Item 1. Financial Statements
VERTEX ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
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|
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|
|
|
|
|
|
September 30,
2020
|
|
December 31,
2019
|
|
ASSETS
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
15,552,980
|
|
|
$
|
4,099,655
|
|
|
Restricted cash
|
100,125
|
|
|
100,170
|
|
|
Accounts receivable, net
|
9,090,927
|
|
|
12,138,078
|
|
|
Federal income tax receivable
|
—
|
|
|
68,606
|
|
|
Inventory
|
3,584,317
|
|
|
6,547,479
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
4,597,361
|
|
|
4,452,920
|
|
|
Total current assets
|
32,925,710
|
|
|
27,406,908
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
|
|
Fixed assets, at cost
|
73,444,184
|
|
|
69,469,548
|
|
|
Less accumulated depreciation
|
(28,175,982)
|
|
|
(24,708,151)
|
|
|
Fixed assets, net
|
45,268,202
|
|
|
44,761,397
|
|
|
Finance lease right-of-use assets
|
1,640,694
|
|
|
851,570
|
|
|
Operating lease right-of use assets
|
34,014,076
|
|
|
35,586,885
|
|
|
Intangible assets, net
|
9,880,310
|
|
|
11,243,800
|
|
|
Deferred income taxes
|
—
|
|
|
68,605
|
|
|
Other assets
|
1,424,288
|
|
|
840,754
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
125,153,280
|
|
|
$
|
120,759,919
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
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September 30,
2020
|
|
December 31,
2019
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|
LIABILITIES, TEMPORARY EQUITY, AND EQUITY
|
|
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|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
$
|
8,275,862
|
|
|
$
|
7,620,098
|
|
|
Accrued expenses
|
3,312,018
|
|
|
5,016,132
|
|
|
Dividends payable
|
591,763
|
|
|
389,176
|
|
|
Finance lease liability-current
|
489,974
|
|
|
217,164
|
|
|
Operating lease liability-current
|
5,830,681
|
|
|
5,885,304
|
|
|
Current portion of long-term debt, net of unamortized finance costs
|
4,867,167
|
|
|
2,017,345
|
|
|
Derivative commodity liability
|
23,995
|
|
|
375,850
|
|
|
Revolving note
|
—
|
|
|
3,276,230
|
|
|
|
|
|
|
|
Total current liabilities
|
23,391,460
|
|
|
24,797,299
|
|
|
Long-term liabilities
|
|
|
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|
Long-term debt, net of unamortized finance costs
|
8,297,605
|
|
|
12,433,000
|
|
|
Finance lease liability-long-term
|
1,072,623
|
|
|
610,450
|
|
|
Operating lease liability-long-term
|
28,183,395
|
|
|
29,701,581
|
|
|
|
|
|
|
|
Derivative warrant liability
|
124,847
|
|
|
1,969,216
|
|
|
Total liabilities
|
61,069,930
|
|
|
69,511,546
|
|
|
|
|
|
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|
COMMITMENTS AND CONTINGENCIES (Note 3)
|
—
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—
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TEMPORARY EQUITY
|
|
|
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|
Series B Convertible Preferred Stock, $0.001 par value per share;
10,000,000 shares designated, 4,002,619 and 3,826,055 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively with a liquidation preference of $12,408,119 and $11,860,771 at September 30, 2020 and December 31, 2019, respectively.
|
12,408,119
|
|
|
11,006,406
|
|
|
|
|
|
|
|
Series B1 Convertible Preferred Stock, $0.001 par value per share;
17,000,000 shares designated, 7,219,164 and 9,028,085 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively with a liquidation preference of $11,261,896 and $14,083,813 at September 30, 2020 and December 31, 2019, respectively.
|
10,567,161
|
|
|
12,743,047
|
|
|
|
|
|
|
|
Redeemable non-controlling interest
|
29,928,211
|
|
|
4,396,894
|
|
|
Total Temporary Equity
|
52,903,491
|
|
|
28,146,347
|
|
|
EQUITY
|
|
|
|
|
50,000,000 of total Preferred shares authorized:
|
|
|
|
|
Series A Convertible Preferred Stock, $0.001 par value;
5,000,000 shares designated, 419,859 shares issued and outstanding at September 30, 2020 and December 31, 2019, with a liquidation preference of $625,590 at September 30, 2020 and December 31, 2019.
|
420
|
|
|
420
|
|
|
|
|
|
|
|
Series C Convertible Preferred Stock, $0.001 par value;
44,000 shares designated, no shares issued or outstanding.
|
—
|
|
|
—
|
|
|
|
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|
|
|
Common stock, $0.001 par value per share;
750,000,000 shares authorized; 45,554,841 and 43,395,563 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively.
|
45,555
|
|
|
43,396
|
|
|
Additional paid-in capital
|
94,404,520
|
|
|
81,527,351
|
|
|
Accumulated deficit
|
(84,323,362)
|
|
|
(59,246,514)
|
|
|
Total Vertex Energy, Inc. stockholders' equity
|
10,127,133
|
|
|
22,324,653
|
|
|
Non-controlling interest
|
1,052,726
|
|
|
777,373
|
|
|
Total Equity
|
11,179,859
|
|
|
23,102,026
|
|
|
TOTAL LIABILITIES, TEMPORARY EQUITY, AND EQUITY
|
$
|
125,153,280
|
|
|
$
|
120,759,919
|
|
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
Revenues
|
|
$
|
37,383,632
|
|
|
$
|
37,799,259
|
|
|
$
|
94,961,188
|
|
|
$
|
120,777,263
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
|
31,186,684
|
|
|
32,372,316
|
|
|
80,221,343
|
|
|
103,732,086
|
|
|
|
|
|
|
Depreciation and amortization attributable to costs of revenues
|
|
1,313,162
|
|
|
1,359,629
|
|
|
3,731,320
|
|
|
3,965,626
|
|
|
|
|
|
|
Gross profit
|
|
4,883,786
|
|
|
4,067,314
|
|
|
11,008,525
|
|
|
13,079,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
6,241,570
|
|
|
6,153,184
|
|
|
18,972,648
|
|
|
17,529,784
|
|
|
|
|
|
|
Depreciation and amortization attributable to operating expenses
|
|
482,869
|
|
|
455,953
|
|
|
1,412,719
|
|
|
1,367,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Total operating expenses
|
|
6,724,439
|
|
|
6,609,137
|
|
|
20,385,367
|
|
|
18,897,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(1,840,653)
|
|
|
(2,541,823)
|
|
|
(9,376,842)
|
|
|
(5,818,092)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
1
|
|
|
918,153
|
|
|
101
|
|
|
920,071
|
|
|
|
|
|
|
Gain (loss) on sale of assets
|
|
(136,434)
|
|
|
—
|
|
|
(124,090)
|
|
|
31,443
|
|
|
|
|
|
|
Gain on change in value of derivative warrant liability
|
|
256,587
|
|
|
1,290,792
|
|
|
1,844,369
|
|
|
331,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(234,671)
|
|
|
(826,005)
|
|
|
(796,930)
|
|
|
(2,322,780)
|
|
|
|
|
|
|
Total other income (expense)
|
|
(114,517)
|
|
|
1,382,940
|
|
|
923,450
|
|
|
(1,039,551)
|
|
|
|
|
|
|
Loss before income tax
|
|
(1,955,170)
|
|
|
(1,158,883)
|
|
|
(8,453,392)
|
|
|
(6,857,643)
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Net loss
|
|
(1,955,170)
|
|
|
(1,158,883)
|
|
|
(8,453,392)
|
|
|
(6,857,643)
|
|
|
|
|
|
|
Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest
|
|
480,215
|
|
|
(67,102)
|
|
|
190,771
|
|
|
(374,862)
|
|
|
|
|
|
|
Net loss attributable to Vertex Energy, Inc.
|
|
(2,435,385)
|
|
|
(1,091,781)
|
|
|
(8,644,163)
|
|
|
(6,482,781)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable noncontrolling interest to redemption value
|
|
(1,287,559)
|
|
|
(1,849,930)
|
|
|
(13,635,797)
|
|
|
(1,849,930)
|
|
|
|
|
|
|
Accretion of discount on Series B and B1 Preferred Stock
|
|
(29,157)
|
|
|
(550,774)
|
|
|
(1,500,395)
|
|
|
(1,644,374)
|
|
|
|
|
|
|
Dividends on Series B and B1 Preferred Stock
|
|
(591,777)
|
|
|
(419,096)
|
|
|
(1,296,493)
|
|
|
(1,238,766)
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(4,343,878)
|
|
|
$
|
(3,911,581)
|
|
|
$
|
(25,076,848)
|
|
|
$
|
(11,215,851)
|
|
|
|
|
|
|
Loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.10)
|
|
|
$
|
(0.09)
|
|
|
$
|
(0.55)
|
|
|
$
|
(0.28)
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.10)
|
|
|
$
|
(0.09)
|
|
|
$
|
(0.55)
|
|
|
$
|
(0.28)
|
|
|
|
|
|
|
Shares used in computing earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
45,554,841
|
|
|
41,376,335
|
|
|
45,494,235
|
|
|
40,626,700
|
|
|
|
|
|
|
Diluted
|
|
45,554,841
|
|
|
41,376,335
|
|
|
45,494,235
|
|
|
40,626,700
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment of carrying mount of non-controlling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,091,068
|
|
|
—
|
|
|
—
|
|
|
9,091,068
|
|
|
Share based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
163,269
|
|
|
—
|
|
|
—
|
|
|
163,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
119,268
|
|
|
2,908,128
|
|
|
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 loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,997,638)
|
|
|
(17,879)
|
|
|
(9,015,517)
|
|
|
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
|
|
|
Dividends on Series B and B1
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(591,777)
|
|
|
—
|
|
|
(591,777)
|
|
|
Accretion of discount on Series B and B1
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,157)
|
|
|
—
|
|
|
(29,157)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable non-controlling interest to redemption value
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,287,559)
|
|
|
—
|
|
|
(1,287,559)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,435,385)
|
|
|
173,964
|
|
|
(2,261,421)
|
|
|
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, 2019
|
|
|
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, 2019
|
40,174,821
|
|
|
$
|
40,175
|
|
|
419,859
|
|
|
$
|
420
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
75,131,122
|
|
|
$
|
(47,800,886)
|
|
|
$
|
1,438,213
|
|
|
$
|
28,809,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
143,063
|
|
|
—
|
|
|
—
|
|
|
143,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B1 Preferred stock to common
|
96,160
|
|
|
96
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
149,914
|
|
|
—
|
|
|
—
|
|
|
150,010
|
|
|
Dividends on Series B and B1
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(406,795)
|
|
|
—
|
|
|
(406,795)
|
|
|
Accretion of discount on Series B and B1
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(560,675)
|
|
|
—
|
|
|
(560,675)
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,963,564)
|
|
|
(105,431)
|
|
|
(5,068,995)
|
|
|
Balance on March 31, 2019
|
40,270,981
|
|
|
$
|
40,271
|
|
|
419,859
|
|
|
$
|
420
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
75,424,099
|
|
|
$
|
(53,731,920)
|
|
|
$
|
1,332,782
|
|
|
$
|
23,065,652
|
|
|
Exercise of options to purchase common stock
|
75,925
|
|
|
76
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,424
|
|
|
—
|
|
|
—
|
|
|
4,500
|
|
|
Share based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
171,002
|
|
|
—
|
|
|
—
|
|
|
171,002
|
|
|
Distribution to noncontrolling
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(285,534)
|
|
|
(285,534)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Series B and B1
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(412,875)
|
|
|
—
|
|
|
(412,875)
|
|
|
Accretion of discount on Series B and B1
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(532,925)
|
|
|
—
|
|
|
(532,925)
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(427,436)
|
|
|
(202,329)
|
|
|
(629,765)
|
|
|
Balance on June 30, 2019
|
40,346,906
|
|
|
$
|
40,347
|
|
|
419,859
|
|
|
$
|
420
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
75,599,525
|
|
|
$
|
(55,105,156)
|
|
|
$
|
844,919
|
|
|
$
|
21,380,055
|
|
|
Exercise of options to common
|
2,500
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,572
|
|
|
—
|
|
|
—
|
|
|
2,575
|
|
|
Share based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
159,426
|
|
|
—
|
|
|
—
|
|
|
159,426
|
|
|
Adjustment of carrying amount of non-controlling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
970,809
|
|
|
—
|
|
|
—
|
|
|
970,809
|
|
|
Accretion of redeemable non-controlling interest to redemption value
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,849,930)
|
|
|
—
|
|
|
(1,849,930)
|
|
|
Issuance of common stock and warrants
|
1,500,000
|
|
|
1,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,987,413
|
|
|
(772,202)
|
|
|
—
|
|
|
2,216,711
|
|
|
Dividends on Series B and B1
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(419,096)
|
|
|
—
|
|
|
(419,096)
|
|
|
Accretion of discount on Series B and B1
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(550,774)
|
|
|
—
|
|
|
(550,774)
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,091,781)
|
|
|
(37,981)
|
|
|
(1,129,762)
|
|
|
Balance on September 30, 2019
|
41,849,406
|
|
|
$
|
41,850
|
|
|
419,859
|
|
|
$
|
420
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
79,719,745
|
|
|
$
|
(59,788,939)
|
|
|
$
|
806,938
|
|
|
$
|
20,780,014
|
|
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2020
|
|
September 30,
2019
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
Net loss
|
$
|
(8,453,392)
|
|
|
$
|
(6,857,643)
|
|
|
|
Adjustments to reconcile net loss to cash provided by operating activities
|
|
|
|
|
|
Stock based compensation expense
|
490,957
|
|
|
473,491
|
|
|
|
Depreciation and amortization
|
5,144,039
|
|
|
5,333,485
|
|
|
|
|
|
|
|
|
|
Loss (gain) on sale of assets
|
124,090
|
|
|
(31,443)
|
|
|
|
|
|
|
|
|
|
Contingent consideration reduction
|
—
|
|
|
(15,564)
|
|
|
|
Bad debt and reduction in allowance for bad debt
|
34,127
|
|
|
(389,943)
|
|
|
|
(Decrease) increase in fair value of derivative warrant liability
|
(1,844,369)
|
|
|
(331,715)
|
|
|
|
(Gain) loss on commodity derivative contracts
|
(4,489,355)
|
|
|
2,691,833
|
|
|
|
Net cash settlements on commodity derivatives
|
5,484,734
|
|
|
(3,446,274)
|
|
|
|
Amortization of debt discount and deferred costs
|
47,826
|
|
|
430,431
|
|
|
|
Changes in operating assets and liabilities, net of effect of acquisition
|
|
|
|
|
|
Accounts receivable
|
4,952,388
|
|
|
(987,778)
|
|
|
|
|
|
|
|
|
|
Inventory
|
3,939,674
|
|
|
2,212,989
|
|
|
|
Prepaid expenses
|
(1,477,191)
|
|
|
(833,485)
|
|
|
|
Accounts payable
|
(367,327)
|
|
|
(1,046,149)
|
|
|
|
Accrued expenses
|
(1,788,693)
|
|
|
(260,341)
|
|
|
|
Other assets
|
(446,324)
|
|
|
—
|
|
|
|
Net cash provided by (used in) operating activities
|
1,351,184
|
|
|
(3,058,106)
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
Acquisition
|
(1,822,690)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Internally developed software
|
(49,229)
|
|
|
(380,216)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
(4,170,166)
|
|
|
(2,907,330)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of fixed assets
|
36,465
|
|
|
86,846
|
|
|
|
Net cash used in investing activities
|
(6,005,620)
|
|
|
(3,200,700)
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
Payments on finance leases
|
(282,655)
|
|
|
(113,241)
|
|
|
|
Proceeds from exercise of stock options
|
—
|
|
|
7,075
|
|
|
|
Distribution VRM LA
|
—
|
|
|
(285,534)
|
|
|
|
Contributions received from redeemable noncontrolling interest
|
21,000,000
|
|
|
3,150,000
|
|
|
|
Proceeds received from issuance of common stock and warrants
|
—
|
|
|
2,216,711
|
|
|
|
Line of credit (payments) proceeds, net
|
(3,276,230)
|
|
|
1,543,003
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable (includes proceeds from PPP note)
|
7,992,346
|
|
|
2,809,139
|
|
|
|
Payments on note payable
|
(9,325,745)
|
|
|
(3,514,365)
|
|
|
|
Net cash provided by financing activities
|
16,107,716
|
|
|
5,812,788
|
|
|
|
Net change in cash, cash equivalents and restricted cash
|
11,453,280
|
|
|
(446,018)
|
|
|
|
Cash, cash equivalents, and restricted cash at beginning of the period
|
4,199,825
|
|
|
2,849,831
|
|
|
|
Cash, cash equivalents, and restricted cash at end of period
|
$
|
15,653,105
|
|
|
$
|
2,403,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION
|
|
|
|
|
Cash paid for interest
|
$
|
812,887
|
|
|
$
|
1,887,012
|
|
|
Cash paid for taxes
|
$
|
—
|
|
|
$
|
—
|
|
|
NON-CASH INVESTING AND FINANCING TRANSACTIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B1 Preferred Stock into common stock
|
$
|
3,368,474
|
|
|
$
|
149,914
|
|
|
Accretion of discount on Series B and B1 Preferred Stock
|
$
|
1,500,395
|
|
|
$
|
1,644,374
|
|
|
Dividends-in-kind accrued on Series B and B1 Preferred Stock
|
$
|
1,296,493
|
|
|
$
|
1,238,766
|
|
|
Equipment acquired under finance leases
|
$
|
1,017,638
|
|
|
$
|
621,000
|
|
|
Initial adjustment of carrying amount redeemable noncontrolling interests
|
$
|
9,091,068
|
|
|
$
|
970,809
|
|
|
Accretion of redeemable noncontrolling interest to redemption value
|
$
|
13,635,797
|
|
|
$
|
1,849,930
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying unaudited consolidated interim financial statements of Vertex Energy, Inc. (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, 2019, contained in the Company's annual report, as filed with the SEC on Form 10-K on March 4, 2020 (the "Form 10-K"). The December 31, 2019 balance sheet was derived from the audited financial statements of our 2019 Form 10-K. 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. 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 2019 as reported in Form 10-K have been omitted.
