock options to purchase an aggregate of the Sale is pending, we may be unable3.6 million shares of common stock at a weighted average exercise price of $1.87 per share; (ii) outstanding warrants to attract and retain key personnel and our management’s focus and attention and employee resources may be diverted from operational matters.
The Sale Transaction will require significant management resources.
The implementation of the Sale Transaction will require significant time, attention, and resources of our senior management and others within the Company, potentially diverting their attention from the conduct of the Company’s business.
If we fail to complete the Sale, our business and financial performance may be adversely affected.
The completion of the Sale is subject to the satisfaction or waiver of various conditions, including the approval of the Sale by our stockholders (which stockholder approval was obtained on September 28, 2021) and the absence of a material adverse effect on the UMO Business, which may not be satisfied in a timely manner or at all. If the Sale is not completed, we may have difficulty recouping the costs incurred in connection with negotiating the Sale, preparing the Sale Agreement and thepurchase 2.6 million shares
proxy statement (and mailing) required in connection therewith. Our directors, executive officersof common stock at an exercise price of $4.50 per share and 0.2 million shares of common stock at an exercise price of $9.25 per share; and (iii) outstanding Convertible Senior Notes which may be converted into a maximum of 22.2 million shares of common stock, based on the initial maximum conversion rate of 233.6449 shares of the Company’s common stock per $1,000 principal amount of Notes, which is subject to customary and other employees will have expended extensive time and effort and will have experienced significant distractions from their work duringadjustments described in the pendencyIndenture. For the life of the Sale,options and we willwarrants, the holders have incurred significant third-party transaction costs, in each case, without any commensurate benefit, which may havethe opportunity to profit from a material and adverse effect on our stock price and results of operations.
In addition, if the Sale is not completed, the Board of Directors, in discharging its fiduciary obligations to our stockholders, may evaluate other strategic options including, but not limited to, continuing to operate the UMO Business for the foreseeable future or an alternative sale transaction relating to the UMO Business or the Continuing Operations. An alternative sale transaction, if available, may yield lower consideration than the proposed Sale, be on less favorable terms and conditions than those containedrise in the Sale Agreement and involve significant delay. Any future salemarket price of all or substantially allour common stock without assuming the risk of ownership. The issuance of shares upon the assetsexercise of outstanding securities will also dilute the Company or other transactions may be subject to further stockholder approval.ownership interests of our existing stockholders.
Finally, if the Sale is not completed, the announcementThe availability of the terminationthese shares for public resale, as well as any actual resales of the Sale Agreement maythese shares, could adversely affect our relationships with customers, suppliers and employees, which could have a material adverse effect on our ability to effectively operate the UMO Business or the Continuing Operations, and we may be required to pay a Break-Fee of $3.0 million to Safety-Kleen under certain circumstances, each of which could have further adverse effects on our business, results of operations and the trading price of our common stock.
We will be subjectcannot predict the size of future issuances of our common stock pursuant to certain contractual restrictions while the Sale Transaction is pending.
The Sale Agreement restricts us from making certain acquisitions and divestitures, entering into certain contracts, and takingexercise of outstanding options or warrants or conversion of other specified actions until the earlier of the completion of the Sale Transactionsecurities, or the terminationeffect, if any, that future issuances and sales of the Sale Agreement. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Sale Transaction and could have the effect of delaying or preventing other strategic transactions.
The Sale Agreement limits our ability to pursue alternatives to the Sale.
The Sale Agreement contains provisions that may make it more difficult for us to sell all, or a significant part, of the UMO Business to any party other than Safety-Kleen. These provisions include the prohibition on our ability to solicit competing proposals and the requirement that we pay Safety-Kleen a termination/break fee of approximately $3.0 million in certain cases, including if (i) (x) Safety-Kleen terminates the Sale Agreement in certain circumstances if it becomes apparent that any of such conditions will not be, fulfilled by December 31, 2021 (as such date may be extended by up to 90 days under certain circumstances) under certain circumstances, unless such failure shall be principally due to the failure of Safety-Kleen or (y) as a result of a breach by us of our non-solicitation requirements, whether such breach results from a determination by our Board of Directors that, in order to fulfill its fiduciary obligations, an acquisition proposal must be considered, or otherwise; or (ii) we refuse to consummate the transactions contemplated by the Sale Agreement under certain circumstances. These provisions could make it less advantageous for a third party that might have an interest in acquiring all of or a significant part of the UMO Business to consider or propose an alternative transaction, even if that party were prepared to pay consideration with a higher value than the consideration to be paid by Safety-Kleen.
The Sale Agreement may be terminated in accordance with its terms and the Sale Transaction may not be completed. We may owe a break-fee in connection with a termination of the Sale Agreement under certain circumstances.
The completion of the Sale Transaction is subject to the satisfaction or waiver of a number of conditions. These conditions to the closing may not be fulfilled and, accordingly, the Sale Transaction may not be completed. In addition, if the Sale Transaction is not completed by December 31, 2021 (Sale Agreement Outside Date) unless such failure shall be principally due to the failure of Safety-Kleen to perform or comply with any of the covenants, agreements or conditions thereof to be performed or complied with by it prior to the closing; provided, however, that if, on the Sale Agreement Outside Date, all of the conditions to closing other than the conditions relating to certain required governmental approvals, and relating to stockholder approval, shall have been satisfied or waived, then either Safety-Kleen or the Company has the right to extend the Sale Agreement Outside Date by up to an additional 90 calendar days, either we or Safety-Kleen may choose not to proceed with the Sale Transaction, and the parties can mutually decide to terminate the Sale Agreement at any time prior to the completion of the Sale Transaction, before or after the required stockholder approval is received (which stockholder approval from our stockholders was obtained at a special meeting of stockholders held on September 28, 2021). In addition, we and Safety-Kleen may elect to terminate the Sale Agreement in certain other circumstances. If the Sale Agreement is terminated, we may incur substantial fees in connection with termination of the Sale Agreement (including, in certain circumstances, the payment of the Break-Fee and/or requirement to reimburse the expenses of Safety-Kleen) and will not recognize the anticipated benefits of the Sale Transaction.
Termination of the Sale Agreement could negatively impact us.