Novel Coronavirus (COVID-19)
In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020 and a global pandemic on March 11, 2020. In March and April, many U.S. states and local jurisdictions began issuing ‘stay-at-home’ orders, which continue in various forms as of the date of this report. Notwithstanding such ‘stay-at-home’ orders, to date, our operations have for the most part been deemed an essential business under applicable governmental orders based on the critical nature of the products we offer.
We sell products and services primarily in the U.S. domestic oil and gas commodity markets. Throughout the first quarter of 2020, the industry experienced multiple factors which lowered both the demand for, and prices of, oil and gas. First, the COVID-19 pandemic lowered global demand for hydrocarbons, as social distancing and travel restrictions were implemented across the world. Second, the lifting of Organization of the Petroleum Exporting Countries (OPEC)+ supply curtailments, and the associated increase in production of oil, drove the global supply of hydrocarbons higher through the first quarter of 2020. As a result of both dynamics, prices for hydrocarbons declined 67% from peak prices within the first quarter of 2020. While global gross domestic product (GDP) growth was impacted by COVID-19 during the first nine months of 2020, we expect GDP to continue to decline globally in the fourth quarter of 2020 and for at least the early part of 2021, as a result of the COVID-19 pandemic. As a result, we expect oil and gas related markets will continue to experience significant volatility in 2020 and 2021. Our goal through this downturn has been to remain disciplined in allocating capital and to focus on liquidity and cash preservation. We are taking the necessary actions to right-size the business for expected activity levels.
As a result of the impact of the COVID-19 outbreak, some of our feedstock suppliers have permanently or temporarily closed their businesses, limited our access to their businesses, and/or have experienced a decreased demand for services. As a result of the above, and due to ‘stay-at-home’ and other social distancing orders, as well as the decline in U.S. travel caused by COVID-19, we have seen a significant decline in the volume of feedstocks (specifically used oil) that we have been able to collect, and therefore process through our facilities. A prolonged economic slowdown, period of social quarantine (imposed by the government or otherwise), or a prolonged period of decreased travel due to COVID-19 or the responses thereto, will likely continue to have a material negative adverse impact on our ability to produce products, and consequently our revenues and results of operations.
The full extent of the impact of COVID-19 on our business and operations currently cannot be estimated and will depend on a number of factors including the scope and duration of the global pandemic.
Currently we believe that we have sufficient cash on hand and will generate sufficient cash through operations to support our operations for the foreseeable future; however, we will continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of any new developments regarding the pandemic.
The pandemic is developing rapidly and the full extent to which COVID-19 will ultimately impact us depends on future developments, including the duration and spread of the virus, as well as potential seasonality of new outbreaks, including, but not limited to the recent increase in infection rates, which may lead to further or extended stay-at-home and similar orders in the markets in which we operate.
NOTE 2. SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 unaudited
|
|
September 30, 2019
|
|
Cash and cash equivalents
|
$
|
15,552,980
|
|
|
$
|
2,303,725
|
|
|
Restricted cash
|
100,125
|
|
|
100,088
|
|
|
Cash and cash equivalents and restricted cash as shown in the consolidated statements of cash flows
|
$
|
15,653,105
|
|
|
$
|
2,403,813
|
|
The Company placed all the restricted cash in a money market account, to serve as collateral for payment of a credit card.
Inventory
Inventories of products consist of feedstocks, refined petroleum products and recovered ferrous and non-ferrous metals and are reported at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method. The Company reviews its inventory commodities for impairment whenever events or circumstances indicate that the value may not be recoverable.
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-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 during the nine months ended September 30, 2020.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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 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.
Redeemable Noncontrolling Interests
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, 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, 2020 and December 31, 2019 consolidated balance sheets (provided that the Heartland SPV interest was not outstanding until January 2020). If an equity instrument subject to the guidance is currently redeemable, the instrument is adjusted to its maximum redemption amount at the balance sheet date. If the equity instrument subject to the guidance is not currently redeemable but it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the guidance permits either of the following measurement methods: (a) accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, or (b) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument. Because the MG SPV and Heartland SPV equity instruments will become redeemable solely based on the passage of time, the Company determined that it is probable that the MG SPV and Heartland SPV equity instruments will become redeemable. The Company has elected to apply the second of the two measurement options described above. An adjustment to the carrying amount of a non-controlling interest from the application of the above guidance does not impact net income in the consolidated financial statements. Rather, such adjustments are treated as equity transactions.
Variable Interest Entities
The Company accounts for the investments it makes 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), either the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impacts the entity’s economic performance, or (3) the obligation to absorb the expected losses of the legal entity or the right to receive expected residual returns of the legal entity. These certain legal entities are referred to as “variable interest entities” or “VIEs.”
The Company consolidates the results of any such entity in which it determines that it has a controlling financial interest. The Company has a “controlling financial interest” in such an entity if the Company has both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive benefits from, the VIE that could be potentially significant to the VIE. On a quarterly basis, the Company reassesses whether it has a controlling financial interest in any investments it has in these certain legal entities.
NOTE 3. CONCENTRATIONS, SIGNIFICANT CUSTOMERS, COMMITMENTS AND CONTINGENCIES
At September 30, 2020 and 2019 and for each of the nine months then ended, the Company’s revenues and receivables were comprised of the following customer concentrations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
Nine Months Ended
September 30, 2019
|
|
|
% of
Revenues
|
|
% of
Receivables
|
|
% of
Revenues
|
|
% of
Receivables
|
|
Customer 1
|
35%
|
|
11%
|
|
35%
|
|
25%
|
|
Customer 2
|
11%
|
|
13%
|
|
8%
|
|
15%
|
|
Customer 3
|
3%
|
|
11%
|
|
—%
|
|
—%
|
|
Customer 4
|
—%
|
|
—%
|
|
12%
|
|
—%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For each of the nine months ended September 30, 2020 and 2019, the Company's segment revenues were comprised of the following customer concentrations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenue by Segment
|
|
% Revenue by Segment
|
|
|
Nine Months Ended September 30, 2020
|
|
Nine Months Ended September 30, 2019
|
|
|
Black Oil
|
|
Refining
|
|
Recovery
|
|
Black Oil
|
|
Refining
|
|
Recovery
|
|
Customer 1
|
54%
|
|
—%
|
|
—%
|
|
41%
|
|
—%
|
|
—%
|
|
Customer 2
|
17%
|
|
—%
|
|
—%
|
|
10%
|
|
—%
|
|
—%
|
|
Customer 3
|
—%
|
|
—%
|
|
25%
|
|
—%
|
|
—%
|
|
—%
|
|
Customer 4
|
—%
|
|
—%
|
|
—%
|
|
14%
|
|
—%
|
|
—%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had one and no vendors that represented 10% of total purchases or payables for the nine months ended September 30, 2020 and 2019, respectively. The vendor represents 19% of total purchases for the nine months ended September 30, 2020 and 17% of accounts payable at September 30, 2020.
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.
Litigation
The Company, in its normal course of business, is involved in various 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 five 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., Case No. 121750, by Kendra Cannon et. al., Case No. 121751, by Lashawn Jones et. al., Case No. 121752, by Joan Strauss et. al. and Case No. 121753, by Donna Allen et. 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.
Related Parties
From time to time, the Company consults with a related party law firm. During the nine months ended September 30, 2020 and 2019, we paid $56,971 and $62,239, respectively, to such law firm for services rendered.
NOTE 4. REVENUES
Disaggregation of Revenue
The following tables present our revenues disaggregated by geographical market and revenue source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
|
Black Oil
|
|
Refining & Marketing
|
|
Recovery
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
Northern United States
|
$
|
7,484,798
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,484,798
|
|
|
Southern United States
|
12,503,324
|
|
|
13,501,749
|
|
|
3,893,761
|
|
|
29,898,834
|
|
|
|
$
|
19,988,122
|
|
|
$
|
13,501,749
|
|
|
$
|
3,893,761
|
|
|
$
|
37,383,632
|
|
|
Sources of Revenue
|
|
|
|
|
|
|
|
|
Base oil
|
$
|
5,632,592
|
|
|
$
|
—
|
|
|
$
|
733,180
|
|
|
$
|
6,365,772
|
|
|
Pygas
|
—
|
|
|
1,184,433
|
|
|
—
|
|
|
1,184,433
|
|
|
Industrial fuel
|
21,190
|
|
|
82,644
|
|
|
—
|
|
|
103,834
|
|
|
Distillates
|
—
|
|
|
12,234,672
|
|
|
—
|
|
|
12,234,672
|
|
|
Oil collection services
|
2,449,454
|
|
|
—
|
|
|
—
|
|
|
2,449,454
|
|
|
Metals
|
—
|
|
|
—
|
|
|
3,160,581
|
|
|
3,160,581
|
|
|
Other re-refinery products
|
834,438
|
|
|
—
|
|
|
—
|
|
|
834,438
|
|
|
VGO/Marine fuel sales
|
11,050,448
|
|
|
—
|
|
|
—
|
|
|
11,050,448
|
|
|
Total revenues
|
$
|
19,988,122
|
|
|
$
|
13,501,749
|
|
|
$
|
3,893,761
|
|
|
$
|
37,383,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
Black Oil
|
|
Refining & Marketing
|
|
Recovery
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
Northern United States
|
$
|
23,210,428
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,210,428
|
|
|
Southern United States
|
37,852,200
|
|
|
22,309,670
|
|
|
11,588,890
|
|
|
71,750,760
|
|
|
|
$
|
61,062,628
|
|
|
$
|
22,309,670
|
|
|
$
|
11,588,890
|
|
|
$
|
94,961,188
|
|
|
Sources of Revenue
|
|
|
|
|
|
|
|
|
Base oil
|
$
|
17,914,941
|
|
|
$
|
—
|
|
|
$
|
2,091,430
|
|
|
$
|
20,006,371
|
|
|
Pygas
|
—
|
|
|
4,815,040
|
|
|
—
|
|
|
4,815,040
|
|
|
Industrial fuel
|
1,262,266
|
|
|
135,396
|
|
|
—
|
|
|
1,397,662
|
|
|
Distillates
|
—
|
|
|
17,359,234
|
|
|
—
|
|
|
17,359,234
|
|
|
Oil collection services
|
5,707,017
|
|
|
—
|
|
|
—
|
|
|
5,707,017
|
|
|
Metals
|
—
|
|
|
—
|
|
|
9,549,144
|
|
|
9,549,144
|
|
|
Other re-refinery products
|
4,341,027
|
|
|
—
|
|
|
(51,684)
|
|
|
4,289,343
|
|
|
VGO/Marine fuel sales
|
31,837,377
|
|
|
—
|
|
|
—
|
|
|
31,837,377
|
|
|
Total revenues
|
$
|
61,062,628
|
|
|
$
|
22,309,670
|
|
|
$
|
11,588,890
|
|
|
$
|
94,961,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
Black Oil
|
|
Refining & Marketing
|
|
Recovery
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
Northern United States
|
$
|
12,325,941
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,325,941
|
|
|
Southern United States
|
20,004,590
|
|
|
3,076,454
|
|
|
2,392,274
|
|
|
25,473,318
|
|
|
|
$
|
32,330,531
|
|
|
$
|
3,076,454
|
|
|
$
|
2,392,274
|
|
|
$
|
37,799,259
|
|
|
Sources of Revenue
|
|
|
|
|
|
|
|
|
Base oil
|
$
|
9,135,650
|
|
|
$
|
—
|
|
|
$
|
640,642
|
|
|
$
|
9,776,292
|
|
|
Pygas
|
—
|
|
|
2,741,557
|
|
|
—
|
|
|
2,741,557
|
|
|
Industrial fuel
|
891,676
|
|
|
334,897
|
|
|
—
|
|
|
1,226,573
|
|
|
Distillates
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Oil collection services
|
1,953,924
|
|
|
—
|
|
|
—
|
|
|
1,953,924
|
|
|
Metals
|
—
|
|
|
—
|
|
|
1,724,025
|
|
|
1,724,025
|
|
|
Other re-refinery products
|
3,057,171
|
|
|
—
|
|
|
27,607
|
|
|
3,084,778
|
|
|
VGO/Marine fuel sales
|
17,292,110
|
|
|
—
|
|
|
—
|
|
|
17,292,110
|
|
|
Total revenues
|
$
|
32,330,531
|
|
|
$
|
3,076,454
|
|
|
$
|
2,392,274
|
|
|
$
|
37,799,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Black Oil
|
|
Refining & Marketing
|
|
Recovery
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
Northern United States
|
$
|
31,530,289
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,530,289
|
|
|
Southern United States
|
71,523,240
|
|
|
9,212,477
|
|
|
8,511,257
|
|
|
89,246,974
|
|
|
|
$
|
103,053,529
|
|
|
$
|
9,212,477
|
|
|
$
|
8,511,257
|
|
|
$
|
120,777,263
|
|
|
Sources of Revenue
|
|
|
|
|
|
|
|
|
Base oil
|
$
|
23,918,490
|
|
|
$
|
—
|
|
|
$
|
2,439,071
|
|
|
$
|
26,357,561
|
|
|
Pygas
|
—
|
|
|
7,656,125
|
|
|
—
|
|
|
7,656,125
|
|
|
Industrial fuel
|
5,714,478
|
|
|
1,501,655
|
|
|
—
|
|
|
7,216,133
|
|
|
Distillates
|
—
|
|
|
54,697
|
|
|
—
|
|
|
54,697
|
|
|
Oil collection services
|
4,261,391
|
|
|
—
|
|
|
—
|
|
|
4,261,391
|
|
|
Metals
|
—
|
|
|
—
|
|
|
5,988,895
|
|
|
5,988,895
|
|
|
Other re-refinery products
|
10,399,007
|
|
|
—
|
|
|
83,291
|
|
|
10,482,298
|
|
|
VGO/Marine fuel sales
|
58,760,163
|
|
|
—
|
|
|
—
|
|
|
58,760,163
|
|
|
Total revenues
|
$
|
103,053,529
|
|
|
$
|
9,212,477
|
|
|
$
|
8,511,257
|
|
|
$
|
120,777,263
|
|
NOTE 5. ACCOUNTS RECEIVABLE
Accounts receivable, net, consists of the following at September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 Unaudited
|
|
December 31, 2019
|
|
Accounts receivable trade
|
$
|
9,441,141
|
|
|
$
|
12,540,553
|
|
|
Allowance for doubtful accounts
|
(350,214)
|
|
|
(402,475)
|
|
|
Accounts receivable trade, net
|
$
|
9,090,927
|
|
|
$
|
12,138,078
|
|
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 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 ABL 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 (1.55% at September 30, 2020) 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.
Loan Agreements
On May 4, 2020, the Company applied for a loan from Texas Citizens Bank in the principal amount of $4.22 million, pursuant to the Paycheck Protection Program (the “PPP”) 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 is unsecured, matures on April 28, 2022, and bears interest at a rate of 1.00% per annum, payable monthly commencing on February 2021, following an initial deferral period as specified under the PPP. Under the terms of the PPP, the entire amount may be forgiven to the extent loan proceeds are used for qualifying expenses. As of the date of this report, the Company believes it has used the PPP funds for qualifying expenses.
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.
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 $1,893,668 at September 30, 2020 and $1,165,172 at December 31, 2019.
Finance Leases
On April 2, 2020, the Company obtained one 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 $410,928 at September 30, 2020.
On May 22, 2020, the Company entered into one finance lease. Payments are $15,078 per month for three years and the amount of the finance lease obligation has been reduced to $485,745 at September 30, 2020.
The Company's outstanding debt facilities as of September 30, 2020 and December 31, 2019 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creditor
|
Loan Type
|
|
Origination Date
|
|
Maturity Date
|
|
Loan Amount
|
|
Balance on September 30, 2020
|
Balance on December 31, 2019
|
|
Encina Business Credit, LLC
|
Term Loan
|
|
February 1, 2017
|
|
February 1, 2022
|
|
$
|
20,000,000
|
|
|
$
|
5,658,000
|
|
$
|
13,333,000
|
|
|
Encina Business Credit SPV, LLC
|
Revolving Note
|
|
February 1, 2017
|
|
February 1, 2022
|
|
$
|
10,000,000
|
|
|
—
|
|
3,276,230
|
|
|
Encina Business Credit, LLC
|
Capex Loan
|
|
August 7, 2020
|
|
February 1, 2022
|
|
$
|
2,000,000
|
|
|
1,250,617
|
|
—
|
|
|
Wells Fargo Equipment Lease-Ohio
|
Finance Lease
|
|
April-May, 2019
|
|
April-May, 2024
|
|
$
|
621,000
|
|
|
465,678
|
|
551,260
|
|
|
AVT Equipment Lease-Ohio
|
Finance Lease
|
|
April 2, 2020
|
|
April 2, 2023
|
|
$
|
337,155
|
|
|
410,928
|
|
—
|
|
|
AVT Equipment Lease-HH
|
Finance Lease
|
|
May 22, 2020
|
|
May 22, 2023
|
|
$
|
551,609
|
|
|
485,745
|
|
—
|
|
|
John Deere Note
|
Note
|
|
May 27, 2020
|
|
June 24, 2024
|
|
$
|
152,643
|
|
|
140,487
|
|
—
|
|
|
Tetra Capital Lease
|
Finance Lease
|
|
May, 2018
|
|
May, 2022
|
|
$
|
419,690
|
|
|
195,761
|
|
264,014
|
|
|
Well Fargo Equipment Lease-VRM LA
|
Finance Lease
|
|
March, 2018
|
|
March, 2021
|
|
$
|
30,408
|
|
|
4,485
|
|
12,341
|
|
|
Texas Citizens Bank
|
PPP Loan
|
|
May 5, 2020
|
|
April 28, 2022
|
|
$
|
4,222,000
|
|
|
4,222,000
|
|
—
|
|
|
Various institutions
|
Insurance premiums financed
|
|
Various
|
|
< 1 year
|
|
$
|
2,902,428
|
|
|
1,893,668
|
|
1,165,172
|
|
|
Total
|
|
|
|
|
|
|
|
|
14,727,369
|
|
18,602,017
|
|
|
Deferred finance costs
|
|
|
|
|
|
|
|
|
—
|
|
(47,826)
|
|
|
Total, net of deferred finance costs
|
|
|
|
|
|
|
|
|
$
|
14,727,369
|
|
$
|
18,554,191
|
|
Future contractual maturities of notes payable as of September 30, 2020 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creditor
|
Year 1
|
|
Year 2
|
|
Year 3
|
|
Year 4
|
|
Year 5
|
|
Thereafter
|
|
Encina Business Credit, LLC
|
$
|
900,000
|
|
|
$
|
4,758,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Encina Business Credit SPV, LLC
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Encina Business Credit, LLC
|
158,966
|
|
|
1,091,651
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
John Deere Note
|
37,071
|
|
|
37,991
|
|
|
38,934
|
|
|
26,491
|
|
|
—
|
|
|
—
|
|
|
Well Fargo Equipment Lease- Ohio
|
119,356
|
|
|
125,643
|
|
|
132,261
|
|
|
88,418
|
|
|
—
|
|
|
—
|
|
|
AVT Equipment Lease-Ohio
|
124,308
|
|
|
135,272
|
|
|
151,348
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
AVT Equipment Lease-HH
|
145,296
|
|
|
158,111
|
|
|
182,338
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Tetra Capital Lease
|
96,530
|
|
|
99,231
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Well Fargo Equipment Lease- VRM LA
|
4,485
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Texas Citizens Bank
|
1,877,461
|
|
|
2,344,539
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Various institutions
|
1,893,668
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Totals
|
$
|
5,357,141
|
|
|
$
|
8,750,438
|
|
|
$
|
504,881
|
|
|
$
|
114,909
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7. EARNINGS PER SHARE
Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the periods presented. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, such as convertible preferred stock, stock options, warrants or convertible securities. Due to their anti-dilutive effect, the calculation of diluted earnings per share for the three and nine months ended September 30, 2020 and 2019 excludes: 1) options to purchase 5,104,288 and 4,218,250 shares, respectively, of common stock, 2) warrants to purchase 8,633,193 and 8,853,056 shares, respectively, of common stock, 3) Series B Preferred Stock which is convertible into 4,002,619 and 3,769,505 shares, respectively, of common stock, 4) Series B1 Preferred Stock which is convertible into 7,219,164 and 10,417,966 shares, respectively, of common stock, and 5) Series A Preferred Stock which is convertible into 419,859 shares of common stock as of September 30, 2020 and 2019.
NOTE 8. COMMON STOCK
The total number of authorized shares of the Company’s common stock is 750,000,000 shares, $0.001 par value per share. As of September 30, 2020, there were 45,554,841 common shares issued and outstanding.
During the nine months ended September 30, 2020, the Company issued 2,159,278 shares of common stock in connection with the conversion of Series B1 Convertible Preferred Stock into common stock of the Company, pursuant to the terms of such securities.
During the nine months ended September 30, 2019, the Company issued 1,596,160 shares of common stock in connection with the July 2019 Tensile Capital Partners Master Fund LP, an investment fund based in San Francisco, California (“Tensile”), Share Purchase and Subscription Agreement and conversions of Series B1 Convertible Preferred Stock into common stock of the Company, pursuant to the terms of such securities. In addition, during the nine months ended September 30, 2019, the Company issued 78,425 shares of common stock in connection with the exercise of options.
Stock Option Agreements
On June 19, 2020, the Board of Directors approved the grant to three employees and one officer/director (Benjamin P. Cowart, the Company’s Chief Executive Officer) of options to purchase an aggregate of 416,885 and 269,153 shares of common stock, respectively, at an exercise price of $0.78 and $0.86 per share, respectively, with a ten year and five year term, respectively (subject to continued employment/directorship), vesting at the rate of 1/4th of such options per year on the first four anniversaries of the grant, under our 2019 Stock Incentive Plan, as amended, in consideration for services rendered and to be rendered to the Company. The grant date fair value is $355,404 which amount is being amortized at the rate of $7,404 per month starting in July 2020.
NOTE 9. PREFERRED STOCK AND DETACHABLE WARRANTS
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 5,000,000 (“Series A Preferred”). The total number of designated shares of the Company’s Series B Convertible Preferred Stock is 10,000,000. The total number of designated shares of the Company’s Series B1 Convertible Preferred Stock is 17,000,000. As of September 30, 2020 and December 31, 2019, there were 419,859 shares of Series A Preferred Stock issued and outstanding. As of September 30, 2020 and December 31, 2019, there were 4,002,619 and 3,826,055 shares of Series B Preferred Stock issued and outstanding, respectively. As of September 30, 2020 and December 31, 2019, there were 7,219,164 and 9,028,085 shares of Series B1 Preferred Stock issued and outstanding, respectively.
Series B Preferred Stock and Temporary Equity
The following table represents the activity related to the Series B Preferred Stock, classified as Temporary Equity on the accompanying unaudited consolidated balance sheet, during the nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Balance at beginning of period
|
$
|
11,006,406
|
|
|
$
|
8,900,208
|
|
|
|
|
|
|
|
Plus: discount accretion
|
854,364
|
|
|
1,031,483
|
|
|
|
|
|
|
|
Plus: dividends in kind
|
547,349
|
|
|
510,502
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
12,408,119
|
|
|
$
|
10,442,193
|
|
The Series B Warrants and Series B1 Warrants were revalued at September 30, 2020 and December 31, 2019 using the Dynamic Black Scholes model that computes the impact of a possible change in control transaction upon the exercise of the warrant shares at approximately $124,847 and $1,969,216, respectively. At September 30, 2020, the Series B Warrants and Series B1 Warrants were valued at approximately $0 and $124,847, respectively. The Dynamic Black Scholes Merton inputs used were: expected dividend rate of 0%, expected volatility of 66%-100%, risk free interest rate of 0.11% (Series B Warrants) and 0.13% (Series B1 Warrants), and expected term of 0.25 years (Series B Warrants) and 1.25 years (Series B1 Warrants).
At September 30, 2020 and December 31, 2019, a total of $310,220 and $177,921 of dividends were accrued on our outstanding Series B Preferred Stock, respectively. During the three months ended September 30, 2020 and 2019, we paid dividends in-kind in additional shares of Series B Preferred Stock of $188,837 and $175,305, respectively. Because such preferred stock was not redeemed on June 24, 2020, the preferred stock accrues a 10% per annum dividend (payable in-kind at the option of the Company), until such preferred stock is redeemed or converted into common stock.
Series B1 Preferred Stock and Temporary Equity
The following table represents the activity related to the Series B1 Preferred Stock, classified as Temporary Equity on the accompanying unaudited consolidated balance sheet, for the nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Balance at beginning of period
|
$
|
12,743,047
|
|
|
$
|
13,279,755
|
|
|
Less: conversions of shares to common
|
(3,368,474)
|
|
|
(119,768)
|
|
|
Plus: discount accretion
|
646,031
|
|
|
582,649
|
|
|
Plus: dividends in kind
|
546,557
|
|
|
712,185
|
|
|
Balance at end of period
|
$
|
10,567,161
|
|
|
$
|
14,454,821
|
|
As of September 30, 2020 and December 31, 2019, respectively, a total of $281,557 and $211,269 of dividends were accrued on our outstanding Series B1 Preferred Stock. During the three months ended September 30, 2020 and 2019, we paid dividends in-kind in additional shares of Series B1 Preferred Stock of $171,380 and $240,185, respectively.
The following is an analysis of changes in the derivative liability for the nine months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level Three Roll-Forward
|
|
|
|
|
|
|
2020
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
1,969,216
|
|
$
|
1,481,692
|
|
|
Change in valuation of warrants
|
|
(1,844,369)
|
|
(331,715)
|
|
|
Balance at end of period
|
|
$
|
124,847
|
|
$
|
1,149,977
|
|
|
|
|
|
|
|
|
|
|
|
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 primary of the sale of (a) petroleum products which include base oil and industrial fuels—which consist of used motor oils, cutterstock and fuel oil generated by our facilities; (b) oil collection services—which consist of used oil sales, burner fuel sales, antifreeze sales and service charges; (c) the sale of other re-refinery products including asphalt, condensate, recovered products, and used motor oil; (d) transportation revenues; and (e) the sale of VGO (vacuum gas oil)/marine fuel.
(2) The Refining and Marketing segment consists primarily 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 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, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED SEPTEMBER 30, 2020
|
|
|
|
Black Oil
|
|
Refining &
Marketing
|
|
Recovery
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Base oil
|
|
$
|
5,632,592
|
|
|
$
|
—
|
|
|
$
|
733,180
|
|
|
$
|
6,365,772
|
|
|
Pygas
|
|
—
|
|
|
1,184,433
|
|
|
—
|
|
|
1,184,433
|
|
|
Industrial fuel
|
|
21,190
|
|
|
82,644
|
|
|
—
|
|
|
103,834
|
|
|
Distillates (1)
|
|
—
|
|
|
12,234,672
|
|
|
—
|
|
|
12,234,672
|
|
|
Oil collection services
|
|
2,449,454
|
|
|
—
|
|
|
—
|
|
|
2,449,454
|
|
|
Metals (2)
|
|
—
|
|
|
—
|
|
|
3,160,581
|
|
|
3,160,581
|
|
|
Other re-refinery products (3)
|
|
834,438
|
|
|
—
|
|
|
—
|
|
|
834,438
|
|
|
VGO/Marine fuel sales
|
|
11,050,448
|
|
|
—
|
|
|
—
|
|
|
11,050,448
|
|
|
Total revenues
|
|
19,988,122
|
|
|
13,501,749
|
|
|
3,893,761
|
|
|
37,383,632
|
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
|
14,687,141
|
|
|
13,217,757
|
|
|
3,281,786
|
|
|
31,186,684
|
|
|
Depreciation and amortization attributable to costs of revenues
|
|
1,041,719
|
|
|
121,744
|
|
|
149,699
|
|
|
1,313,162
|
|
|
Gross profit
|
|
4,259,262
|
|
|
162,248
|
|
|
462,276
|
|
|
4,883,786
|
|
|
Selling, general and administrative expenses
|
|
4,899,956
|
|
|
696,611
|
|
|
645,003
|
|
|
6,241,570
|
|
|
Depreciation and amortization attributable to operating expenses
|
|
390,105
|
|
|
72,314
|
|
|
20,450
|
|
|
482,869
|
|
|
Loss from operations
|
|
$
|
(1,030,799)
|
|
|
$
|
(606,677)
|
|
|
$
|
(203,177)
|
|
|
$
|
(1,840,653)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED SEPTEMBER 30, 2019
|
|
|
|
Black Oil
|
|
Refining &
Marketing
|
|
Recovery
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Base oil
|
|
$
|
9,135,650
|
|
|
$
|
—
|
|
|
$
|
640,642
|
|
|
$
|
9,776,292
|
|
|
Pygas
|
|
—
|
|
|
2,741,557
|
|
|
—
|
|
|
2,741,557
|
|
|
Industrial fuel
|
|
891,676
|
|
|
334,897
|
|
|
—
|
|
|
1,226,573
|
|
|
Distillates (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Oil collection services
|
|
1,953,924
|
|
|
—
|
|
|
—
|
|
|
1,953,924
|
|
|
Metals (2)
|
|
—
|
|
|
—
|
|
|
1,724,025
|
|
|
1,724,025
|
|
|
Other re-refinery products (3)
|
|
3,057,171
|
|
|
—
|
|
|
27,607
|
|
|
3,084,778
|
|
|
VGO/Marine fuel sales
|
|
17,292,110
|
|
|
—
|
|
|
—
|
|
|
17,292,110
|
|
|
Total revenues
|
|
32,330,531
|
|
|
3,076,454
|
|
|
2,392,274
|
|
|
37,799,259
|
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
|
27,663,983
|
|
|
2,511,314
|
|
|
2,197,019
|
|
|
32,372,316
|
|
|
Depreciation and amortization attributable to costs of revenues
|
|
1,073,520
|
|
|
147,658
|
|
|
138,451
|
|
|
1,359,629
|
|
|
Gross profit
|
|
3,593,028
|
|
|
417,482
|
|
|
56,804
|
|
|
4,067,314
|
|
|
Selling, general and administrative expenses
|
|
5,040,772
|
|
|
494,781
|
|
|
617,631
|
|
|
6,153,184
|
|
|
Depreciation and amortization attributable to operating expenses
|
|
335,105
|
|
|
100,398
|
|
|
20,450
|
|
|
455,953
|
|
|
Loss from operations
|
|
$
|
(1,782,849)
|
|
|
$
|
(177,697)
|
|
|
$
|
(581,277)
|
|
|
$
|
(2,541,823)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2020
|
|
|
|
Black Oil
|
|
Refining &
Marketing
|
|
Recovery
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Base oil
|
|
$
|
17,914,941
|
|
|
$
|
—
|
|
|
$
|
2,091,430
|
|
|
$
|
20,006,371
|
|
|
Pygas
|
|
—
|
|
|
4,815,040
|
|
|
—
|
|
|
4,815,040
|
|
|
Industrial fuel
|
|
1,262,266
|
|
|
135,396
|
|
|
—
|
|
|
1,397,662
|
|
|
Distillates (1)
|
|
—
|
|
|
17,359,234
|
|
|
—
|
|
|
17,359,234
|
|
|
Oil collection services
|
|
5,707,017
|
|
|
—
|
|
|
—
|
|
|
5,707,017
|
|
|
Metals (2)
|
|
—
|
|
|
—
|
|
|
9,549,144
|
|
|
9,549,144
|
|
|
Other re-refinery products (3)
|
|
4,341,027
|
|
|
—
|
|
|
(51,684)
|
|
|
4,289,343
|
|
|
VGO/Marine fuel sales
|
|
31,837,377
|
|
|
—
|
|
|
—
|
|
|
31,837,377
|
|
|
Total revenues
|
|
61,062,628
|
|
|
22,309,670
|
|
|
11,588,890
|
|
|
94,961,188
|
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
|
46,601,716
|
|
|
21,772,587
|
|
|
11,847,040
|
|
|
80,221,343
|
|
|
Depreciation and amortization attributable to costs of revenues
|
|
2,960,699
|
|
|
341,498
|
|
|
429,123
|
|
|
3,731,320
|
|
|
Gross profit (loss)
|
|
11,500,213
|
|
|
195,585
|
|
|
(687,273)
|
|
|
11,008,525
|
|
|
Selling, general and administrative expenses
|
|
15,180,569
|
|
|
1,867,027
|
|
|
1,925,052
|
|
|
18,972,648
|
|
|
Depreciation and amortization attributable to operating expenses
|
|
1,072,877
|
|
|
278,492
|
|
|
61,350
|
|
|
1,412,719
|
|
|
Loss from operations
|
|
$
|
(4,753,233)
|
|
|
$
|
(1,949,934)
|
|
|
$
|
(2,673,675)
|
|
|
$
|
(9,376,842)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2019
|
|
|
|
Black Oil
|
|
Refining &
Marketing
|
|
Recovery
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Base oil
|
|
$
|
23,918,490
|
|
|
$
|
—
|
|
|
$
|
2,439,071
|
|
|
$
|
26,357,561
|
|
|
Pygas
|
|
—
|
|
|
7,656,125
|
|
|
—
|
|
|
7,656,125
|
|
|
Industrial fuel
|
|
5,714,478
|
|
|
1,501,655
|
|
|
—
|
|
|
7,216,133
|
|
|
Distillates (1)
|
|
—
|
|
|
54,697
|
|
|
—
|
|
|
54,697
|
|
|
Oil collection services
|
|
4,261,391
|
|
|
—
|
|
|
—
|
|
|
4,261,391
|
|
|
Metals (2)
|
|
—
|
|
|
—
|
|
|
5,988,895
|
|
|
5,988,895
|
|
|
Other re-refinery products (3)
|
|
10,399,007
|
|
|
—
|
|
|
83,291
|
|
|
10,482,298
|
|
|
VGO/Marine fuel sales
|
|
58,760,163
|
|
|
—
|
|
|
—
|
|
|
58,760,163
|
|
|
Total revenues
|
|
103,053,529
|
|
|
9,212,477
|
|
|
8,511,257
|
|
|
120,777,263
|
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
|
88,374,446
|
|
|
7,767,882
|
|
|
7,589,758
|
|
|
103,732,086
|
|
|
Depreciation and amortization attributable to costs of revenues
|
|
3,122,664
|
|
|
431,948
|
|
|
411,014
|
|
|
3,965,626
|
|
|
Gross profit
|
|
11,556,419
|
|
|
1,012,647
|
|
|
510,485
|
|
|
13,079,551
|
|
|
Selling, general and administrative expenses
|
|
14,500,306
|
|
|
1,424,572
|
|
|
1,604,906
|
|
|
17,529,784
|
|
|
Depreciation and amortization attributable to operating expenses
|
|
1,005,315
|
|
|
301,194
|
|
|
61,350
|
|
|
1,367,859
|
|
|
Loss from operations
|
|
$
|
(3,949,202)
|
|
|
$
|
(713,119)
|
|
|
$
|
(1,155,771)
|
|
|
$
|
(5,818,092)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2020 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 $55.2 million as of September 30, 2020 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 $8.5 million from January 1, 2020 through September 30, 2020.