If the Sale Agreement is terminated in accordance with its terms and the Sale Transaction is not completed, our ongoing business may be adversely affected by a variety of factors. Our business may be impacted by having foregone other strategic opportunities during the pendency of the Sale Transaction, the failure to obtain the anticipated benefits of completing the Sale Transaction, changes to existing business relationships caused by uncertainties pending the Sale Transaction, payment of certain costs relating to the Sale Transaction, and the attention, time, and resources of our senior management and other employees devoted to the Sale Transaction, diverting their attention from the conduct of our business. In addition, if the Sale Agreement is terminated under certain circumstances, we may be required to pay the Break-Fee or reimburse certain expenses of Safety-Kleen (which is creditable toward the Break-Fee), depending on the circumstances surrounding the termination. We may also be negatively impacted if the Sale Agreement is terminated and the Board of Directors is unable to execute an alternative strategic transaction offering equivalent or more attractive benefits than the benefits to be provided in the Sale Transaction.
The parties to the Sale Agreement must obtain certain regulatory approvals in order to complete the Sale Transaction; if such approvals are not obtained or are obtained with conditions, the Sale Transaction may be prevented or delayed or the anticipated benefits of the Sale Transaction could be reduced.
Completion of the Sale Transaction is conditioned upon, among other things, the expiration or termination of the applicable waiting period under The Hart–Scott–Rodino Antitrust Improvements Act of 1976 (“HSR Act”). We are currently responding to inquiries received from the Federal Trade Commission (the “FTC”), which is not required to rule on the matter until the expiration of 30 days following submission of our responses which is not expected to occur before November 30, 2021, if then. At any time before or after the Sale Transaction is completed, any of the United States Department of Justice (DOJ), the United States Federal Trade Commission (FTC), or U.S. state attorneys general could take action under the antitrust laws in opposition to the Sale Transaction, including seeking to enjoin completion of the Sale Transaction or condition completion of the Sale Transaction upon the divestiture of assets held by us, Safety-Kleen or our or their respective subsidiaries or affiliates. Any such requirements or restrictions may prevent or delay completion of the Sale Transaction or may reduce the anticipated benefits of the Sale Transaction, which could also have a material adverse effect on us. Furthermore, the requirement to obtain HSR Act and/or FTC approval for the Sale could delay or prevent the Sale Transaction from being completed.
Risks Related to the Planned Acquisition of the Mobile Refinery
Combining the Mobile Refinery and the Company may be more difficult, costly or time-consuming than expected and the Company may fail to realize the anticipated benefits of the acquisition of the Mobile Refinery, including expected financial and operating performance of the Company.
The success of the acquisition of the Mobile Refinery will depend, in part, on the Company’s ability to realize anticipated cost savings from combining the businesses of the Company and the Mobile Refinery. To realize the anticipated benefits and cost savings from the Mobile Refinery acquisition, the Company must successfully integrate and combine the business of the Mobile Refinery in a manner that permits those cost savings to be realized. If the Company is not able to successfully achieve this objective, the anticipated benefits of the Mobile Refinery may not be realized fully or at all or may take longer to realize than expected.
The Company and the Mobile Refinery have operated and, until the completion of the acquisition of the Mobile Refinery, must continue to operate independently. It is possible that the integration process could result in the loss of key employees, the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers, suppliers and employees or to achieve the anticipated benefits and cost savings. Integration efforts may also divert management attention and resources. These integration matters could have an adverse effect on each of the Company and the Mobile Refinery during this transition period and for an undetermined period after completion of the acquisition of the Mobile Refinery.
We will need to raise significant additional capital to complete the acquisition of the Mobile Refinery, a planned capital project, and to pay other expenses associated with the Mobile Refinery.
The initial base purchase price for the Mobile Refinery is $75.0 million, and together with related assets and other costs payable at closing, the total purchase price is expected to be approximately $86.7 million. The funds from the sale of the Convertible Notes will not be sufficient, on their own, to allow us to complete the acquisition of the Mobile Refinery, and we currently estimate that we will need approximately an additional $53.0 million to complete such acquisition (in addition to
amounts from the Convertible Note offering currently held in escrow which are anticipated to be used to pay the purchase price for the Mobile Refinery). In addition, we are also required to pay for the hydrocarbon inventory located at the Mobile Refinery, as valued at closing, and the purchase price is subject to other customary purchase price adjustments and reimbursement for certain capital expenditures. We also plan to undertake certain engineering services and the initial payments of purchase orders for long lead-time equipment associated with the Conversion in the approximate amount of $13.0 million. Upon completion of the acquisition of the Mobile Refinery and provided that our fundraising initiatives are successful, we plan to follow through with completion of the Conversion at an additional cost of approximately $72.0 million, for a total cost of the Conversion of approximately $85.0 million. We also anticipate the need for approximately $125.0 million of working capital in connection with the Mobile Refinery. We currently anticipate raising such additional required funding for the Mobile Acquisition and other items described above through the entry into a secured term loan in the amount of approximately $125.0 million and a secured working capital facility in the amount of approximately $125.0 million. However, we have not entered into any definitive agreements regarding such funding to date, and such funding may not be available on favorable terms, if at all. If debt financing is available and obtained, our interest expense may increase and we may be subject to the risk of default, depending on the terms of such financing. If equity financing is available and obtained it may result in our stockholders’ experiencing significant dilution. If such financing is unavailable, we may be unable to complete the acquisition of the Mobile Refinery and/or may be unable to complete the planned capital project.
We anticipate financing a portion of the acquisition of the Mobile Refinery by way of a secured term loan, and financing certain working capital and other amounts by way of a secured working capital facility, both of which are expected to be secured by a priority security interest in substantially all of our assets.
As described in the risk factor above, we currently anticipate raising required funding to complete the Mobile Acquisition, to complete a planned capital project thereon, and for working capital, through the entry into a secured term loan in the amount of approximately $125.0 million and a secured working capital facility in the amount of approximately $125.0 million. In the event that such funding is available to us, and we are able to borrow such planned funding, we anticipate our obligations under the debt facilities being secured by a priority security interest in substantially all of our assets, with the term loan being secured by a first priority security interest in the Mobile Refinery, assuming we are successful in closing the acquisition of such refinery, and the working capital facility being secured by a first priority security interest in our inventory and receivables. We further expect that substantially all of our subsidiaries would be required to guarantee our obligations under such loan facilities. As such, our creditors will likely have security interests over our assets and/or our subsidiaries which secure the repayment of such obligations, and in the event we default under such facilities, the lenders may be able to take control of our assets and operations, force a sale of our assets, force us to seek bankruptcy protection, or force us to curtail or abandon our current business plans and operations. If that were to happen, any investment in the Company (including, but not limited to any investment in our common stock) could become worthless.
Our failure to comply with the covenants in any documents governing future indebtedness could materially adversely affect our financial condition and liquidity.