NOTE 12. 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 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.
The mark-to-market effects of these contracts as of September 30, 2020 and December 31, 2019, 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 swap agreements is based on the difference between the strike price and the New York Mercantile Exchange futures price for the applicable trading months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
Contract Type
|
Contract Period
|
Weighted Average Strike Price (Barrels)
|
|
|
Remaining Volume (Barrels)
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Swap
|
Sep. 2020- Oct. 2020
|
$
|
37.10
|
|
|
|
10,000
|
|
$
|
9,000
|
|
|
Swap
|
Sep. 2020- Oct. 2020
|
$
|
46.33
|
|
|
|
10,000
|
|
(28,896)
|
|
|
Futures
|
Sep. 2020- Dec. 2020
|
$
|
48.67
|
|
|
|
26,000
|
|
(4,099)
|
|
|
|
|
|
|
|
|
$
|
(23,995)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Contract Type
|
Contract Period
|
Weighted Average Strike Price (Barrels)
|
|
|
Remaining Volume (Barrels)
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Swap
|
Dec. 2019-Mar. 2020
|
$
|
40.88
|
|
|
|
130,000
|
|
$
|
539,800
|
|
|
Swap
|
Dec. 2019-Mar. 2020
|
$
|
81.19
|
|
|
|
130,000
|
|
(673,428)
|
|
|
Futures
|
Dec. 2019-Mar. 2020
|
$
|
84.53
|
|
|
|
105,000
|
|
(242,222)
|
|
|
|
|
|
|
|
|
$
|
(375,850)
|
|
The carrying values of the Company's derivatives positions and their locations on the consolidated balance sheets as of September 30, 2020 and December 31, 2019 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
Contract Type
|
2020
|
2019
|
|
|
|
|
|
|
|
Crude oil swaps
|
$
|
(19,896)
|
|
$
|
(133,628)
|
|
|
|
Crude oil futures
|
(4,099)
|
|
(242,222)
|
|
|
|
|
|
|
|
Derivative commodity liability
|
|
$
|
(23,995)
|
|
$
|
(375,850)
|
|
For the three months ended September 30, 2020 and 2019, we recognized a $4,557 gain and a $1,622,056 loss, respectively, on commodity derivative contracts on the consolidated statements of operations as part of our costs of revenues. For the nine months ended September 30, 2020 and 2019, we recognized a $4,489,355 gain and a $2,691,833 loss, respectively, on commodity derivative contracts on the consolidated statements of operations as part of our costs 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, 2020 and 2019 were $101,841 and $53,121, 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, 2020 and 2019
were $33,077 and $12,436, respectively, and are included in interest expense on the unaudited consolidated statements of operations. The associated amortization expense for the nine months ended September 30, 2020 and 2019 were $228,514 and $113,825, 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, 2020 and 2019 were $66,014 and $30,206, 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 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, 2020 and 2019. Total operating lease costs for the three months ended September 30, 2020 and 2019 were $1.5 million and $1.6 million, respectively. Total operating lease costs, including some small leases with initial terms less than twelve months, for the nine months ended September 30, 2020 and 2019 were $4.5 million and $4.7 million, respectively.
Cash Flows
An initial right-of-use asset of $37.8 million was recognized as a non-cash asset addition with the adoption of the new lease accounting standard. Cash paid for amounts included in operating lease liabilities, including some small leases with initial terms less than twelve months was $1.6 million during the nine months ended September 30, 2020 and 2019, and is included in operating cash flows. Cash paid for amounts included in finance lease was $282,655 and $113,241 during the nine months ended September 30, 2020 and 2019, respectively, and is included in financing cash flows.
Maturities of our lease liabilities for all operating leases are as follows as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Facilities
|
|
Equipment
|
|
Plant
|
|
Railcar
|
|
Total
|
|
Year 1
|
$
|
710,879
|
|
|
$
|
161,539
|
|
|
$
|
4,060,417
|
|
|
$
|
897,846
|
|
|
$
|
5,830,681
|
|
|
Year 2
|
446,869
|
|
|
67,338
|
|
|
4,060,417
|
|
|
229,656
|
|
|
4,804,280
|
|
|
Year 3
|
346,733
|
|
|
—
|
|
|
4,060,417
|
|
|
56,712
|
|
|
4,463,862
|
|
|
Year 4
|
300,000
|
|
|
—
|
|
|
4,060,417
|
|
|
—
|
|
|
4,360,417
|
|
|
Year 5
|
300,000
|
|
|
—
|
|
|
4,060,417
|
|
|
—
|
|
|
4,360,417
|
|
|
Thereafter
|
2,150,000
|
|
|
—
|
|
|
30,479,594
|
|
|
—
|
|
|
32,629,594
|
|
|
Total lease payments
|
$
|
4,254,481
|
|
|
$
|
228,877
|
|
|
$
|
50,781,679
|
|
|
$
|
1,184,214
|
|
|
$
|
56,449,251
|
|
|
Less: interest
|
(1,510,219)
|
|
|
(10,024)
|
|
|
(20,856,360)
|
|
|
(58,572)
|
|
|
(22,435,175)
|
|
|
Present value of lease liabilities
|
$
|
2,744,262
|
|
|
$
|
218,853
|
|
|
$
|
29,925,319
|
|
|
$
|
1,125,642
|
|
|
$
|
34,014,076
|
|
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
Remaining lease term and discount rate:
|
|
September 30, 2020
|
|
Weighted average remaining lease terms (years)
|
|
|
|
Lease facilities
|
|
5.53
|
|
Lease equipment
|
|
1.42
|
|
Lease plant
|
|
12.51
|
|
Lease railcar
|
|
1.15
|
|
Weighted average discount rate
|
|
|
|
Lease facilities
|
|
9.19
|
%
|
|
Lease equipment
|
|
8.00
|
%
|
|
Lease plant
|
|
9.37
|
%
|
|
Lease railcar
|
|
8.00
|
%
|
Significant Judgments
Significant judgments include the discount rates applied, the expected lease terms, lease renewal options and residual value guarantees. There are several leases with renewal options or purchase options. Using the practical expedient, the Company utilized existing lease classifications as of September 30, 2020 and 2019.
The purchase options are not expected to have a material impact on the lease obligation. There are several facility and plant leases which have lease renewal options from one to twenty years.
The largest facility lease has an initial term through 2032. That lease does not have an extension option. The two plant leases both have multiple 5-year extension options for a total of 20 years. Two extension options have been included in the lease right-of-use asset and lease obligation at January 1, 2019.
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 14. SHARE PURCHASE AND SUBSCRIPTION AGREEMENTS
Myrtle Grove Share Purchase and Subscription Agreement
Amounts received by MG SPV from its direct sale of Class B Units to Tensile-MG may only be used for additional investments in the MG refinery or for day to day operations at the MG refinery. At September 30, 2020, $2.0 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 the 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 three and nine months ended September 30, 2020. “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 appropriate 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, 2020.
Myrtle Grove Redeemable Noncontrolling Interest
As a result of the 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.
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 $970,809 between the fair value of the consideration received of $3,150,000 and the carrying amount of the noncontrolling interest determined in accordance with ASC 810-10 of $2,179,191, 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 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 $120,031 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 adjustment of $833,354 increased the carrying amount of redeemable noncontrolling interests to the redemption value as of September 30, 2020 of $5,181,388. 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, 2020.
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Beginning balance
|
$
|
4,396,894
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to redeemable non-controlling interest
|
(120,031)
|
|
|
|
Change in ownership
|
71,171
|
|
|
|
Accretion of non-controlling interest to redemption value
|
833,354
|
|
|
|
Ending balance
|
$
|
5,181,388
|
|
|
Heartland Share Purchase and Subscription Agreement
On January 17, 2020 (the “Heartland Closing Date”), Vertex Operating, Tensile-Heartland, and solely for the purposes of the Heartland Guaranty (defined below), the Company, and HPRM LLC, a Delaware limited liability company, which entity was formed as a special purpose vehicle in connection with the transactions, described in greater detail below (“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% of the ownership of Vertex Refining OH, LLC, its indirect wholly-owned subsidiary (“Vertex OH”) to Heartland SPV in consideration for 13,500 Class A Units, 13,500 Class A-1 Preferred Units and 11,300 Class B Units 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 owned 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 sold Tensile-Heartland the 13,500 Class A Units and 13,500 Class A-1 Preferred Units of Heartland SPV in consideration for $13.5 million. Also, on the Heartland Closing Date, Tensile-Heartland purchased 7,500 Class A Units 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.
The approximate $7.5 million purchase amount and future free cash flows from the operation of Heartland SPV are planned to be available for investments at the Heartland facility to increase self-collections, maximize the throughput of the refinery, enhance the quality of the output and complete other projects.
Concurrently with 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). 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 five-member Board of Managers, of which three members are appointed by Tensile-Heartland and two 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 Agreement of Heartland SPV (the “Heartland Company Agreement”), based on a conversion price (initially one-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 (ii) 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 still owns Class B Units on such date) and (z) the original per-unit price for such Class A Units plus 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 amount equal to 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 Preferred Unit holders (initially Tensile-Heartland)(such aggregate capital invested by the Class A Preferred Unit holders, the “Heartland Invested Capital”, which totaled approximately $21 million as of the Heartland Closing Date, subject to adjustment as provided in the Heartland Share Purchase), less prior distributions (such greater amount of (A) and (B), the “Class A Preferred Priority Distributions”); (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, 2020:
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
Cash and cash equivalents
|
$
|
8,072,347
|
|
|
Accounts receivable, net
|
2,879,431
|
|
|
Inventory
|
310,596
|
|
|
Prepaid expense and other current assets
|
1,968,335
|
|
|
Total current assets
|
13,230,709
|
|
|
|
|
|
Fixed assets, net
|
5,619,248
|
|
|
Finance lease right-of-use assets
|
1,106,671
|
|
|
Operating lease right-of-use assets
|
369,333
|
|
|
Intangible assets, net
|
1,127,352
|
|
|
Other assets
|
108,643
|
|
|
Total assets
|
$
|
21,561,956
|
|
|
|
|
|
Accounts payable
|
$
|
1,413,378
|
|
|
Accrued expenses
|
335,267
|
|
|
Finance lease liability-current
|
340,193
|
|
|
Operating lease liability-current
|
268,437
|
|
|
Total current liabilities
|
2,357,275
|
|
|
|
|
|
Finance lease liability-long term
|
732,174
|
|
|
Operating lease liability-long term
|
100,896
|
|
|
Total liabilities
|
$
|
3,190,345
|
|
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 Capital Partners Master Fund LP, an investment fund based in San Francisco, California (“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 gain of $35,449 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 adjustment of $12,802,442 increased the carrying amount of redeemable noncontrolling interests to the redemption value as of
September 30, 2020 of $24,746,823. 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 Heartland SPV as of September 30, 2020.
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
Beginning balance
|
$
|
—
|
|
|
|
|
|
Initial adjustment of carrying amount of non-controlling interest
|
11,908,932
|
|
|
Net gain attributable to redeemable non-controlling interest
|
35,449
|
|
|
Accretion of non-controlling interest to redemption value
|
12,802,442
|
|
|
Ending balance
|
$
|
24,746,823
|
|
The amounts of accretion of redeemable noncontrolling interest to redemption value of $1,287,559 and $13,635,797 presented as an adjustment to net loss attributable to Vertex Energy, Inc., to arrive at net loss available to common shareholders on the consolidated statements of operations represent the MG SPV and Heartland SPV accretion of redeemable noncontrolling interest to redemption value combined for the three and nine months ended September 30, 2020, respectively.
NOTE 15. ACQUISITION
Crystal Energy, LLC
On June 1, 2020, the Company entered into and closed a Member Interest Purchase Agreement with Crystal Energy, LLC ("Crystal") pursuant to which the Company agreed to buy all of the outstanding membership interests of Crystal for aggregate cash consideration of $1,822,690. This resulted in the recognition of $1,939,364 in accounts receivable, $976,512 in inventory, $14,484 in other current assets, and $1,107,670 in current liabilities. Upon the closing of the acquisition, Crystal became a wholly-owned subsidiary of the Company. The acquisition was accounted for as a business combination.
Crystal is an Alabama limited liability company that was organized on September 7, 2016, for the purpose of purchasing, storing, selling, and distributing refined motor fuels. These activities include the wholesale distribution of gasoline, blended gasoline, and diesel for use as engine fuel to operate automobiles, trucks, locomotives, and construction equipment. Crystal markets its products to third-party customers, and customers will typically resell these products to retailers, end use consumers, and others. These assets are used in our Refining division.
NOTE 16. SUBSEQUENT EVENTS
Issuance of Series B and B1 Preferred Stock Shares In-Kind and Common Stock
We paid the accrued dividends on our Series B Preferred Stock and Series B1 Preferred Stock, which were accrued as of September 30, 2020, in-kind by way of the issuance of 100,071 restricted shares of Series B Preferred Stock pro rata to each of the then holders of our Series B Preferred Stock in October 2020 and the issuance of 180,485 restricted shares of Series B1 Preferred Stock pro rata to each of the then holders of our Series B1 Preferred Stock in October 2020. If converted in full, the 100,071 shares of Series B Preferred Stock would convert into 100,071 shares of common stock and the 180,485 shares of Series B1 Preferred Stock would convert into 180,485 shares of common stock.
Marrero Refinery Fire
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 instrumentation in the immediate area of the fire. The largest impact was the damage to the electrical conduit that feeds the power to the refinery equipment. As of October 26, 2020, the facility was back up and running and in the process of filing a claim with our insurance company. The Company believes that it maintains adequate insurance coverage.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Report. These factors include:
•risks associated with our outstanding credit facilities, including amounts owed, restrictive covenants, security interests thereon and our ability to repay such facilities and amounts due thereon when due;
•risks associated with our outstanding preferred stock, including redemption obligations in connection therewith, restrictive covenants and our ability to redeem such securities when required pursuant to the terms of such securities and applicable law;
•the level of competition in our industry and our ability to compete;
•our ability to respond to changes in our industry;
•the loss of key personnel or failure to attract, integrate and retain additional personnel;
•our ability to protect our intellectual property and not infringe on others’ intellectual property;
•our ability to scale our business;
•our ability to maintain supplier relationships and obtain adequate supplies of feedstocks;
•our ability to obtain and retain customers;
•our ability to produce our products at competitive rates;
•our ability to execute our business strategy in a very competitive environment;
•trends in, and the market for, the price of oil and gas and alternative energy sources;
•our ability to maintain our relationship with KMTEX;
•the impact of competitive services and products;
•our ability to integrate acquisitions;
•our ability to complete future acquisitions;
•our ability to maintain insurance;
•potential future litigation, judgments and settlements;
•rules and regulations making our operations more costly or restrictive, including IMO 2020 (defined below);
•changes in environmental and other laws and regulations and risks associated with such laws and regulations;
•economic downturns both 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;
•our ability to effectively integrate acquired assets, companies, employees or businesses;
•liabilities associated with acquired companies, assets or businesses;
•interruptions at our facilities;
•unexpected changes in our anticipated capital expenditures resulting from unforeseen required maintenance, repairs, or upgrades;
•our ability to acquire and construct new facilities;
•certain events of default which have occurred under our debt facilities and previously been waived;
•prohibitions on borrowing and other covenants of our debt facilities;
•our ability to effectively manage our growth;
•decreases in global demand for, and the price of, oil, due to COVID-19, state, federal and foreign responses thereto;
•our ability to acquire sufficient amounts of used oil feedstock through our collection routes, to produce finished products, and in the absence of such internally collected feedstocks, our ability to acquire third-party feedstocks on commercially reasonable terms;
•risks associated with COVID-19, the global efforts to stop the spread of COVID-19, potential downturns in the U.S. and global economies due to COVID-19 and the efforts to stop the spread of the virus, and COVID-19 in general;
•the lack of capital available on acceptable terms to finance our continued growth; and
•other risk factors included under “Risk Factors” in our latest Annual Report on Form 10-K and set forth below under “Risk Factors”.
You should read the matters described in, and incorporated by reference in, “Risk Factors” and the other cautionary statements made in this Report, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
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.
Please see the “Glossary of Selected Terms” incorporated by reference hereto as Exhibit 99.1, for a list of abbreviations and definitions used throughout this Report.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Vertex”, “Vertex Energy” and “Vertex Energy, Inc.” refer specifically 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" 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" or the "Commission" refers to the United States Securities and Exchange Commission;
"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.
Novel Coronavirus (COVID-19)
In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020 and a global pandemic on March 11, 2020. In March and April, many U.S. states and local jurisdictions began issuing ‘stay-at-home’ orders, which continue in various forms as of the date of this report. Notwithstanding such ‘stay-at-home’ orders, to date, our operations have for the most part been deemed an essential business under applicable governmental orders based on the critical nature of the products we offer.
We sell products and services primarily in the U.S. domestic oil and gas commodity markets. Throughout the first quarter of 2020, the industry experienced multiple factors which lowered both the demand for, and prices of, oil and gas. First, the COVID-19 pandemic lowered global demand for hydrocarbons, as social distancing and travel restrictions were implemented across the world. Second, the lifting of Organization of the Petroleum Exporting Countries (OPEC)+ supply curtailments, and the associated increase in production of oil, drove the global supply of hydrocarbons higher through the first quarter of 2020. As a result of both dynamics, prices for hydrocarbons declined 67% from peak prices within the quarter. In addition, while global gross domestic product (GDP) growth was impacted by COVID-19 during the first nine months of 2020, we expect GDP to continue to decline globally in the fourth quarter of 2020 and for at least the early part of 2021, as a result of the COVID-19 pandemic. As a result, we expect oil and gas related markets will continue to experience significant volatility in 2020 and 2021. Our goal through this downturn has been to remain disciplined in allocating capital and to focus on liquidity and cash preservation. We are taking the necessary actions to right-size the business for expected activity levels.
As a result of the impact of the COVID-19 outbreak, some of our feedstock suppliers have permanently or temporarily closed their businesses, limited our access to their businesses, or have experienced a decreased demand for services. As a result of the above, and due to ‘stay-at-home’ and other social distancing orders, as well as the decline in U.S. travel caused by COVID-19, we have seen a significant decline in the volume of feedstocks (specifically used oil) that we have been able to collect, and therefore process through our facilities. A prolonged economic slowdown, period of social quarantine (imposed by the government or otherwise), or a prolonged period of decreased travel due to COVID-19 or the responses thereto, will likely have a material negative adverse impact on our ability to produce products, and consequently our revenues and results of operations.
The full extent of the impact of COVID-19 on our business and operations currently cannot be estimated and will depend on a number of factors including the scope and duration of the global pandemic.
Currently we believe that we have sufficient cash on hand and will generate sufficient cash through operations to support our operations for the foreseeable future; however, we will continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of any new developments regarding the pandemic.
The pandemic is developing rapidly and the full extent to which COVID-19 will ultimately impact us depends on future developments, including the duration and spread of the virus, as well as potential seasonality of new outbreaks.
Description of Business Activities:
We are an environmental services company that recycles industrial waste streams and off-specification commercial chemical products. Our primary focus is recycling used motor oil and other petroleum by-products. We are engaged in operations across the entire petroleum recycling value chain including collection, aggregation, transportation, storage, re-refinement, and sales of aggregated feedstock and re-refined products to end users. We operate in three divisions: Black Oil, Refining and Marketing, and Recovery.
We currently provide our services in 15 states, primarily in the Gulf Coast, Midwest and Mid-Atlantic regions of the United States. For the rolling twelve-month period ending September 30, 2020, we aggregated approximately 81.4 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 69.8 million gallons of used motor oil with our proprietary vacuum gas oil ("VGO") and Base Oil processes.
Our Black Oil division collects and purchases used motor oil directly from third-party generators, aggregates used motor oil from an established network of local and regional collectors, and sells used motor oil to our customers for use as a feedstock or replacement fuel for industrial burners. We operate a refining facility that uses our proprietary Thermal Chemical Extraction Process (“TCEP”) and we also utilize third-party processing facilities. TCEP’s original purpose was to re-fine used oil into marine cutterstock; however, in the third quarter of fiscal 2015, that use ceased to be economically accretive, and instead, we operated TCEP for the purposes of pre-treating our used motor oil feedstock prior to shipping to our facility in Marrero, Louisiana from the third quarter of fiscal 2015 to the third quarter of 2019. During the fourth quarter of 2019, the original purpose of TCEP once again became economically viable and at that time we switched to using TCEP to re-fine used oil into marine cutterstock; provided that with the recent decline in oil prices and challenges in obtaining feedstock, we switched back to using TCEP for the purposes of pre-treating our used motor oil feedstock prior to shipping to our facility in Marrero, Louisiana, beginning in the first quarter of 2020, and continuing through the filing date of this report.
We also acquired our Marrero, Louisiana facility, which facility re-refines used motor oil and also produces VGO and the Myrtle Grove re-refining complex in Belle Chasse, Louisiana (which is now owned by a special purpose entity which we own an approximate 85% interest of) in May 2014.
Our Refining and Marketing division aggregates and manages the re-refinement of used motor oil and other petroleum by-products and sells the re-refined products to end customers.
Our Recovery division includes a generator solutions company for the proper recovery and management of hydrocarbon streams as well as metals which includes transportation and marine salvage services throughout the Gulf Coast.
Black Oil Division
Our Black Oil division is engaged in operations across the entire used motor oil recycling value chain including collection, aggregation, transportation, storage, refinement, and sales of aggregated feedstock and re-refined products to end users. We collect and purchase used oil directly from generators such as oil change service stations, automotive repair shops, manufacturing facilities, petroleum refineries, and petrochemical manufacturing operations. We own a fleet of 41 collection vehicles, which routinely visit generators to collect and purchase used motor oil. We also aggregate used oil from a diverse network of approximately 50 suppliers who operate similar collection businesses to ours.
We manage the logistics of transport, storage and delivery of used oil to our customers. We own a fleet of 30 transportation trucks and more than 80 aboveground storage tanks with over 8.6 million gallons of storage capacity. These assets are used by both the Black Oil division and the Refining and Marketing division. In addition, we also utilize third parties for the transportation and storage of used oil feedstocks. Typically, we sell used oil to our customers in bulk to ensure efficient delivery by truck, rail, or barge. In many cases, we have contractual purchase and sale agreements with our suppliers and customers, respectively. We believe these contracts are beneficial to all parties involved because it ensures that a minimum volume is purchased from collectors and generators, a minimum volume is sold to our customers, and we are able to minimize our inventory risk by a spread between the costs to acquire used oil and the revenues received from the sale and delivery of used oil. Also, as discussed above under “Description of Business Activities”, from time to time, when market conditions warrant (i.e., when oil prices are sufficiently high), we have used our proprietary TCEP technology to re-refine used oil into marine fuel cutterstock. Due to the recent decline in oil prices and challenges in obtaining feedstock, since the first quarter of 2020, we have used TCEP solely to pre-treat our used motor oil feedstock prior to shipping to our facility in Marrero, Louisiana. In addition, at our Marrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product that is sold to refineries as well as to the marine fuels market. At our Columbus, Ohio facility (Heartland Petroleum), we produce a base oil product that is sold to lubricant packagers and distributors.
Refining and Marketing Division
Our Refining and Marketing division is engaged in the aggregation of feedstock, re-refining it into higher value-end products, and selling these products to our customers, as well as related transportation and storage activities. We aggregate a diverse mix of feedstocks including used motor oil, petroleum distillates, transmix and other off-specification chemical products. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and are also transferred from our Black Oil division. We have a toll-based processing agreement in place with KMTEX to re-refine feedstock streams, under our direction, into various end products that we specify. KMTEX uses industry standard processing technologies to re-refine our feedstocks into pygas, gasoline blendstock and marine fuel cutterstock. We sell all of our re-refined products directly to end-customers or to processing facilities for further refinement. In addition, we are distributing refined motor fuels such as gasoline, blended gasoline products and diesel used as engine fuels, to third party customers who typically resell these products to retailers and end consumers.
Recovery Division
The Company’s Recovery Segment includes a generator solutions company for the proper recovery and management of hydrocarbon streams, the sales and marketing of Group III base oils and other petroleum-based products, together with the recovery and processing of metals.
Thermal Chemical Extraction Process
We own the intellectual property for our patented TCEP. TCEP is a technology which utilizes thermal and chemical dynamics to extract impurities from used oil which increases the value of the feedstock. We intend to continue to develop our TCEP technology and design with the goal of producing additional re-refined products, including lubricating base oil.
TCEP differs from conventional re-refining technologies, such as vacuum distillation and hydrotreatment, by relying more heavily on chemical processes to remove impurities rather than temperature and pressure. Therefore, the capital requirements to build a TCEP plant are typically much less than a traditional re-refinery because large feed heaters, vacuum distillation columns, and a hydrotreating unit are not required. The end product currently produced by TCEP is used as fuel oil cutterstock. Conventional re-refineries produce lubricating base oils or product grades slightly lower than base oil that can be used as industrial fuels or transportation fuel blendstocks.
We currently estimate the cost to construct a new, fully-functional, commercial facility using our TCEP technology, with annual processing capacity of between 25 and 50 million gallons at another location would be approximately $10 - $15 million, which could fluctuate based on throughput capacity. The facility infrastructure would require additional capitalized expenditures which would depend on the location and site specifics of the facility. Our TCEP technology converts feedstock into a low sulfur marine fuel that can be sold into the new 0.5% low sulfur marine fuel specification mandated under International Maritime Organization (IMO) rules which went into effect on January 1, 2020. As described above, due to the recent decline in oil prices and challenges in obtaining feedstock, we switched back to using TCEP for the purposes of pre-treating our used motor oil feedstock prior to shipping to our facility in Marrero, Louisiana beginning in the first quarter of 2020. We have no current plans to construct any other TCEP facilities at this time.
Products and Services
We generate substantially all of our revenue from the sale of eight product categories. All of these products are commodities that are subject to various degrees of product quality and performance specifications.
Base Oil
Base oil is an oil to which other oils or substances are added to produce a lubricant. Typically the main substance in lubricants, base oils, are refined from crude oil.
Pygas
Pygas, or pyrolysis gasoline, is a product that can be blended with gasoline as an octane booster or that can be distilled and separated into its components, including benzene and other hydrocarbons.
Industrial Fuel
Industrial fuel is a distillate fuel oil which is typically a blend of lower quality fuel oils. It can include diesel fuels and fuel oils such as No. 1, No. 2 and No. 4 diesel fuels that are historically used for space heating and power generation. Industrial fuel is typically a fuel with low viscosity, as well as low sulfur, ash, and heavy metal content, making it an ideal blending agent.
Distillates
Distillates are finished fuel products such as gasoline and diesel fuels.
Oil Collection Services
Oil collection services include the collection, handling, treatment and sales of used motor oil and products which include used motor oil (such as oil filters) which are collected from our customers.
Metals
Metals consist of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes, barges, boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut-up and sent back to a steel mill for re-purposing.
Other re-refinery products
Other re-refinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.
VGO/Marine fuel sales
VGO/Marine fuel sales relate to the sale of low sulfur fuel meeting the criteria for IMO 2020 compliant marine fuels.
The way that the product categories above fit into our three operating segments (1) Black Oil; (2) Refining and Marketing; and (3) Recovery, are indicated below:
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Black Oil(1)
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Refining and Marketing(2)
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Recovery(3)
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Base oil
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Pygas
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Industrial fuel
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Distillates
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Oil collection services
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Metals
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Other re-refinery products
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VGO/Marine fuel sales
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(1) As discussed in greater detail above under “Black Oil Division”, the Black Oil segment consists primary of the sale of (a) petroleum products which include base oil and industrial fuels—which consist of used motor oils, cutterstock and fuel oil generated by our facilities; (b) oil collection services—which consist of used oil sales, burner fuel sales, antifreeze sales and service charges; (c) the sale of other re-refinery products including asphalt, condensate, recovered products, and used motor oil; (d) transportation revenues; and (e) the sale of VGO (vacuum gas oil)/marine fuel.
(2) As discussed in greater detail above under “Refining and Marketing Division”, the Refining and Marketing segment consists primarily of the sale of pygas; industrial fuels, which are produced at a third-party facility (KMTEX); and distillates.
(3) As discussed in greater detail above under “Recovery Division”, the Recovery segment consists primarily of revenues generated from the sale of ferrous and non-ferrous recyclable Metal(s) products that are recovered from manufacturing and consumption. It also includes revenues generated from trading/marketing of Group III Base Oils.
RESULTS OF OPERATIONS
Description of Material Financial Line Items:
Revenues
We generate revenues from three existing operating divisions as follows:
BLACK OIL - Revenues from our Black Oil division are comprised primarily of product sales from our re-refineries and feedstock sales (used motor oil) which are purchased from generators of used motor oil such as oil change shops and garages, as well as a network of local and regional suppliers. Volumes are consolidated for efficient delivery and then sold to third-party re-refiners and fuel oil blenders for the export market. In addition, through used oil re-refining, we re-refine used oil into different commodity products. Through the operations at our Marrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product from used oil re-refining which is then sold via barge to crude refineries to be utilized as an intermediate feedstock in the refining process. Through the operations at our Columbus, Ohio facility, we produce a base oil finished product which is then sold via truck or rail car to end users for blending, packaging and marketing of lubricants.
REFINING AND MARKETING - The Refining and Marketing division generates revenues relating to the sales of finished products. The Refining and Marketing division gathers hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have become off-specification during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and then processed at a third-party facility under our direction. The end products are typically three distillate petroleum streams (gasoline blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large petroleum trading and blending companies. The end products are delivered by barge and truck to customers.
RECOVERY - The Recovery division is a generator solutions company for the proper recovery and management of hydrocarbon streams. We own and operate a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials.
Our revenues are affected by changes in various commodity prices including crude oil, natural gas, #6 oil and metals.
Cost of Revenues
BLACK OIL - Cost of revenues for our Black Oil division are comprised primarily of feedstock purchases from a network of providers. Other cost of revenues include processing costs, transportation costs, purchasing and receiving costs, analytical assessments, brokerage fees and commissions, and surveying and storage costs.
REFINING AND MARKETING - The Refining and Marketing division incurs cost of revenues relating to the purchase of feedstock, purchasing and receiving costs, and inspection and processing of the feedstock into gasoline blendstock, pygas and fuel oil cutter by a third party. Cost of revenues also includes broker’s fees, inspection and transportation costs.
RECOVERY - The Recovery division incurs cost of revenues relating to the purchase of hydrocarbon products, purchasing and receiving costs, inspection, and transporting of metals and other salvage and materials. Cost of revenues also includes broker’s fees, inspection and transportation costs.
Our cost of revenues is affected by changes in various commodity indices, including crude oil, natural gas, #6 oil and metals. For example, if the price for crude oil increases, the cost of solvent additives used in the production of blended oil products, and fuel cost for transportation cost from third party providers will generally increase. Similarly, if the price of crude oil falls, these costs may also decline.
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries and other employee-related benefits for executive, administrative, legal, financial, and information technology personnel, as well as outsourced and professional services, rent, utilities, and related expenses at our headquarters, as well as certain taxes.
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's (“Omega Refining”) and 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 the 2019 Annual Report and herein (as to Crystal).
Depreciation and amortization expense attributable to cost of revenues reflects the depreciation and amortization of the fixed assets at our refineries along with rolling stock at our collection branches.
Depreciation and amortization expense attributable to operating expenses reflects depreciation and amortization related to our corporate and administrative offices along with internet technology (IT) related items and intangibles.
Recent Events
Heads of Agreement
On January 10, 2020, Vertex Operating entered into a Heads of Agreement (the “Heads of Agreement”) with Bunker One (USA) Inc., which is owned by Bunker Holding, a Danish holding company (“Bunker One”). Pursuant to the Heads of Agreement, the Company and Bunker One agreed to form a joint decision-making body (the “JDMB”) to focus on strategic matters related to the overall cooperation of the parties and to establish rules and procedures for identifying and undertaking joint projects. The Heads of Agreement is described in greater detail in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on January 13, 2020.
JSMA
Also on January 10, 2020, Vertex Operating entered into a Joint Supply and Marketing Agreement (the “JSMA”), with Bunker One. The JSMA is effective as of May 1, 2020, and provides for Bunker One to acquire 100% of the production from the Company’s Marrero, Louisiana re-refining facility (which produces approximately 100,000 barrels per month of a bunker suitable fuel for offshore use and use as a marine vessel’s propulsion system (“Bunker Fuel”)) at the arithmetic mean of Platts #2 USGC Pipe and Platt’s ULSD USGC Waterborne on agreed pricing days less an agreed upon discount, adjusted every three months. The JSMA is described in greater detail in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on January 13, 2020.
Heartland Share Purchase, Subscription Agreement and Heartland Limited Liability Company Agreement
Our Heartland Share Purchase and Subscription Agreement and the Heartland Limited Liability Company Agreement are described in greater detail under “Part I” - “Item 1. Financial Statements” - “Note 14. Share Purchase and Subscription Agreements” - “Heartland Share Purchase and Subscription Agreement".
Administrative Services Agreement
Pursuant to an Administrative Services Agreement, entered into on the Heartland Closing Date, Heartland SPV engaged Vertex Operating and the Company to provide administrative/management services and day-to-day operational management services of Heartland SPV in connection with the collection, storage, transportation, transfer, refining, re-refining, distilling, aggregating, processing, blending, sale of used motor oil, used lubricants, wholesale lubricants, recycled fuel oil, or related products and services such as vacuum gas oil, base oil, and asphalt flux, in consideration for a monthly fee. The Administrative Services Agreement has a term continuing until the earlier of (a) the date terminated with the mutual consent of the parties; (b) a liquidation of Heartland SPV; (c) a Heartland Redemption (as described in Note 14 to the unaudited notes to the consolidated financial statements included herein); (d) the determination of Heartland SPV to terminate following a change of control (as described in the Administrative Services Agreement) of Heartland SPV or the Company; or (e) written notice from the non-breaching party upon the occurrence of a breach which is not cured within the cure period set forth in the Administrative Services Agreement.
The Administrative Services Agreement also provides that in the event that Heartland SPV is unable to procure used motor-oil (“UMO”) through its ordinary course operations, subject to certain conditions, Vertex Operating and the Company are required to use their best efforts to sell (or cause an affiliate to sell) UMO to Heartland SPV, at the lesser of the (i) then-current market price for UMO sold in the same geography area and (ii) price paid by such entity for such UMO. Finally, the Administrative Services Agreement provides that in the event that the Heartland SPV is unable to procure vacuum gas oil (“VGO”) feedstock
through its ordinary course operations, subject to certain conditions, Vertex Operating and the Company are required to use their best efforts to sell (or cause an affiliate to sell) VGO to Heartland SPV, at the lesser of the (i) then-current market price for VGO sold in the same geographic area and (ii) price paid for such VGO.