In connection with our planned credit facilities discussed above, we anticipate being subject to certain affirmative and negative covenants and to be subject to financial covenants. A breach of any of these covenants, if uncured or unwaived, could lead to an event of default, which in some circumstances could give our creditors the right to demand that we accelerate repayment of amounts due and/or enforce their rights under the credit agreements. This would likely, in turn, trigger cross-acceleration or cross-default rights in other documents governing our indebtedness, including the Convertible Notes. Therefore, in the event of any such breach, we may need to seek covenant waivers or amendments from our creditors or seek alternative or additional sources of financing, and we may not be able to obtain any such waivers or amendments or alternative or additional financing on acceptable terms, if at all. In addition, any covenant breach or event of default could harm our credit rating and our ability to obtain additional financing on acceptable terms. The occurrence of any of these events could have a material adverse effect on our financial condition and liquidity and/or cause our lenders to pursue enforcement remedies available to them under their respective credit agreements which could ultimately result in foreclosure, which would have a material adverse effect on our operations and the value of our securities. As a result, we may be unable to pay amounts due on the Convertible Notes, including upon maturity, and the valueshares of our common stock may decline in value or become worthless.
Regulatory and other approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the Company following the Mobile Refinery acquisition.
Before the Mobile Refinery acquisition may be completed, applicable approvals may need to be obtained under certain laws and regulations and from various third parties. In deciding whether to grant regulatory clearances and approvals, the relevant governmental entities may consider, among other things, the effect of the Mobile Refinery acquisition on competition within their relevant jurisdiction. The terms and conditions of the approvals that are granted may impose requirements, limitations or costs or place restrictions on the conduct of the Company’s business. There can be no assurance that regulators
will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the Mobile Refinery acquisition or that obtaining the consent of such regulators or third parties will not result in additional material costs. In addition, any such conditions, terms, obligations or restrictions may result in the delay or abandonment of the Mobile Refinery acquisition.
Upon the closing of the Mobile Refinery acquisition, we plan to transition the majoritymarket price of our business operations to thosecommon stock. Sales or distributions of the Mobile Refinery.
Following the closing of the Mobile Refinery acquisition, we anticipate that the more significant portionsubstantial amounts of our assets and operations will be related to such Mobile Refinery. Our change in business structure may not be successful. Additionally, our directors and officers may not be able to properly manage our new direction. If our new management fails to properly manage and direct our operations, we may be forced to scale back or abandon our planned operations, which may cause the value of our securities to decline or become worthless.
We will be subject to business uncertainties and contractual restrictions while the Mobile Refinery acquisition is pending.
Uncertainty about the effect of the Mobile Refinery acquisition on employees and partners may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Mobile Refinery acquisition is completed, and could cause partners and others that deal with us to seek to change existing business relationships, cease doing business with us or cause potential new partners to delay doing business with us until the Mobile Refinery acquisition has been successfully completed or terminated. Retention of certain employees may be challenging during the pendency of the Mobile Refinery acquisition, as certain employees may experience uncertainty about their future roles or compensation structure. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the business, our business following the Mobile Refinery acquisition could be negatively impacted. In addition, the Mobile Refinery acquisition restricts us from making certain acquisitions and taking other specified actions until the Mobile Refinery acquisition is completed without certain consents and approvals. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Mobile Refinery acquisition.
The Mobile Refinery acquisition agreement may be terminated in accordance with its terms and the Mobile Refinery acquisition may not be completed.
The Mobile Refinery acquisition agreement is subject to several conditions that must be fulfilled in order to complete the Mobile Refinery acquisition. These conditions to the closing of the Mobile Refinery acquisition may not be fulfilled and, accordingly, the Mobile Refinery acquisition may not be completed. In addition, the parties to the Mobile Refinery acquisition agreement can generally terminate such agreement if the transactions contemplated thereby do not close by May 26, 2022 (subject to certain extension rights), under certain other conditions if the terms of the Mobile Refinery acquisition agreement are breached, and the parties can mutually decide to terminate the Mobile Refinery acquisition agreement at any time.
Litigation could prevent or delay the closing of the Mobile Refinery acquisition or otherwise negatively impact the business and operations of the Company.
The Company may incur costscommon stock (including shares issued in connection with the defense or settlement of any stockholder lawsuits filed in connection with the Mobile Refinery acquisition. Such litigation could have an adverse effect on the financial condition and results of operations of the Company and could prevent or delay the consummation of the Mobile Refinery acquisition. Such litigation, affecting the Mobile Refinery and/acquisition), or the transaction,perception that such sales could delay or prevent the closing of the Mobile Refinery acquisition.
Termination of the Mobile Refinery acquisition agreement could negatively impact the Company.
In the event the Mobile Refinery acquisition agreement is terminated, our businessoccur, may have been adversely impacted by our failure to pursue other beneficial opportunities due to the focus of management on the Mobile Refinery acquisition, andcause the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the Mobile Refinery acquisition will be completed. If the Mobile Refinery acquisition is terminated and our Board of Directors seeks another acquisition or business combination, our stockholders cannot be certain that we will be able to find a party willing to offer equivalent or more attractive consideration than the consideration provided for by the Mobile Refinery acquisition. Upon termination of the Mobile Refinery transaction under certain circumstances, we could lose the $10.0 million deposit thatdecline.
we paid pursuant to the terms of the Mobile Refinery acquisition agreement (which was originally in the form of a note, which has been fully funded to date).
Completion of the acquisition of the Mobile Refinery is subject to certain conditions, and if these conditions are not satisfied or waived, the acquisition will not be completed.
The obligations of the parties to the Mobile Refinery acquisition agreement to complete such sale and purchase are subject to satisfaction or waiver (if permitted) of a number of conditions. The satisfaction of all of the required conditions could delay the completion of the transaction for a significant period of time or prevent it from occurring. Any delay in completing the acquisition could cause the Company not to realize some or all of the benefits that the Company expects to achieve if the acquisition is successfully completed within its expected time frame. Further, there can be no assurance that the conditions to the closing of the acquisition will be satisfied or waived or that the acquisition will be completed.
Failure to complete the Mobile Refinery acquisition could negatively impact our stock price and future business and financial results.