Advisory Agreement
On the Heartland Closing Date, Heartland SPV entered into an Advisory Agreement with Tensile, pursuant to which Tensile agreed to provide advisory and consulting services to Heartland SPV and Heartland SPV agreed to reimburse and indemnify Tensile and its representatives, in connection therewith.
Crystal Energy, LLC
On June 1, 2020, the Company entered into and closed a Member Interest Purchase Agreement with Crystal Energy, LLC ("Crystal') pursuant to which the Company agreed to buy the outstanding membership interests of Crystal for aggregate cash consideration of $1,822,690. This resulted in the recognition of $1,939,364 in accounts receivable, $976,512 in inventory, $14,484 in other current assets, and $1,107,670 in current liabilities. Upon the closing of the acquisition, Crystal became a wholly-owned subsidiary of the Company.
Crystal is an Alabama limited liability company that was organized on September 7, 2016, for the purpose of purchasing, storing, selling, and distributing refined motor fuels. These activities include the wholesale distribution of gasoline, blended gasoline, and diesel for use as engine fuel to operate automobiles, trucks, locomotives, and construction equipment. Crystal markets its products to third-party customers, and customers will typically resell these products to retailers, end use consumers, and others. These assets are used in our Refining division.
Marrero Refinery Fire
On October 7, 2020, we had a fire at our Marrero refinery which took the facility offline for repairs for about two weeks. The refinery suffered some minor structural damage along with piping, valves and instrumentation in the immediate area of the fire, the largest impact was the damage to the electrical conduit that feeds the power to the refinery equipment. As of October 26, 2020, the facility was back up and running and in the process of filing a claim with our insurance company. The Company believes that it maintains adequate insurance coverage.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2019
Set forth below are our results of operations for the three months ended September 30, 2020 as compared to the same period in 2019.
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Three Months Ended September 30,
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$ Change - Favorable (Unfavorable)
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|
% Change - Favorable (Unfavorable)
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2020
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2019
|
|
Revenues
|
$
|
37,383,632
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|
|
$
|
37,799,259
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|
|
$
|
(415,627)
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(1)
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%
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
31,186,684
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32,372,316
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1,185,632
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4
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%
|
|
Depreciation and amortization attributable to costs of revenues
|
1,313,162
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1,359,629
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46,467
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3
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%
|
|
Gross profit
|
4,883,786
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|
4,067,314
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|
816,472
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20
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%
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Operating expenses:
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Selling, general and administrative expenses
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6,241,570
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6,153,184
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(88,386)
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(1)
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%
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Depreciation and amortization attributable to operating expenses
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482,869
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455,953
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(26,916)
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(6)
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%
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Total operating expenses
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6,724,439
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6,609,137
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(115,302)
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(2)
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%
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Loss from operations
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(1,840,653)
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(2,541,823)
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|
701,170
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28
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%
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Other income (expense):
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Other income
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1
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918,153
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(918,152)
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(100)
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%
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Gain (loss) on asset sales
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(136,434)
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—
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(136,434)
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(100)
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%
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Gain (loss) on change in value of derivative liability
|
256,587
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1,290,792
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(1,034,205)
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(80)
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%
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Interest expense
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(234,671)
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(826,005)
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591,334
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72
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%
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Total other income (expense)
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(114,517)
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1,382,940
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(1,497,457)
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(108)
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%
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Loss before income tax
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(1,955,170)
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(1,158,883)
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(796,287)
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(69)
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%
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|
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Income tax benefit (expense)
|
—
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|
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—
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—
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|
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—
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%
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Net Loss
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(1,955,170)
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(1,158,883)
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(796,287)
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(69)
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%
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Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest
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480,215
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(67,102)
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|
547,317
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|
816
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%
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Net loss attributable to Vertex Energy, Inc.
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$
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(2,435,385)
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$
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(1,091,781)
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$
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(1,343,604)
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(123)
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%
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Our revenues and cost of revenues are significantly impacted by fluctuations in commodity prices; increases in commodity prices typically result in increases in revenue and cost of revenues (i.e., feedstock acquisition costs). Our gross profit is to a large extent a function of the market discount we are able to obtain in purchasing feedstock, as well as how efficiently management conducts operations. Additionally, we use hedging instruments to manage our exposure to underlying commodity prices. During the three months ended September 30, 2020, we had a gain of $5 thousand in our hedging instruments as compare to a loss of $1.6 million for the three months ended September 30, 2019. We recognize our hedging activities from commodity derivatives in our cost of goods sold. During the three months ended September 30, 2020, compared to the same period in 2019, we saw a 10% decrease in the discount we were paying for feedstock into our refineries. In addition, we saw a 3% decrease in operating costs (inclusive of depreciation and amortization) on a per barrel basis for the third quarter of 2020 as compared to the same period in 2019.
Total revenues decreased by 1% for the three months ended September 30, 2020, compared to the same period in 2019, due primarily to lower commodity prices and decreased volumes at our refineries; offset by the $17 million of revenue generated in from our newly acquired Crystal opertations for the three months ended September 30, 2020, compared to the same period in 2019. Total volume increased 1% during the three months ended September 30, 2020 compared to the same period in 2019. Volumes were impacted as a result of decreased availability of feedstocks, specifically used motor oil, in the overall marketplace which forced us
to have reduced production rates at each of our facilities. This decrease was largely due to continued impacts of the shelter in place orders in the locations in which we collect used motor oil as a result of the COVID-19 pandemic, which directly impacted the generation of used oil, which caused a reduction in volumes of feedstock available for use in our refineries. The Company saw an increase in the volume of Group III base oil during the three months ended September 30, 2020. Gross profit increased by 20% for the three months ended September 30, 2020, compared to the three months ended September 30, 2019. This increase was largely a result of lower operating costs at our facilities relating to decreased transportation expenses, maintenance and contract labor, which had an impact on margins during the period, and the increases in volumes as noted above.
During the three months ended September 30, 2020, total cost of revenues (exclusive of depreciation and amortization) was $31,186,684, compared to $32,372,316 for the three months ended September 30, 2019, a decrease of $1,185,632 or 4% from the prior period. The main reason for the decrease was the result of a decline in commodity prices, which impacted our feedstock pricing and a decrease in overall operating costs at our refining facilities.
For the three months ended September 30, 2020, total depreciation and amortization expense attributable to cost of revenues was $1,313,162, compared to $1,359,629 for the three months ended September 30, 2019, a decrease of $46,417 mainly due to some of our assets becoming fully depreciated.
We had gross profit as a percentage of revenue of 13% for the three months ended September 30, 2020, compared to gross profit as a percentage of revenues of 10.7% for the three months ended September 30, 2019. The main reason for the improvement was the slight increase in volumes, along with decreases in operating expenses at our refineries during the period. In addition, the company was proactive in its risk management of commodity prices through the use of derivative instruments which resulted in a $1.6 million positive impact on gross margins when compared to the same period a year ago.
Additionally, our per barrel margin increased 19% for the three months ended September 30, 2020, relative to the three months ended September 30, 2019. Our per barrel margin is calculated by dividing the total volume of product sold (in bbls) by total gross profit for the applicable period ($4,883,786 for the 2020 period versus $4,067,314 for the 2019 period). This increase was a result of the improvements in our product spreads related to decreases in feedstock product prices and decreases in operating costs at our refining facilities, during the three months ended September 30, 2020, compared to the same period during 2019.
Overall, commodity prices were down for the three months ended September 30, 2020, compared to the same period in 2019. For example, the average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the three months ended September 30, 2020, decreased $13.62 per barrel from a three-month average of $51.56 for the three months ended September 30, 2019 to $37.95 per barrel for the three months ended September 30, 2020. The average posting (U.S. Gulfcoast Unleaded 87 Waterborne) for the three months ended September 30, 2020 decreased $22.74 per barrel from a three-month average of $72.97 for the three months ended September 30, 2019 to $50.22 per barrel for the three months ended September 30, 2020.
We had a loss from operations of $1,840,653 for the three months ended September 30, 2020, compared to a loss from operations of $2,541,823 for the three months ended September 30, 2019, a decrease of $701,170 or 28% from the prior year’s three-month period. The decrease in loss from operations was due to the overall reduction in operating expenses at our facilities along with increases in charges throughout our collection operations. As market conditions change, the charges for our oil collection services will fluctuate.
We had interest expense of $234,671 for the three months ended September 30, 2020, compared to interest expense of $826,005 for the three months ended September 30, 2019, a decrease in interest expense of $591,334 or 72% from the prior period, due to having a lower balance owed under our line of credit and term loan along with a lower interest rate on the term debt outstanding during the three months ended September 30, 2020, compared to the prior year’s period. The Company received a total of $21.0 million from the Tensile transaction, of which approximately $9.0 million was used to pay down our debt obligations.
We had a $256,587 gain on change in value of derivative liability for the three months ended September 30, 2020, 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 $1,290,792 in the prior year's period. This change was mainly due to the fluctuation in the market price of our common stock and non-cash accounting adjustments in connection therewith. This resulted in a significant change in non-cash expense for the period, compared to the prior year’s period.
We had other income of $1 for the three months ended September 30, 2020, compared to other income of $918,153 for the three months ended September 30, 2019. Other income for the three months ended September 30, 2019, was in connection with the Company receiving a payment of $ 907,500 related to the proceeds of an insurance settlement for a fire that had occurred at its used
oil re-refining plant located in Churchill County, Nevada, which we previously rented. The Company previously determined this loan was uncollectible and wrote it off.
We had a loss on asset sales of $136,434 for the three months ended September 30, 2020, in connection with sale of equipment compared to no gain or loss on asset sales in the prior year’s period.
We had a net loss of $1,955,170 for the three months ended September 30, 2020, compared to a net loss of $1,158,883 for the three months ended September 30, 2019, an increase in net loss of $796,287 or 69% from the prior period. The main reason for the increase in net loss for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, was attributable to the decrease in gain in derivative liability for the three months ended September 30, 2020, which decreased to $256,587 for such period, compared to $1,290,792 for the period ended September 30, 2019, offset by the $816,472 increase in gross profit as discussed above.
Each of our segments’ income (loss) from operations during the three months ended September 30, 2020 and 2019 was as follows:
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Three Months Ended
September 30,
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$ Change - Favorable (Unfavorable)
|
|
% Change - Favorable (Unfavorable)
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Black Oil Segment
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2020
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|
2019
|
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Revenues
|
$
|
19,988,122
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|
|
$
|
32,330,531
|
|
|
$
|
(12,342,409)
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|
(38)
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%
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
14,687,141
|
|
|
27,663,983
|
|
|
12,976,842
|
|
|
47
|
%
|
|
Depreciation and amortization attributable to costs of revenues
|
1,041,719
|
|
|
1,073,520
|
|
|
31,801
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
4,259,262
|
|
|
3,593,028
|
|
|
666,234
|
|
|
19
|
%
|
|
Selling general and administrative expense
|
4,899,956
|
|
|
5,040,772
|
|
|
140,816
|
|
|
3
|
%
|
|
Depreciation and amortization attributable to operating expenses
|
390,105
|
|
|
335,105
|
|
|
(55,000)
|
|
|
(16)
|
%
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
$
|
(1,030,799)
|
|
|
$
|
(1,782,849)
|
|
|
$
|
752,050
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Refining and Marketing Segment
|
|
|
|
|
|
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Revenues
|
$
|
13,501,749
|
|
|
$
|
3,076,454
|
|
|
$
|
10,425,295
|
|
|
339
|
%
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
13,217,757
|
|
|
2,511,314
|
|
|
(10,706,443)
|
|
|
(426)
|
%
|
|
Depreciation and amortization attributable to costs of revenues
|
121,744
|
|
|
147,658
|
|
|
25,914
|
|
|
18
|
%
|
|
Gross profit
|
162,248
|
|
|
417,482
|
|
|
(255,234)
|
|
|
(61)
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%
|
|
Selling general and administrative expense
|
696,611
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|
|
494,781
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|
|
(201,830)
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|
|
(41)
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%
|
|
Depreciation and amortization attributable to operating expenses
|
72,314
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|
|
100,398
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|
|
28,084
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|
|
28
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%
|
|
Loss from operations
|
$
|
(606,677)
|
|
|
$
|
(177,697)
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|
|
$
|
(428,980)
|
|
|
(241)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
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|
|
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|
|
Recovery Segment
|
|
|
|
|
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Revenues
|
$
|
3,893,761
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|
|
$
|
2,392,274
|
|
|
$
|
1,501,487
|
|
|
63
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%
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
3,281,786
|
|
|
2,197,019
|
|
|
(1,084,767)
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|
|
(49)
|
%
|
|
Depreciation and amortization attributable to costs of revenues
|
149,699
|
|
|
138,451
|
|
|
(11,248)
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|
|
(8)
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%
|
|
Gross profit
|
462,276
|
|
|
56,804
|
|
|
405,472
|
|
|
714
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%
|
|
Selling general and administrative expense
|
645,003
|
|
|
617,631
|
|
|
(27,372)
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|
|
(4)
|
%
|
|
Depreciation and amortization attributable to operating expenses
|
20,450
|
|
|
20,450
|
|
|
—
|
|
|
—
|
%
|
|
Loss from operations
|
$
|
(203,177)
|
|
|
$
|
(581,277)
|
|
|
$
|
378,100
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Black Oil segment generated revenues of $19,988,122 for the three months ended September 30, 2020, with cost of revenues (exclusive of depreciation and amortization) of $14,687,141, and depreciation and amortization attributable to cost of revenues of $1,041,719. During the three months ended September 30, 2019, these revenues were $32,330,531 with cost of revenues (exclusive of depreciation and amortization) of $27,663,983 and depreciation and amortization attributable to cost of revenues of $1,073,520. Loss from operations improved for the three months ended September 30, 2020, compared to 2019, as a result of improvements in operating expenses through our various facilities as well as by diligent management of our street collections and pricing.
Our Black Oil segment's volume decreased approximately 6% during the three months ended September 30, 2020, compared to the same period in 2019. This decrease was largely due to continued impacts of the shelter in place orders in the locations in which we collect used motor oil as a result of the COVID-19 pandemic, which directly impacted the generation of used oil, which caused a reduction in volumes of feedstock available for use in our refineries. In addition, we were impacted in the Gulf Coast region by weather delays experienced from the various hurricanes in the region during the period. The Heartland facility experienced lower demands for finished products during the three months ended September 30, 2020 compared to the same period in 2019. Volumes collected through our H&H Oil, L.P. (“H&H Oil”) (based in Houston, Austin and Corpus Christi, Texas) and Heartland (based in Ohio and West Virginia) collection facilities increased 5% during the three months ended September 30, 2020, compared to the same period in 2019. One of our key initiatives continues to be a focus on growing our own volumes of collected material and displacing the third-party oil processed in our facilities. We started to see improvements in our collection volumes at the end of the period.
During the three months ended September 30, 2020, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were $13,217,757, of which the processing costs for our Refining and Marketing business located at KMTEX were $328,225, and depreciation and amortization attributable to cost of revenues was $121,744. Revenues for the same period were $13,501,749. During the three months ended September 30, 2019, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were $2,511,314, which included the processing costs at KMTEX of $434,046, and depreciation and amortization attributable to cost of revenues was $147,658. Revenues for the same period were $3,076,454.
Our Refining segment includes the business operations of our Refining and Marketing operations, as well as our newly acquired assets from Crystal. With the acquisition of the Crystal assets, we now operate as a wholesale distributer of motor fuels which include gasoline, blended gasoline and diesel. Revenues in the Refining division were up 339% during the three months ended September 30, 2020, as compared to the same period in 2019 mostly as a result of the added business line. Overall volume for the Refining and Marketing division decreased 21% during the three months ended September 30, 2020, as compared to the same period in 2019. This is a result of a focus on the production of higher quality finished products, which in turn has decreased the amount of volume being produced. In addition, volumes were slightly impacted as a result of 'stay-at-home' orders during the period. Our pygas volumes decreased 24% for the three months ended September 30, 2020, as compared to the same period in 2019. Our fuel oil cutter volumes decreased 10% for the three months ended September 30, 2020, as compared to the same period in 2019, due to lower volumes of feedstock available from third party facilities in the Gulf coast region as a result of weather delays. We have also had to assess the volume of fuel oil cutterstocks that we manage due to enhanced quality of products being demanded in the marketplace.
Our Recovery segment generated revenues of $3,893,761 for the three months ended September 30, 2020, with cost of revenues (exclusive of depreciation and amortization) of $3,281,786, and depreciation and amortization attributable to cost of revenues of $149,699. During the three months ended September 30, 2019, these revenues were $2,392,274 with cost of revenues (exclusive of depreciation and amortization) of $2,197,019, and depreciation and amortization attributable to cost of revenues of $138,451. Income from operations increased for the three months ended September 30, 2020, compared to 2019, as a result of increased volumes attributable to our Recovery division and margins related thereto, through our various facilities.
Our Recovery segment includes the business operations of Vertex Recovery Management as well as our Group III base oil business. Vertex acts as Penthol C.V. of the Netherlands aka Penthol LLC's (a Penthol subsidiary in the United States) (“Penthol’s”) exclusive agent to provide marketing, sales, and logistical duties of Group III base oil from the United Arab Emirates to the United States. Revenues for this division increased 63% as a result of an increase in volumes during the three months ended September 30, 2020, compared to the same period in 2019. Volumes were up in our metals division during the three months ended September 30, 2020, compared to the same period during 2019, due to certain one-time projects. This division periodically participates in project work that is not ongoing thus we expect to see fluctuations in revenue and gross profit from this division from period to period.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2019
Set forth below are our results of operations for the nine months ended September 30, 2020 as compared to the same period in 2019.