If the Mobile Refinery acquisition is not completed, our ongoing business may be adversely affected and we would be subject to a number of risks, including the following:
•we will not realize the benefits expected from the Mobile Refinery acquisition, including a potentially enhanced competitive and financial position, expansion of assets and therefore opportunities, and will instead be subject to all the risks we currently face as an independent company;
•we may experience negative reactions from the financial markets and our partners and employees;
•the Mobile Refinery acquisition places certain restrictions on the conduct of our business prior to the completion of the Mobile Refinery acquisition or the termination of the Mobile Refinery acquisition. Such restrictions, the waiver of which is subject to the consent of the counterparties to such agreement, may prevent us from making certain acquisitions, taking certain other specified actions or otherwise pursuing business opportunities during the pendency of the Mobile Refinery acquisition; and
•matters relating to the Mobile Refinery acquisition (including integration planning) may require substantial commitments of time and resources by our management, which would otherwise have been devoted to other opportunities that may have been beneficial to us.
Significant costs are expected to be incurred in connection with the consummation of the Mobile Refinery acquisition and integration of the Company and the Mobile Refinery into a single business, including legal, accounting, financial advisory and other costs.
If the Mobile Refinery acquisition is consummated, the Company is expected to incur significant costs in connection with integrating the Mobile Refinery operations. These costs may include costs for:
• employee redeployment, relocation or severance;
•integration of information systems; and
• reorganization or closures of facilities.
In addition, the Company expects to incur a number of non-recurring costs associated with combining the operations of the Mobile Refinery, which cannot be estimated accurately at this time. The Company will also incur transaction fees and other costs related to the Mobile Refinery acquisition. Additional unanticipated costs may be incurred in the integration of the Mobile Refinery. Upon completion of the Mobile Acquisition, and provided that our fundraising initiatives are successful, we plan to complete the Conversion for an additional cost of approximately $72.0 million, which will be the continuation of engineering services and initial payments of purchase orders for long lead-time equipment associated with the Conversion in the amount of approximately $13.0 million that we plan to initiate prior to closing the Mobile Acquisition. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved in the near term, or at all. There can be no assurance that the Company will be successful in these integration efforts.
We plan to use a portion of the approximately $33.5 million of funds which we received immediately upon the sale of the Convertible Notes for engineering services and for the initial payments of purchase orders for long lead-time equipment associated with the Conversion.
The approximately $33.5 million of net funds from the offering of the Convertible Notes which were not placed in the escrow account will be available for use by us immediately. We plan to use approximately $13.0 million of these funds for engineering services and for the initial payments of purchase orders for long lead-time equipment associated with the Conversion. These expenses will be paid in anticipation of the closing of the Mobile Acquisition, and in the event that the Mobile Acquisition does not close in the future, we do not believe we will be able to recoup such expenses, which we anticipate will likely be written off in their entirety. As such, in the event the Mobile Acquisition does not close, the use of such proceeds in advance of such closing could have a material adverse effect on us, our operating results and our ability to redeem the Convertible Notes from time to time.
Risks Related to the Convertible Notes
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the Convertible Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
We owe a significant amount of money under the Convertible Notes which could adversely affect our financial flexibility and our competitive position and our failure to comply with the terms of the Indenture could result in the Convertible Notes being declared in default.
We have a significant amount of outstanding indebtedness. As of the date of this filing, we owed approximately $155.0 million under the Convertible Notes. Despite our current debt levels, we and our subsidiaries may be able to incur substantial additional debt in the future, subject to the restrictions contained in our debt instruments, some of which may be secured debt.
Our substantial indebtedness could have important consequences and significant effects on our business. For example, it could:
•increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
•require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
•restrict us from taking advantage of business opportunities;
•make it more difficult to satisfy our financial obligations;
•place us at a competitive disadvantage compared to our competitors that have less debt obligations; and
•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes on satisfactory terms or at all.
The indenture governing our Senior Notes imposes certain restrictions on us and requires us to maintain compliance with specified covenants. Our ability to comply with these covenants may be affected by events beyond our control. A failure to comply with the covenants and other provisions of our outstanding debt could result in events of default under such instruments, which could permit acceleration of all of our debt and borrowings. Any required repayment of our debt as a result
of a fundamental change or other acceleration would lower our current cash on hand such that we would not have those funds available for use in our business.
We may need to raise additional funding in the future to repay or refinance the Convertible Notes and as such may need to seek additional debt or equity financing. Such additional financing may not be available on favorable terms, if at all. If debt financing is available and obtained, our interest expense may increase and we may be subject to the risk of default, depending on the terms of such financing. If equity financing is available and obtained it may result in our shareholders experiencing significant dilution. If such financing is unavailable, we may be forced to curtail our operations, which may cause the value of our securities to decline in value and/or become worthless.
Our ability to service our indebtedness will depend on our ability to generate cash in the future.
Our ability to make payments on our indebtedness (including our Convertible Notes) will depend on our ability to generate cash in the future. Our ability to generate cash is subject to general economic and market conditions and financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not generate sufficient cash to fund our working capital requirements, capital expenditure, debt service and other liquidity needs, which could result in our inability to comply with financial and other covenants contained in our debt agreements, our being unable to repay or pay interest on our indebtedness, and our inability to fund our other liquidity needs. If we are unable to service our debt obligations, fund our other liquidity needs and maintain compliance with our financial and other covenants, we could be forced to curtail our operations, our creditors could accelerate our indebtedness and exercise other remedies and we could be required to pursue one or more alternative strategies, such as selling assets or refinancing or restructuring our indebtedness. However, such alternatives may not be feasible or adequate.
We may not have enough available funds or the ability to raise the funds necessary to pay the special mandatory redemption price on the Convertible Notes upon a special mandatory redemption, to repurchase the Convertible Notes for cash upon a fundamental change or to settle conversions of the Convertible Notes in cash, and our future indebtedness may contain limitations on our ability to pay cash upon conversion or repurchase of the Convertible Notes.
If the Mobile Acquisition is not consummated on or prior to April 1, 2022, if we have not certified to the escrow agent of the escrow pursuant to which 75% of the net proceeds from our November 2021 Convertible Note offering (approximately $100 million) are being held, pending all conditions precedent to our obligations to consummate the Mobile Acquisition being satisfied, or if we notify the Trustee and the escrow agent in writing that the Refinery Purchase Agreement has been terminated, the Convertible Notes will be subject to special mandatory redemption at a special mandatory redemption price equal to 100% of the aggregate accreted principal amount thereof, plus accrued and unpaid interest to, but excluding, the special mandatory redemption date, plus accrued and unpaid interest to, and including, the date that is nine months after the special mandatory redemption date.
Further, holders of the Convertible Notes will have the right to require us to repurchase all or a portion of their Convertible Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the accreted principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.
In addition, unless and until we obtain stockholder approval to issue more than 12,650,514 shares of our common stock, which is 19.99% of our common stock outstanding on October 26, 2021, upon conversion of the Convertible Notes in accordance with the listing standards of The Nasdaq Capital Market, we will be required to elect “cash settlement” for all conversions of the Convertible Notes and we will not be permitted to issue shares of common stock upon conversion until we obtain such stockholder approval. After we obtain such stockholder approval, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Notes being converted.
Moreover, we will be required to repay the Convertible Notes in cash at their maturity unless earlier repurchased, redeemed or converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Notes surrendered therefor or Convertible Notes are being redeemed or converted. In addition, our ability to repurchase the Convertible Notes or to pay cash upon redemptions of the Convertible Notes may be limited by agreements we enter into governing our future indebtedness, which may limit our ability to repurchase the Convertible Notes or to pay cash upon redemptions or conversions of the Convertible Notes. Finally, our ability to repurchase the Convertible Notes or to pay cash upon redemptions or conversions of the Convertible Notes may be limited by law or by regulatory authority. Our failure to repurchase Convertible Notes at a time when the repurchase is required by the indenture or to pay any cash payable upon redemption or on future conversions of the Convertible Notes, as required by the indenture, would constitute a default under the indenture. A default under the indenture or the occurrence of a fundamental change itself could also lead to a default under agreements governing our future indebtedness. Moreover, the occurrence of a fundamental change under the indenture governing the Convertible Notes could constitute an event of default under any agreements
governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Notes or make cash payments upon conversions thereof.
We may not have sufficient funds available to pay amounts owed on the Convertible Notes, and such funding may not be available on favorable terms, if at all. Our failure to pay the amounts due under the Convertible Notes, when due, would constitute a default under the Convertible Notes and may force us to sell certain assets, curtail our business plan, or seek bankruptcy protection.
Unless and until we obtain stockholder approval to issue more than 12,650,514 shares of our common stock upon conversion of the Convertible Notes in accordance with the listing standards of The Nasdaq Capital Market, we will be required to elect “cash settlement” for all conversions of the Convertible Notes.
Unless and until we obtain stockholder approval to issue more than 12,650,514 shares of our common stock upon conversion of the Convertible Notes in accordance with the listing standards of The Nasdaq Capital Market, we will be required to elect “cash settlement” for all conversions of the Convertible Notes and will not be permitted to issue shares of common stock upon conversion until we obtain such stockholder approval (the “Stockholder Approval Date”). We may not be able to receive such stockholder approval and may not be able to deliver shares of common stock upon conversion of the Convertible Notes during the term of the Convertible Notes. As discussed above and below, we may not have the cash or the ability to raise funds necessary to make such cash payments and any such payment, if made, could adversely affect our liquidity.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and liquidity.
In the event the conditional conversion feature of the Convertible Notes is triggered, and that we have obtained stockholder approval for the issuance of shares in excess of the applicable share threshold discussed above, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option.
Specifically, the Convertible Notes bear interest at a rate of 6.25% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The Convertible Notes are convertible into common stock (following the Stockholder Approval Date) at an initial conversion rate of 169.9235 shares of common stock, per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $5.89 per share). Prior to July 1, 2027, the Convertible Notes will be convertible at the option of the holders of the Convertible Notes only upon the satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election, provided that until such time as the Company's stockholders have approved the issuance of more than 19.99% of our common stock issuable upon conversion of the Convertible Notes in accordance with the rules of The Nasdaq Capital Market, the Company is required to elect “cash settlement” for all conversions of the Convertible Notes. The Company will also be required to increase the conversion rate for holders who convert their Convertible Notes in connection with a fundamental change and certain other corporate events or convert their Convertible Notes called for optional redemption (or deemed called for optional redemption) following delivery by the Company of a notice of redemption, in either case, in certain circumstances.
If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share)(to the extent the Stockholder Approval Date has occurred), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. Further, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes, as a current rather than long-term liability, which would result in a material reduction of our net working capital.
Additionally, the issuance of common stock upon conversion of the Convertible Notes will result in immediate and substantial dilution to the interests of other stockholders. In addition, the common stock issuable upon exercise/conversion of the Convertible Notesoutstanding convertible securities may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of the company’sour stock will decrease, and any additional shares which shareholdersstockholders attempt to sell in the market will only further decrease the share price. The Convertible Notes may in the future be convertible into shares of our common stock at a discount to market, which would provide the holders with the ability to sell their common stock at or below market and still make a profit. If the share volume of our common stock cannot absorb the discounted shares sold by holders of our outstanding convertible securities, then the value of our common stock will likely decrease.
The accounting method for reflecting the Convertible Notes on our balance sheet, accruing interest expense for the Convertible Notes and reflecting the underlyingSales of a significant number of shares of our common stock in our reported diluted earnings per share may adversely affect our reported earnings and financial condition.
In August 2020, the Financial Accounting Standards Board (“FASB”) published an Accounting Standards Update, which we refer to as ASU 2020-06, which simplifies certain of the accounting standards that apply to convertible notes. ASU 2020-06 will be effective for SEC-reporting entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. However, early adoption is permitted in certain circumstances for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. In accordance with ASU 2020-06, we expect that the Convertible Notes will be reflected as a liability on our balance sheets, with the initial carrying amount equal to the principal amount of the Convertible Notes, net of issuance costs. The issuance costs will be treated as a debt discount for accounting purposes, which will be amortized into interest expense over the term of the Convertible Notes. As a result of this amortization, the interest expense that we expect to recognize for the Convertible Notes for accounting purposes will be greater than the cash interest payments we will pay on the Convertible Notes, which will result in lower reported income.
In addition, we expect that the shares underlying the Convertible Notes will be reflected in our diluted earnings per share using the “if converted” method, in accordance with ASU 2020-06. Under that method, if the conversion value of the Convertible Notes exceeds their principal amount for a reporting period, then we will calculate our diluted earnings per share assuming that all of the Convertible Notes were converted at the beginning of the reporting period and that we issued shares of our common stock to settle the excess. However, if reflecting the Convertible Notes in diluted earnings per share in this manner is anti-dilutive, or if the conversion value of the Convertible Notes does not exceed their principal amount for a reporting period, then the shares underlying the Convertible Notes will not be reflected in our diluted earnings per share. The application of the if-converted method may reduce our reported diluted earnings per share, and accounting standards may change in the future in a manner that may adversely affect our diluted earnings per share.