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|
Nine Months Ended September 30,
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$ Change - Favorable (Unfavorable)
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|
% Change - Favorable (Unfavorable)
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2020
|
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2019
|
|
Revenues
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|
$
|
94,961,188
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|
$
|
120,777,263
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|
$
|
(25,816,075)
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(21)
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%
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|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
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|
80,221,343
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|
103,732,086
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|
|
23,510,743
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23
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%
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|
Depreciation and amortization attributable to costs of revenues
|
|
3,731,320
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|
|
3,965,626
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|
234,306
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6
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%
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|
Gross Profit
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11,008,525
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|
13,079,551
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(2,071,026)
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(16)
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%
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Operating expenses:
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Selling, general and administrative expenses
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18,972,648
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17,529,784
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(1,442,864)
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(8)
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%
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Depreciation and amortization attributable to operating expenses
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1,412,719
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|
1,367,859
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(44,860)
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(3)
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%
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Total operating expenses
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20,385,367
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18,897,643
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(1,487,724)
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(8)
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%
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Loss from operations
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|
(9,376,842)
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(5,818,092)
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(3,558,750)
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(61)
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%
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Other income (expense):
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Other Income
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101
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920,071
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(919,970)
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(100)
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%
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Gain (loss) on sale of assets
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(124,090)
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31,443
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(155,533)
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(495)
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%
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|
Gain (loss) on change in value of derivative liability
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|
1,844,369
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331,715
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1,512,654
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456
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%
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Interest expense
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(796,930)
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|
(2,322,780)
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1,525,850
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|
66
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%
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|
Total other income (expense)
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|
923,450
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|
(1,039,551)
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|
1,963,001
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|
|
189
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%
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Loss before income taxes
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|
(8,453,392)
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(6,857,643)
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(1,595,749)
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(23)
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%
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Income tax (expense) benefit
|
|
—
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—
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—
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—
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%
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|
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|
Net loss
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(8,453,392)
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(6,857,643)
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(1,595,749)
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(23)
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%
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|
Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest
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190,771
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(374,862)
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565,633
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151
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%
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|
Net loss attributable to Vertex Energy, Inc.
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$
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(8,644,163)
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|
$
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(6,482,781)
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|
$
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(2,161,382)
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(33)
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%
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|
Our revenues and cost of revenues are significantly impacted by fluctuations in commodity prices; increases in commodity prices typically result in increases in revenue and cost of revenues (i.e., feedstock acquisition costs). Additionally, we use hedging instruments to manage our exposure to underlying commodity prices. During the nine months ended September 30, 2020, we had a gain of $4.4 million in our hedging instruments, which lowered our cost of goods sold. As demand for used oil feedstock increases, the prices we are required to pay for such feedstock typically increases as well – i.e., the discount pricing to non-used oil shrinks, which increases our acquisition costs. Our gross profit is to a large extent a function of the market discount we are able to obtain in purchasing feedstock, as well as how efficiently management conducts operations. As demand for used oil feedstock increases, the prices we are required to pay for such feedstock typically increases as well – i.e., the discount pricing to non-used oil shrinks, which increases our acquisition costs.
Our cost of revenues are a function of the ultimate price we are required to pay to acquire feedstocks, how efficient we are in acquiring such feedstocks (which relates to everything from how efficient our collection trucks are in their collection routes to how efficiently we operate our facilities), and the cost of turn-arounds and other maintenance at our facilities.
Total revenues decreased by 21% for the nine months ended September 30, 2020 compared to the same period in 2019, due primarily to lower commodity prices and decreased volumes at our refineries, during the nine months ended September 30, 2020,
compared to the prior year's period. Total volume was down 5% during the nine months ended September 30, 2020, compared to the same period in 2019.
During the nine months ended September 30, 2020, total cost of revenues (exclusive of depreciation and amortization) was $80,221,343, compared to $103,732,086 for the nine months ended September 30, 2019, a decrease of $23,510,743 or 23% from the prior period. The main reason for the decrease was the result of a decline in commodity prices, which impacted our feedstock pricing, a decrease in volumes throughout the business as well as recent efforts in reducing operating costs at our facilities.
Additionally, our per barrel margin decreased 11% for the nine months ended September 30, 2020, relative to the nine months ended September 30, 2019, due to lower volumes, along with decreases in commodity prices for the finished products we sell during the nine months ended September 30, 2020, compared to the same period during 2019. Our per barrel margin is calculated by dividing the total volume of product sold (in bbls) by total gross profit for the applicable period ($11,008,525 for the 2020 period versus $13,079,551 for the 2019 period). The 23% decrease in cost of revenues (exclusive of depreciation and amortization) for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, is mainly a result of the decrease in commodity prices, lower volumes at our refining facilities during the period and decreases in operating expenses at our facilities.
Volumes in our street collections were down 2% for the nine months ended September 30, 2020, as compared to the same period in 2019, and we saw a 10% decrease in the discount we were paying for feedstock into our refineries during the period. In addition, we saw an 8% decrease in operating costs (inclusive of depreciation and amortization) on a per barrel basis for the nine months ended September 30, 2020, as compared to the same period in 2019. The cost of the oil collected was down 10% and revenue was up 34% from the prior period. The reduction in collection costs is a function of route efficiencies and increased volumes of collections when compared to fixed costs across our collection operations, as well as aggressive price changes on the street. Overall, this provided an additional 15% of gross margin to the business or approximately $2 million, for the nine-month period ended September 30, 2020. These improvements were mostly a result of an improvement in logistic costs for the period, as well as efficiencies in operations of our refineries and reductions in maintenance costs for the period. One of our key initiatives continues to be a focus on growing our own volumes of collected material and displacing the third-party oil processed in our facilities.
For the nine months ended September 30, 2020, total depreciation and amortization expense attributable to cost of revenues was $3,731,320, compared to $3,965,626 for the three months ended September 30, 2019, a decrease of $234,306 mainly due to some of our assets becoming fully depreciated.
We had gross profit as a percentage of revenue of 11.6% for the nine months ended September 30, 2020, compared to gross profit as a percentage of revenues of 10.8% for the nine months ended September 30, 2019. The main reason for the improvement was a combination of reduced operating costs along with reduced product pricing on a per barrel basis. In addition, the company was proactive in its risk management of commodity prices through the use of derivative instruments which resulted in a $4.4 million positive impact on gross margins when compared to the same period a year ago.
In addition, commodity prices decreased approximately 35% for the nine months ended September 30, 2020, compared to the same period in 2019. For example, the average posting (U.S. Gulfcoast No. 2 Waterbone) for the nine months ended September 30, 2020, decreased $24.92 per barrel from a nine-month average of $58.35 for the nine months ended September 30, 2019, to $33.43 per barrel for the nine months ended September 30, 2020.
We had selling, general, and administrative expenses of $18,972,648 for the nine months ended September 30, 2020, compared to $17,529,784 of selling, general, and administrative expenses for the prior year's period, an increase of $1,442,864 or 8%. This increase is primarily due to the additional selling, general and administrative expenses incurred during the period as a result of increased personnel costs, legal expenses, and insurance expenses related to expansion of trucks and facilities through organic growth, as well as increased accounting, legal and consulting expenses related to our Tensile transaction which closed in the first part of the year, as disclosed in greater detail under “Part I” - “Item 1. Financial Statements” - “Note 14. Share Purchase and Subscription Agreements”.
We had a loss from operations of $9,376,842 for the nine months ended September 30, 2020, compared to a loss from operations of $5,818,092 for the nine months ended September 30, 2019, an increase of $3,558,750 or 61% from the prior year’s nine-month period. The increase was mainly due to a decrease in overall revenues for the nine months ended September 30, 2020, due to the reasons discussed above.
We had interest expense of $796,930 for the nine months ended September 30, 2020, compared to interest expense of $2,322,780 for the nine months ended June 30, 2019, a decrease in interest expense of $1,525,850 or 66%, due to a lower amount of
term debt outstanding during the nine months ended September 30, 2020, compared to the prior period. The Company received a total of $21.0 million from the Tensile transaction, of which approximately $9.0 million was used to pay down our debt obligations.
We had other income of $101 for the nine months ended September 30, 2020, compared to $920,071 for the nine months ended September 30, 2019, which was in connection with the Company receiving a payment of $907,500 related to the proceeds of an insurance settlement for a fire that had occurred at the used oil re-refining plant located in Churchill County, Nevada, which we previously rented. The Company previously determined this loan was uncollectible and wrote it off.
We had a loss on the sale of assets of $124,090 for the nine months ended September 30, 2020, compared to a gain on the sale of assets of $31,443 for the nine months ended September 30, 2019.
We had a $1,844,369 gain on change in value of derivative liability for the nine months ended September 30, 2020, 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 $331,715 in the prior year's period. This change was mainly due to a fluctuation in the market price of our common stock.
We had a net loss of $8,453,392 for the nine months ended September 30, 2020, compared to a net loss of $6,857,643 for the nine months ended September 30, 2019, an increase in net loss of $1,595,749 or 23% from the prior period due to the reasons described above. The majority of our net loss for the nine months ended September 30, 2020, was attributable to the decline in market conditions and commodity prices.
Each of our segments’ income (loss) from operations during the nine months ended September 30, 2020 and 2019 was as follows:
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|
Nine Months Ended September 30,
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|
$ Change - Favorable (Unfavorable)
|
|
% Change - Favorable (Unfavorable)
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|
|
Black Oil Segment
|
|
2020
|
|
2019
|
|
Revenues
|
|
$
|
61,062,628
|
|
|
$
|
103,053,529
|
|
|
$
|
(41,990,901)
|
|
|
(41)
|
%
|
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
|
46,601,716
|
|
|
88,374,446
|
|
|
41,772,730
|
|
|
47
|
%
|
|
|
Depreciation and amortization attributable to costs of revenues
|
|
2,960,699
|
|
|
3,122,664
|
|
|
161,965
|
|
|
5
|
%
|
|
|
Gross profit
|
|
11,500,213
|
|
|
11,556,419
|
|
|
(56,206)
|
|
|
*%
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|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
15,180,569
|
|
|
14,500,306
|
|
|
(680,263)
|
|
|
(5)
|
%
|
|
|
Depreciation and amortization attributable to operating expenses
|
|
1,072,877
|
|
|
1,005,315
|
|
|
(67,562)
|
|
|
(7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(4,753,233)
|
|
|
$
|
(3,949,202)
|
|
|
$
|
(804,031)
|
|
|
(20)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Refining Segment
|
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|
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Revenues
|
|
$
|
22,309,670
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|
|
$
|
9,212,477
|
|
|
$
|
13,097,193
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|
|
142
|
%
|
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
|
21,772,587
|
|
|
7,767,882
|
|
|
(14,004,705)
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|
|
(180)
|
%
|
|
|
Depreciation and amortization attributable to costs of revenues
|
|
341,498
|
|
|
431,948
|
|
|
90,450
|
|
|
21
|
%
|
|
|
Gross profit
|
|
195,585
|
|
|
1,012,647
|
|
|
(817,062)
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|
|
(81)
|
%
|
|
|
Selling, general and administrative expense
|
|
1,867,027
|
|
1,424,572
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|
(442,455)
|
|
(31)%
|
|
|
Depreciation and amortization attributable to operating expenses
|
|
278,492
|
|
301,194
|
|
22,702
|
|
8%
|
|
|
Loss from operations
|
|
$
|
(1,949,934)
|
|
$
|
(713,119)
|
|
$
|
(1,236,815)
|
|
(173)%
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|
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|
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|
|
|
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|
|
Recovery Segment
|
|
|
|
|
|
|
|
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|
|
Revenues
|
|
$
|
11,588,890
|
|
$
|
8,511,257
|
|
$
|
3,077,633
|
|
36%
|
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
|
11,847,040
|
|
7,589,758
|
|
(4,257,282)
|
|
(56)%
|
|
|
Depreciation and amortization attributable to costs of revenues
|
|
429,123
|
|
411,014
|
|
(18,109)
|
|
(4)%
|
|
|
Gross profit (loss)
|
|
(687,273)
|
|
510,485
|
|
(1,197,758)
|
|
(235)%
|
|
|
Selling, general and administrative expense
|
|
1,925,052
|
|
1,604,906
|
|
(320,146)
|
|
(20)%
|
|
|
Depreciation and amortization attributable to operating expenses
|
|
61,350
|
|
61,350
|
|
—
|
|
—%
|
|
|
Loss from operations
|
|
$
|
(2,673,675)
|
|
$
|
(1,155,771)
|
|
$
|
(1,517,904)
|
|
(131)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Less than 1%.
Our Black Oil segment generated revenues of $61,062,628 for the nine months ended September 30, 2020, with cost of revenues (exclusive of depreciation and amortization) of $46,601,716, and depreciation and amortization attributable to cost of revenues of $2,960,699. During the nine months ended September 30, 2019, these revenues were $103,053,529 with cost of revenues (exclusive of depreciation and amortization) of $88,374,446, and depreciation and amortization attributable to cost of revenues of $3,122,664 Income from operations decreased for the nine months ended September 30, 2020, compared to 2019, as a result of lower volumes of processed products at the refineries, and other facilities, as well as an overall decrease in margins throughout the business as a result of lower commodity pricing, offset by decreased operating expenses through our various facilities, along with diligent management of our street collections and pricing.
Our Black Oil segment's volume decreased approximately 18% during the nine months ended September 30, 2020, compared to the same period in 2019. This decrease was largely due to the overall economic impact of the 'stay-at-home' orders that were imposed as a result of the COVID-19 pandemic. Volumes collected through our H&H Oil and Heartland collection facilities decreased 2% during the nine months ended September 30, 2020, compared to the same period in 2019. One of our key initiatives
continues to be a focus on growing our own volumes of collected material and displacing the third-party oil processed in our facilities.
Our Refining segment includes the business operations of our Refining and Marketing operations, as well as our newly acquired assets from Crystal. With the acquisition of the Crystal assets, we now operate as a wholesale distributer of motor fuels which include gasoline, blended gasoline and diesel. During the nine months ended September 30, 2020, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were $21,772,587, of which the processing costs for our Refining and Marketing business located at KMTEX were $1,202,050, and depreciation and amortization attributable to cost of revenues of $341,498. Revenues for the same period were $22,309,670. During the nine months ended September 30, 2019, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were $7,767,882, which included the processing costs at KMTEX of $1,419,225, and depreciation and amortization attributable to cost of revenues of $431,948 .Revenues for the same period were $9,212,477.
Overall volume for the Refining and Marketing division decreased 16% during the nine months ended September 30, 2020, as compared to the same period in 2019. Our fuel oil cutter volumes decreased 46% for the nine months ended September 30, 2020, compared to the same period in 2019. Our pygas volumes decreased 6% for the nine months ended September 30, 2020, as compared to the same period in 2019. The lower margins were a result of decreases in available feedstock volumes. We experienced a large decrease in volumes being received from third party facilities as a result of COVID-19 as well as recent weather delays as a result of the hurricanes in the Gulf which caused some of these facilities to shut-down operations for short periods of time. We have also had to assess the volume of fuel oil cutterstocks that we manage due to enhanced quality of products being demanded in the marketplace.
Our Recovery segment generated revenues of $11,588,890 for the nine months ended September 30, 2020, with cost of revenues (exclusive of depreciation and amortization) of $11,847,040, and depreciation and amortization attributable to cost of revenues of $429,123. During the nine months ended September 30, 2019, these revenues were $8,511,257 with cost of revenues (exclusive of depreciation and amortization) of $7,589,758, and depreciation and amortization attributable to cost of revenues of $411,014. Income from operations decreased for the nine months ended September 30, 2020, compared to 2019, as a result of increased operating expenses through our various facilities.
Our Recovery segment includes the business operations of Vertex Recovery Management as well as our Group III base oil business. Vertex acts 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. Revenues for this division increased 36% as a result of increased volumes compared to the same period in 2019. Volumes of petroleum products acquired in our Recovery business were up 20% during the nine months ended September 30, 2020, compared to the same period during 2019. This segment periodically participates in project work that is not ongoing, thus we expect to see fluctuations in revenue and income before income taxes from period to period. These projects are typically bid related and can take time to line out and get started; however, we believe these are very good projects for the Company and we anticipate more in the upcoming periods.
The Company purchases product/feedstock from third-party collectors as well as internally collected product using its fleet of trucks. Our long-term goal is to collect as much of our product/feedstock as possible as this helps to improve margins and ultimately net income of the Company. The more product/feedstock we can collect with our own fleet and displace third-party purchases improves the overall profitability of the Company through cost reductions, as our internally collected product/feedstock is generally cheaper than product/feedstock we have to purchase from third-parties. In general, the more product/feedstock we are required to acquire from third-parties, the lower our margins. While the breakdown between internally sourced and third-party sourced product/feedstock has no effect on revenue (which is a function of fluctuating product spreads), it does have an effect on cost of revenues, and therefore our profit before corporate selling, general and administrative expenses. Specifically, a higher number of third-party sourced product/feedstock generally results in increases to costs of revenues. Inventories are also affected to a limited extent by collection and production values – the more product we collect, the greater our inventories of product/feedstock, at least until such product/feedstock is processed into end-products. The inventory levels of our end-products are determined based on supply and demand, and how quickly such products can be transported, and not typically dependent on the amount of products/feedstock we source internally or externally.
The following table sets forth the high and low spot prices during the nine months ended September 30, 2020, for our key benchmarks.