We have not reached a final determination regarding the accounting treatment for the Convertible Notes, and the description above is preliminary. Accordingly, we may account for the Convertible Notes in a manner that is significantly different than described above.
In addition, so long as we are required to settle conversions of Convertible Notes entirely in cash, the conversion option that is part of the Convertible Notes may be accounted for as a derivative pursuant to accounting standards relating to derivative instruments and hedging activities. Under such standards, for each financial statement period after issuance of the Convertible Notes, if “cash settlement” applies, a gain (or loss) would be reported in our consolidated statement of operations to the extent the valuation of the conversion option changes from the previous period, whichpublic market could result in significant volatility in our results of operations. This could adversely affect our reported or future financial results,harm the market price of our common stock and the value of the Convertible Notes. Furthermore, this could also make it harder to compare period to period financial results, as a result of potentially significant non-cash gains or losses relating to such accounting.
The conversion rate for Convertible Notes converted in connection with a make-whole fundamental change or a notice of redemption for an optional redemption may be increased.
If a make-whole fundamental change occurs prior to the maturity date of the Convertible Notes or upon the issuance of a notice of redemption for an optional redemption, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such make-whole fundamental change or elects to convert its Convertible Notes called (or deemed called) for optional redemption during the related redemption period, by a number of additional shares of our common stock. The increase in the conversion rate will be determined based on the date on which the specified corporate transaction becomes effective or the date of the notice and the price paid (or deemed to be paid) per shareMost of our common stock is available for resale in such transaction or the date ofpublic market, and if sold would increase the redemption notice. Provided however, in no event will the conversion rate per $1,000 principal amount of Convertible Notes as a result of this adjustment exceed 233.6449 shares of common stock.
In addition, unless and until we obtain stockholder approval to issue more than 12,650,514 sharessupply of our common stock, thereby causing a decrease in its price. Some or all of our shares of common stock may be offered from time to time in the open market pursuant to effective registration statements and/or compliance with Rule 144, which sales could have a depressive effect on the market for our shares of common stock. Subject to certain restrictions, a person who has held restricted shares for a period of six months may generally sell common stock into the market. The sale of a significant portion of such shares when such shares are eligible for public sale may cause the value of our common stock to decline in value.
The Warrants have certain anti-dilutive rights, put and call rights upon conversionthe occurrence of a fundamental transaction, and include a limitation on the number of shares of common stock which may be issued upon exercise thereof without shareholder approval.
A total of 2,584,900 of the Convertible NotesWarrants have a term through April 1, 2027 and a $4.50 per share exercise price and a total of 235,000 of the Warrants have a term through November 26, 2027 and a $9.25 exercise price. All of the Warrants include weighted average anti-dilutive rights in the event any shares of common stock or other equity or equity equivalent securities payable in common stock are granted, issued or sold (or the Company enters into any agreement to grant, issue or sell), or in accordance with the listing standards of The Nasdaq Capital Market, we will be required to elect “cash settlement” for all conversionsterms of the Convertible NotesWarrant Agreements, are deemed to have granted, issued or sold, in each case, at a price less than the exercise price, which automatically decreases the exercise price of the Warrants upon the occurrence of such event, as described in greater detail in the Warrant Agreements, and we will not be permitted to issueincreases the number of shares of common stock issuable upon conversion until we obtainexercise of the Warrants, such stockholder approval.
Our obligation to increasethat the conversion rate for Convertible Notes convertedaggregate exercise price of all Warrants remains the same before and after any such dilutive event. Such anti-dilution rights, if triggered, could result in connectiona significant decrease in the exercise price of the Warrants combined with a make-wholesignificant increase in the number of shares of common stock issuable upon exercise thereof, which could result in significant dilution to existing shareholders.
Upon the occurrence of a fundamental changetransaction (as described in the Warrant Agreements) the Warrant Agreements (a) provide each holder a put right and (b) provide the Company with a call right in respect of the Warrants. Upon the exercise of a put right by the holder or Convertible Notes calleda call right by the Company, the Company is obligated to repurchase the Warrants for optional redemption that are converted during the related redemption period couldBlack Scholes Value of the Warrants repurchased, as calculated in the Warrant Agreements. Such Black Scholes value may be consideredsignificant and the requirement to pay such amount may prohibit us from completing a penalty, intransaction which casewould otherwise be accretive to shareholders or make such transaction more costly.
Additionally, until or unless the enforceability thereof would be subject to general principlesCompany receives shareholder approval under applicable Nasdaq listing rules for the issuance of reasonableness and equitable remedies.
entered into (i.e., more than 12,828,681 shares of common stock)(the “The fundamental change repurchase featureShare Cap”), the Company may not issue more shares of common stock upon exercise of the Convertible Notes could delay or prevent an otherwise beneficial attemptWarrants than totals the Share Cap, and is required to take over our company, or discourage a potential acquirerpay the Lenders cash, based on the fair market value of us.
The Convertible Notes include certain repurchaseany shares required to be issued upon exercise of the Warrants (as calculated in the Warrant Agreements), which would exceed the Share Cap. In the event the anti-dilutive rights of the holders which are triggeredWarrants result in more than 12,828,681 shares of common stock being issuable upon a fundamental change as discussed herein. A takeoverexercise of our company would trigger an option ofthe Warrants, we could be required to pay cash to the holders of the Convertible NotesWarrants in the amount equal to require ussuch excess shares, which could have a significant adverse effect on our available funds and liquidity.
The Warrants also include cashless exercise rights. As a result, we may not receive any cash upon the exercise of the Warrants.
We face significant penalties and damages in the event a registration statement registering the resale of the shares of common stock issuable upon exercise of the Warrants is not available for the sale of such shares.
In connection with the grant of the Warrants, the Company and the holders of such Warrants entered into a Registration Rights Agreement. Under the Registration Rights Agreement, the Company agreed to repurchaseuse commercially reasonable efforts to file a registration statement (the “Registration Statement”) with the Convertible Notes. ThisSEC, for purposes of registering the resale of the shares of common stock issuable upon exercise of the Warrants no later than July 1, 2022. The Company also agreed to use commercially reasonable efforts to cause the SEC to declare the Registration Statement effective as soon as practicable and no later than 45 days following the filing of the Registration Statement; provided, that such date is extended until 75 days after the filing date if the Initial Registration Statement is reviewed by the staff of the Commission. The Registration Statement was filed with the SEC and became effective on July 8, 2022. The Registration Rights Agreement also provides the holders of the Warrants certain piggyback and demand registration rights (including pursuant to an underwritten offering, in the event the gross proceeds from such underwritten offering are expected to exceed $35 million).
If, subject to certain limited exceptions described in the Registration Rights Agreement, during the period commencing on the effective date of the Registration Statement and ending on the earlier of the date when there are no registrable securities or the third anniversary of the effective date of the Registration Statement, a registration statement is not continuously effective to allow the sale of the shares underlying the Warrants, for more than 10 consecutive calendar days or more than an aggregate of 15 calendar days (which need not be consecutive) during any 12-month period, then, in addition to any other rights such holder of Warrants may have under the effectRegistration Rights Agreement or applicable law, (x) on the first such applicable default date, the Company is required to pay to such holder of delayinga Warrant an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of the fair market value (such fair market value calculated as required under the Registration Rights Agreement) of the registrable securities held by such holder (the “1% Penalty”), and (y) on each monthly anniversary of such default date until all applicable defaults have been cured, shall pay the 1% Penalty, subject to a maximum penalty of 10% of the fair market value of the registrable securities held by each applicable holder of Warrants (such fair market value calculated as required under the Registration Rights Agreement).
The Company has agreed, among other things, to indemnify the holders of the Warrants and their affiliates with respect to certain liabilities and to pay all fees and expenses incident to the Company’s obligations under the Registration Rights Agreement.
In the event the Registration Statement is suspended or preventing a takeoverterminated, or we otherwise fail to meet certain requirements set forth in the Registration Rights Agreement, we could be required to pay significant penalties which could adversely affect our cash flow and cause the value of our company thatsecurities to decline in value.
We have established preferred stock which can be designated by the Board of Directors without shareholder approval.*
We have 50 million shares of preferred stock authorized of which no shares are currently designated and no shares are issued and outstanding. Our directors, within the limitations and restrictions contained in our Articles of Incorporation and without further action by our shareholders, have the authority to issue shares of preferred stock from time to time in one or more series and to fix the number of shares and the relative rights, conversion rights, voting rights, and terms of redemption, liquidation preferences and any other preferences, special rights and qualifications of any such series. Any issuance of shares of preferred stock could adversely affect the rights of holders of our common stock. Should we issue additional shares of our common stock at a later time, each investor’s ownership interest in our stock would otherwise be beneficialproportionally reduced. Because our board of directors is entitled to designate the powers and preferences of the preferred stock without a vote of our shareholders, or discouraging a potential acquirer of us.subject to Nasdaq rules and regulations, our shareholders will have no control over what designations and preferences our future preferred stock, if any, will have.
Item 2. Recent Sales of Unregistered Securities
There have been no sales of unregistered securities during the quarter ended September 30, 20212022 and from the period from October 1, 20212022, to the filing date of this report, which have not previously been disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, or a Current Report on Form 8-K, except as set forth below:
In July 2021, a holder of Series A Convertible Preferred Stock of the Company converted 6,001 shares of the Company’s Series A Convertible Preferred Stock into 6,001 shares of common stock, pursuant to the terms of such Series A Convertible Preferred Stock.
We claim an exemption from registration provided by Section 3(a)(9) of the Securities Act for such issuance, as the securities were exchanged by us with our existing security holder in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.
In August 2021, a holder of warrants exercised2022, warrants to purchase 32,052100 shares of our common stock with an exercise price of $1.53$4.50 per share paying thewere exercised by a holder thereof in consideration for $450 and we issued 100 shares of common stock.
In July 2022, warrants to purchase an aggregate of 165,000 shares of common stock with an exercise price of $49,040,$4.50 per share were exercised by two holders thereof via cashless exercises, and were issued a net of an aggregate of 95,974 shares of common stock. Additionally, in July 2022, warrants to purchase an aggregate of 15,000 shares of common stock with an exercise price of $9.25 per share were exercised by a holder thereof in a cashless exercise, pursuant to which the holder was issued 32,052due a net of 2,101 shares of common stock in connection therewith. We claim an exemptiontherewith, which shares have not been issued to date, or included in the number of issued and outstanding shares disclosed throughout this report.
The above exercises were exempt from registration pursuant to Section 4(a)(2) of the Securities Act for the above issuance in connection with the exercise. The resale of shares of common stock issuable upon exercise of the warrant was registered under the Securities Act.
In August 2021, two holders of warrants exercised warrants to purchase an aggregate of 120,194 shares of our common stock with an exercise price of $1.53 per share, paying the aggregate exercise price of $183,897, and was issued an aggregate of 120,194 shares of common stock in connection therewith. We claim an exemption from registration pursuant to Section 4(a)(2) of the Securities Act, for the above issuances in connection with the exercises. The resale of shares of common stock issuable upon exercise of the warrants were registered under the Securities Act .
In September 2021,because they did not involve a holder of warrants exercised warrants to purchase 1,126,111 shares of our common stock with an exercise price of $1.53 per share, paying the aggregate exercise price of $1,722,950, and was issued 1,126,111 shares of common stock in connection therewith. We claim an exemption from registration pursuant to Section 4(a)(2) of the Securities Act, for the above issuance in connection with the exercise. The resale of shares of common stock issuable upon exercise of the warrant was registered under the Securities Act.
In September 2021, certain other holders of warrants exercised warrants to purchase an aggregate of 281,535 shares of our common stock with an exercise price of $1.53 per share, paying the aggregate exercise price of $430,749, and were issued an aggregate of 281,535 shares of common stock in connection therewith. We claim an exemption from registration pursuant to Section 4(a)(2) of the Securities Act, for the above issuances in connection with the exercises. The resale of shares of common stock issuable upon exercise of the warrants were registered under the Securities Act .
In September 2021, a holder of warrants exercised warrants to purchase 280,449 shares of our common stock with an exercise price of $1.53 per share, paying the aggregate exercise price of $429,087, and was issued 280,449 shares of common stock in connection therewith. We claim an exemption from registration pursuant to Section 4(a)(2) of the Securities Act, for the above issuance in connection with the exercise. The resale of shares of common stock issuable upon exercise of the warrant was registered under the Securities Act.
As a result of the issuances described above, and certain other transactions which occurred during the period as previously reported, there are 385,601 outstanding shares of Series A Convertible Preferred Stock issued and outstanding as of the date of this Report, and the maximum number of shares of common stock which may be issued, if such shares were converted in full, totals 385,601 shares of common stock.
Use of Proceeds from Sale of Registered Securities
None.