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|
|
|
|
|
|
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)
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|
|
|
|
|
|
The following table sets forth the high and low spot prices during the nine months ended September 30, 2019, for our key benchmarks.
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|
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|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
Benchmark
|
|
High
|
|
Date
|
|
Low
|
|
Date
|
|
U.S. Gulfcoast No. 2 Waterborne (dollars per gallon)
|
|
$
|
2.01
|
|
|
September 16
|
|
$
|
1.53
|
|
|
January 2
|
|
U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)
|
|
$
|
2.08
|
|
|
April 10
|
|
$
|
1.31
|
|
|
January 2
|
|
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)
|
|
$
|
68.54
|
|
|
April 25
|
|
$
|
49.82
|
|
|
January 2
|
|
NYMEX Crude oil (dollars per barrel)
|
|
$
|
66.30
|
|
|
April 23
|
|
$
|
46.54
|
|
|
January 2
|
|
Reported in Platt's US Marketscan (Gulf Coast)
|
|
|
|
|
|
|
We saw an extreme drop in March and April of 2020, in each of the benchmark commodities we track compared to the same period in 2019. The extreme drop in market prices was a result of COVID-19, which led to worldwide shutdowns and halting of commercial and interpersonal activity, as governments around the world imposed regulations in response to efforts to control the spread of COVID-19, such as 'shelter-in-place' orders, quarantines, executive orders and similar restrictions. As a result, the global economy has been marked by significant slowdown and uncertainty, which has led to a precipitous decline in oil prices in response to demand concerns, further exacerbated by the price war among members of 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 towards the end of 2020 and into 2021, we anticipate that our results of operations will continue to be significantly impacted by the price of, and demand for oil, COVID-19 and the global response thereto.
Our margins are a function of the difference between what we are able to pay for raw materials and the market prices for the range of products produced. The various petroleum products produced are typically a function of crude oil indices and are quoted on multiple exchanges such as 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. Additionally, for the near term, results of operations will be subject to further uncertainty, as the global markets and exchanges, including the NYMEX, continue to experience volatility.
As our competitors bring new technologies to the marketplace, which will likely enable them to obtain higher values for the finished products created through their technologies from purchased black oil feedstock, we anticipate that they will have to pay more for feedstock due to the additional value received from their finished product (i.e., as their margins increase, they are able to increase the prices they are willing to pay for feedstock). If we are not able to continue to refine and improve our technologies and gain efficiencies in our technologies, we could be negatively impacted by the ability of our competitors to bring new processes to market which compete with our processes, as well as their ability to outbid us for feedstock supplies. Additionally, if we are forced to pay more for feedstock, our cash flows will be negatively impacted and our margins will decrease.
Liquidity and Capital Resources
The success of our current business operations has become dependent on repairs and maintenance to our facilities and our ability to make routine capital expenditures, as well as our ability to manage our margins which are a function of the difference between what we are able to pay or charge for raw materials and the market prices for the range of products produced. We also must maintain relationships with feedstock suppliers and end-product customers, and operate with efficient management of overhead costs. Through these relationships, we have historically been able to achieve volume discounts in the procurement of our feedstock, thereby increasing the margins of our segments’ operations. The resulting operating cash flow is crucial to the viability and growth of our existing business lines.
We had total assets of $125,153,280 as of September 30, 2020, compared to $120,759,919 at December 31, 2019. The increase was mainly due to the generation of additional liquidity from the closing of the Tensile transaction relating to Heartland SPV as discussed above, during the nine months ended September 30, 2020.
We had total current liabilities of $23,391,460 as of September 30, 2020, compared to $24,797,299 at December 31, 2019. We had total liabilities of $61,069,930 as of September 30, 2020, compared to total liabilities of $69,511,546 as of December 31, 2019. The decrease in current liabilities and total liabilities was mainly in connection with the generation of additional liquidity from the closing of the Heartland SPV transaction during the nine months ended September 30, 2020, and the reduction of debt associated therewith.
We had working capital of $9,534,250 as of September 30, 2020, compared to working capital of $2,609,609 as of December 31, 2019. The increase in working capital from December 31, 2019 to September 30, 2020 is mainly due to the generation of additional liquidity from the closing of the Heartland SPV transaction during the nine months ended September 30, 2020.
The Company received a total of $21.0 million from the Tensile transaction, of which approximately $9.0 million was used to pay down our debt obligations, approximately $7.0 million is included in cash as of September 30, 2020, and the remaining balance was used to fund operations.
Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including commodity prices, the cost of recovered oil, and the ability to turn our inventory. Other factors that have affected and are expected to continue to affect earnings and cash flow are transportation, processing, and storage costs. Over the long term, our operating cash flows will also be impacted by our ability to effectively manage our administrative and operating costs. Additionally, we may incur capital expenditures related to new TCEP facilities in the future (provided that none are currently planned).
Given the ongoing COVID-19 pandemic, challenging market conditions and recent market events resulting in industry-wide spending cuts, we continue to remain focused on maintaining a strong balance sheet and adequate liquidity. Over the near term, we plan to reduce, defer or cancel certain planned capital expenditures and reduce our overall cost structures commensurate with our expected level of activities. We believe that our cash on hand, internally generated cash flows and availability under the Revolving Credit Facility will be sufficient to fund our operations and service our debt in the near term. A prolonged period of weak, or a significant decrease in, industry activity and overall markets, due to COVID-19 or otherwise, may make it difficult to comply with our covenants and the other restrictions in the agreements governing our debt. Current global and market conditions have increased the potential for that difficulty.
The Company's outstanding debt facilities as of September 30, 2020 and December 31, 2019 are summarized as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creditor
|
Loan Type
|
|
Origination Date
|
|
Maturity Date
|
|
Loan Amount
|
|
Balance on September 30, 2020
|
Balance on December 31, 2019
|
|
Encina Business Credit, LLC
|
Term Loan
|
|
February 1, 2017
|
|
February 1, 2022
|
|
$
|
20,000,000
|
|
|
$
|
5,658,000
|
|
$
|
13,333,000
|
|
|
Encina Business Credit SPV, LLC
|
Revolving Note
|
|
February 1, 2017
|
|
February 1, 2022
|
|
$
|
10,000,000
|
|
|
—
|
|
3,276,230
|
|
|
Encina Business Credit, LLC
|
Capex Loan
|
|
August 7, 2020
|
|
February 1, 2022
|
|
$
|
2,000,000
|
|
|
1,250,617
|
|
—
|
|
|
Wells Fargo Equipment Lease-Ohio
|
Finance Lease
|
|
April-May, 2019
|
|
April-May, 2024
|
|
$
|
621,000
|
|
|
465,678
|
|
551,260
|
|
|
AVT Equipment Lease-Ohio
|
Finance Lease
|
|
April 2, 2020
|
|
April 2, 2023
|
|
$
|
337,155
|
|
|
410,928
|
|
—
|
|
|
AVT Equipment Lease-HH
|
Finance Lease
|
|
May 22, 2020
|
|
May 22, 2023
|
|
$
|
551,609
|
|
|
485,745
|
|
—
|
|
|
John Deere Note
|
Note
|
|
May 27, 2020
|
|
June 24, 2024
|
|
$
|
152,643
|
|
|
140,487
|
|
—
|
|
|
Tetra Capital Lease
|
Finance Lease
|
|
May, 2018
|
|
May, 2022
|
|
$
|
419,690
|
|
|
195,761
|
|
264,014
|
|
|
Well Fargo Equipment Lease-VRM LA
|
Finance Lease
|
|
March, 2018
|
|
March, 2021
|
|
$
|
30,408
|
|
|
4,485
|
|
12,341
|
|
|
Texas Citizens Bank
|
PPP Loan
|
|
May 5, 2020
|
|
April 28, 2022
|
|
$
|
4,222,000
|
|
|
4,222,000
|
|
—
|
|
|
Various institutions
|
Insurance premiums financed
|
|
Various
|
|
< 1 year
|
|
$
|
2,902,428
|
|
|
1,893,668
|
|
1,165,172
|
|
|
Total
|
|
|
|
|
|
|
|
|
14,727,369
|
|
18,602,017
|
|
|
Deferred finance costs
|
|
|
|
|
|
|
|
|
—
|
|
(47,826)
|
|
|
Total, net of deferred finance costs
|
|
|
|
|
|
|
|
|
$
|
14,727,369
|
|
$
|
18,554,191
|
|
Future contractual maturities of notes payable are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creditor
|
Year 1
|
|
Year 2
|
|
Year 3
|
|
Year 4
|
|
Year 5
|
|
Thereafter
|
|
Encina Business Credit, LLC
|
$
|
900,000
|
|
|
$
|
4,758,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Encina Business Credit SPV, LLC
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Encina Business Credit, LLC
|
158,966
|
|
|
1,091,651
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
John Deere Note
|
37,071
|
|
|
37,991
|
|
|
38,934
|
|
|
26,491
|
|
|
—
|
|
|
—
|
|
|
Well Fargo Equipment Lease- Ohio
|
119,356
|
|
|
125,643
|
|
|
132,261
|
|
|
88,418
|
|
|
—
|
|
|
—
|
|
|
AVT Equipment Lease-Ohio
|
124,308
|
|
|
135,272
|
|
|
151,348
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
AVT Equipment Lease-HH
|
145,296
|
|
|
158,111
|
|
|
182,338
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Tetra Capital Lease
|
96,530
|
|
|
99,231
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Well Fargo Equipment Lease- VRM LA
|
4,485
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Texas Citizens Bank
|
1,877,461
|
|
|
2,344,539
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Various institutions
|
1,893,668
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Totals
|
$
|
5,357,141
|
|
|
$
|
8,750,438
|
|
|
$
|
504,881
|
|
|
$
|
114,909
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Need for additional funding
Our re-refining business will require significant capital to design and construct any new facilities. The facility infrastructure would be an additional capitalized expenditure to these process costs and would depend on the location and site specifics of the facility.
Additionally, as part of our ongoing efforts to maintain a capital structure that is closely aligned with what we believe to be the potential of our business and goals for future growth, which is subject to cyclical changes in commodity prices, we will be exploring additional sources of external liquidity. The receptiveness of the capital markets to an offering of debt or equities cannot be assured and may be negatively impacted by, among other things, debt maturities, current market conditions, and potential stockholder dilution. The sale of additional securities, if undertaken by us and if accomplished, may result in dilution to our shareholders. However, such future financing may not be available in amounts or on terms acceptable to us, or at all.
In addition to the above, we may also seek to acquire additional businesses or assets. In addition, the Company could consider selling assets if a more strategic acquisition presents itself. Finally, in the event we deem such transaction in our best interest, we may enter into a business combination or similar transaction in the future.
We will also need additional capital in the future to redeem our Series B Preferred Stock and Series B1 Preferred Stock, which had a required redemption date of June 24, 2020, provided that, as discussed below under “Risk Factors” - “We do not anticipate redeeming our Series B and B1 Preferred Stock in the near future.”, we are not contractually, or legally, able to redeem such stock and do not anticipate having sufficient cash on hand to complete such redemption in the near term. Because such preferred stock was not redeemed on June 24, 2020, the preferred stock accrues a 10% per annum dividend (payable in-kind at the option of the Company), until such preferred stock is redeemed or converted into common stock.
There is currently only a limited market for our common stock, and as such, we anticipate that such market will be illiquid, sporadic and subject to wide fluctuations in response to several factors moving forward, including, but not limited to:
(1)actual or anticipated variations in our results of operations;
(2)the market for, and volatility in, the market for oil and gas;
(3)our ability or inability to generate new revenues; and
(4)the number of shares in our public float.
Furthermore, because our common stock is traded on the NASDAQ Capital Market, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, at present, we have a limited number of shares in our public float, and as a result, there could be extreme fluctuations in the price of our common stock.
We believe that our stock prices (bid, ask and closing prices) may not relate to the actual value of our company, and may not reflect the actual value of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in our common stock, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in our public reports, industry information, and those business valuation methods commonly used to value private companies.
Cash flows for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
2019
|
|
Beginning cash, cash equivalents and restricted cash
|
|
$
|
4,199,825
|
|
|
$
|
2,849,831
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
|
1,351,184
|
|
|
(3,058,106)
|
|
|
Investing activities
|
|
(6,005,620)
|
|
|
(3,200,700)
|
|
|
Financing activities
|
|
16,107,716
|
|
|
5,812,788
|
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
11,453,280
|
|
|
(446,018)
|
|
|
Ending cash, cash equivalents and restricted cash
|
|
$
|
15,653,105
|
|
|
$
|
2,403,813
|
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Net cash provided by operating activities was $1,351,184 for the nine months ended September 30, 2020, as compared to net cash used in operating activities of $3,058,106 during the corresponding period in 2019. Our primary sources of liquidity are cash flows from our operations and the availability to borrow funds under our credit and loan facilities. The primary reason for the increase in cash provided by operating activities for the nine month period ended September 30, 2020, compared to the same period in 2019, was the fluctuation in market and commodity prices during the nine months ended September 30, 2020, a decrease of $4,952,388 in accounts receivable and $3,939,674 in inventory, and $5,484,734 of net cash settlements on commodity derivatives.
Investing activities used cash of $6,005,620 for the nine months ended September 30, 2020, as compared to having used $3,200,700 of cash during the corresponding period in 2019, due mainly to the purchase of fixed assets and the acquisition of Crystal.
Financing activities provided cash of $16,107,716 for the nine months ended September 30, 2020, as compared to providing cash of $5,812,788 during the corresponding period in 2019. Financing activities for the nine months ended September 30, 2020 were comprised of contributions from the Tensile transaction of $21.0 million, offset by approximately $9.7 million used to pay down our long-term debt, $4.2 million of proceeds from our PPP loan (described in greater detail under “Note 6. Line of Credit and Long-Term Debt” to the unaudited financial statements included herein, under “Loan Agreements”), and $3.3 million of payments on our line of credit. Financing activities for the nine months ended September 30, 2019 were comprised of note proceeds of approximately $2.8 million, offset by approximately $3.5 million used to pay down our long-term debt, and $1.5 million of proceeds on our line of credit.
More information regarding our outstanding line of credits, promissory notes and long-term debt can be found under “Note 6. Line of Credit and Long-Term Debt” to the unaudited financial statements included herein.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance 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, and legal matters. Actual results may differ from these estimates. (See “Part I” - “Item 1. Financial Statements” - “Note 1. Basis of Presentation and Nature of Operations” to the financial statements included herein).
Impairment of long-lived assets
The Company evaluates the carrying value and recoverability of its long-lived assets when circumstances warrant such evaluation by applying the provisions of the FASB ASC regarding long-lived assets. It requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. The Company determined that no long-lived asset impairment existed at September 30, 2020.
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".
Preferred Stock Classification
A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity. A financial instrument issued in the form of shares is mandatorily redeemable if it embodies an unconditional obligation requiring the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event certain to occur. A financial instrument that embodies a conditional obligation to redeem the instrument by transferring assets upon an event not certain to occur becomes mandatorily redeemable-and, therefore, becomes a liability-if that event occurs, the condition is resolved, or the event becomes certain to occur. The Series B Preferred Stock requires the Company to redeem such preferred stock on the fifth anniversary of the issuance of the Series B Preferred Stock and the Series B1 Preferred Stock requires the Company to redeem such preferred stock on the same date as the Series B Preferred Stock, in the event such redemptions are allowed pursuant to the Company’s senior credit facilities and applicable law. SEC reporting requirements provide that any possible redemption outside of the control of the Company requires the preferred stock to be classified outside of permanent equity.
Redeemable Noncontrolling Interest
As more fully described in "Note 14. Share Purchase and Subscription Agreements", the Company is party to put/call option agreements with the holder of MG SPV’s and Heartland SPV's non-controlling interests. The put options permit MG SPV's and Heartland SPV's non-controlling interest holders, at any time on or after the earlier of (a) the fifth anniversary of the applicable closing date of such issuances and (ii) the occurrence of certain triggering events (an “MG Redemption” and "Heartland Redemption", as applicable) to require MG SPV and Heartland SPV to redeem the non-controlling interest from the holder of such interest. Per the agreements, the cash purchase price for such redeemed 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 September 30, 2020 and December 31, 2019 consolidated balance sheets (provided that the Heartland SPV interest was not outstanding until January 2020). If an equity instrument subject to the guidance is currently redeemable, the instrument is adjusted to its maximum redemption amount at the balance sheet date. If the equity instrument subject to the guidance is not currently redeemable but it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the guidance permits either of the following measurement methods: (a) accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, or (b) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument. Because the MG SPV and Heartland SPV equity instruments will become redeemable solely based on the passage of time, the Company determined that it is probable that the MG SPV and Heartland SPV equity instruments will become redeemable. The Company has elected to apply the second of the two measurement options described above. An adjustment to the carrying amount of a non-controlling interest from
the application of the above guidance does not impact net income in the consolidated financial statements. Rather, such adjustments are treated as equity transactions.
Variable Interest Entities
The Company has investments in certain legal entities in which equity investors do not have (1) sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support, (2) as a group, (the holders of the equity investment at risk), do not have either the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impacts the entity’s economic performance, or (3) the obligation to absorb the expected losses of the legal entity or the right to receive expected residual returns of the legal entity. These certain legal entities are referred to as “variable interest entities” or “VIEs.”
The Company consolidates the results of any such entity in which it determines that it has a controlling financial interest. The Company has a “controlling financial interest” in such an entity if the Company has both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive benefits from, the VIE that could be potentially significant to the VIE. On a quarterly basis, the Company reassesses whether it has a controlling financial interest in any investments it has in these certain legal entities.
Market Risk
Our revenues and cost of revenues are affected by fluctuations in the value of energy related products. We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly and by selling our products into markets where we believe we can achieve the greatest value.