Issuer Purchases of Equity Securities by the Issuer and Affiliate Purchasers
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Incorporated by Reference |
| Exhibit Number | | Description of Exhibit | | Filed or Furnished Herewith | | Form | | Exhibit | | Filing Date/Period End Date | | File No. |
|
| 2.1+£ | | | | | | 8-K | | 2.1 | | | 5/27/2021 | | 001-11476 |
| 2.2+£ | | Asset Purchase Agreement among Vertex Energy, Inc., Vertex Energy Operating, LLC, Vertex Refining LA, LLC, Vertex Refining OH, LLC, Cedar Marine Terminals, L.P., H & H Oil, L.P., and Safety-Kleen Systems, Inc. dated as of June 29, 2021 | | | | 8-K | | 2.1 | | | 6/29/2021 | | 001-11476 |
| 3.1 | | | | | | | 8-K | | 3.1 | | | 7/2/2021 | | 001-11476 |
| 4.1 | | | | | | | 8-K | | 4.1 | | | 11/2/2021 | | 001-11476 |
| 4.2 | | | | | | | 8-K | | 4.2 | | | 11/2/2021 | | 001-11476 |
| 10.1+ | | | | | | 8-K | | 10.2 | | | 5/27/2021 | | 001-11476 |
| 10.2 | | | | | | | 8-K | | 10.1 | | | 7/2/2021 | | 001-11476 |
| 10.3 | | | | | | | 8-K | | 10.2 | | | 10/14/2021 | | 001-11476 |
| 10.4 | | | | | | | 8-K | | 10.4 | | | 7/2/2021 | | 001-11476 |
| 10.5 | | | | | | | 8-K | | 10.5 | | | 7/2/2021 | | 001-11476 |
| 10.6 | | | | | | | 8-K | | 10.6 | | | 7/2/2021 | | 001-11476 |
| 31.1 | | | | | X | | | | | | | | |
| 31.2 | | | | | X | | | | | | | | |
| 32.1 | | | | | X | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Incorporated by Reference |
| Exhibit Number | | Description of Exhibit | | Filed or Furnished Herewith | | Form | | Exhibit | | Filing Date/Period End Date | | File No. |
|
| 3.1 | | | | | | 8-K | | 3.1 | | 8/25/2022 | | 001-11476 |
| 3.2 | | | | | | 8-K | | 3.2 | | 8/25/2022 | | 001-11476 |
| 3.3 | | | | | | 8-K | | 3.3 | | 8/25/2022 | | 001-11476 |
| 3.4 | | | | | | 8-K | | 3.4 | | 8/25/2022 | | 001-11476 |
| 4.1 | | | | | | 8-K | | 4.1 | | 11/2/2021 | | 001-11476 |
| 4.2 | | | | | | 8-K | | 4.2 | | 11/2/2021 | | 001-11476 |
| 4.3 | | | | | | 8-K | | 4.1 | | 4/7/2022 | | 001-11476 |
| 4.4 | | | | | | 8-K | | 4.1 | | 5/27/2022 | | 001-11476 |
| 10.1# | | Loan and Security Agreement dated April 1, 2022, by and among Vertex Refining Alabama LLC, as borrower, Vertex Energy, Inc., as parent and as a guarantor, certain direct and indirect subsidiaries of Vertex Energy, Inc., as guarantors, the lenders party thereto, and Cantor Fitzgerald Securities, as administrative agent and collateral agent for the lenders | | | | 8-K | | 10.1 | | 4/7/2022 | | 001-11476 |
| 10.2# | | Amendment Number One to Loan and Security Agreement dated May 26, 2022, by and among Vertex Refining Alabama LLC, as borrower, Vertex Energy Inc., as parent and as a guarantor, certain direct and indirect subsidiaries of Vertex Energy Inc., as guarantors, the lenders party thereto, and Cantor Fitzgerald Securities, as administrative agent and collateral agent for the lenders | | | | 8-K | | 10.1 | | 5/27/2022 | | 001-11476 |
| 10.3# | | Amendment Number Two to Loan and Security Agreement dated September 30, 2022, by and among Vertex Refining Alabama LLC, as borrower, Vertex Energy, Inc., as parent and as a guarantor, certain direct and indirect subsidiaries of Vertex Energy, Inc., as guarantors, the lenders party thereto, and Cantor Fitzgerald Securities, as administrative agent and collateral agent for the lenders | | | | 8-K | | 10.1 | | 10/5/2022 | | 001-11476 |
| | 10.4 | | 10.4 | | Guarantor Joinder dated September 30, 2022, relating to that certain Loan and Security Agreement dated April 1, 2022, as amended from time to time, by and among Vertex Refining Alabama LLC, as borrower, Vertex Energy, Inc., as parent and as a guarantor, certain direct and indirect subsidiaries of Vertex Energy, Inc., as guarantors, the lenders party thereto, and Cantor Fitzgerald Securities, as administrative agent and collateral agent for the lenders | | 8-K | | 10.2 | | 10/5/2022 | | 001-11476 |
| 31.1 | | 31.1 | | | | X | |
| 31.2 | | 31.2 | | | | X | |
| 32.1 | | 32.1 | | | | X | |
| 32.2 | 32.2 | | | | | X | | 32.2 | | | | X | |
| 99.1 | | | | | 10-K | | 99.1 | | | 12/31/2012 | | 001-11476 | |
| 101* | 101* | | Inline XBRL Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q | | X | | 101* | | Inline XBRL Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q | | X | |
| 101.INS* | 101.INS* | | Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | X | | 101.INS* | | Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | X | |
| 101.SCH* | 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document | | X | | 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document | | X | |
| 101.CAL* | 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X | | 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X | |
| 101.DEF* | 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X | | 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X | |
| 101.LAB* | 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | |
| 101.PRE* | 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | |
| 104* | 104* | | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set | | X | | 104* | | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set | | X | |
* Filed herewith.
** Furnished herewith.
*** Indicates management contract or compensatory plan or arrangement.
+# Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request; provided, however that Vertex Energy, Inc. may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.
£ Certain confidential portions of this Exhibit were omitted by means of marking such portions with brackets (“[****]”) because the identified confidential portions (i) are not material and (ii) the Company customarily and actually treats that information as private or confidential.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.
| | | | | |
| | VERTEX ENERGY, INC. |
| |
Date: November 8, 20217, 2022 | By: /s/ Benjamin P. Cowart |
| Benjamin P. Cowart |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| |
Date: November 8, 20217, 2022 | By: /s/ Chris Carlson |
| Chris Carlson |
| | Chief Financial Officer |
| | (Principal Financial/Accounting Officer) |