Item 1. Financial Statements
VERTEX ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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| March 31, 2022 | | December 31, 2021 |
ASSETS | | | |
Current assets | | | |
Cash and cash equivalents | $ | 24,050,252 | | | $ | 36,129,941 | |
Restricted cash | 100,496,998 | | | 100,496,998 | |
Accounts receivable, net | 5,957,642 | | | 5,296,867 | |
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Inventory | 13,052,840 | | | 3,735,878 | |
Derivative commodity asset | 363,590 | | | 95,980 | |
Prepaid expenses and other current assets | 6,719,497 | | | 4,279,732 | |
Assets held for sale, current | 90,474,740 | | | 84,116,152 | |
Total current assets | 241,115,559 | | | 234,151,548 | |
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Fixed assets, at cost | 13,773,860 | | | 13,811,835 | |
Less accumulated depreciation | (2,113,315) | | | (2,045,241) | |
Fixed assets, net | 11,660,545 | | | 11,766,594 | |
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Operating lease right-of use assets | 4,891,254 | | | 5,011,454 | |
Intangible assets, net | 331,965 | | | 358,881 | |
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Other assets | 22,498,249 | | | 14,771,642 | |
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TOTAL ASSETS | $ | 280,497,572 | | | $ | 266,060,119 | |
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LIABILITIES, TEMPORARY EQUITY, AND EQUITY | | | |
Current liabilities | | | |
Accounts payable | $ | 12,023,382 | | | $ | 4,216,275 | |
Accrued expenses | 2,864,643 | | | 3,617,902 | |
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Finance lease liability-current | 263,065 | | | 302,166 | |
Operating lease liability-current | 959,573 | | | 959,573 | |
Current portion of long-term debt | 1,047,081 | | | 2,413,295 | |
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Liabilities held for sale, current | 41,696,760 | | | 37,644,312 | |
Total current liabilities | 58,854,504 | | | 49,153,523 | |
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Long-term debt | 104,777 | | | 114,480 | |
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Convertible senior unsecured note 2027, net | 65,786,685 | | | 64,015,929 | |
Operating lease liability-long-term | 3,931,681 | | | 4,051,881 | |
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Derivative warrant liability | — | | | 75,210,525 | |
Total liabilities | 128,677,647 | | | 192,546,338 | |
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COMMITMENTS AND CONTINGENCIES (Note 3) | — | | | — | |
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| March 31, 2022 | | December 31, 2021 |
TEMPORARY EQUITY | | | |
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Redeemable non-controlling interest | 47,636,617 | | | 43,446,684 | |
Total temporary equity | 47,636,617 | | | 43,446,684 | |
EQUITY | | | |
50,000,000 of total Preferred shares authorized: | | | |
Series A Convertible Preferred Stock, $0.001 par value; 5,000,000 shares designated, 380,560 and 385,601 shares issued and outstanding at March 31, 2022 and December 31, 2021, with a liquidation preference of $567,034 and $574,545 at March 31, 2022 and December 31, 2021. | 381 | | | 386 | |
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Series C Convertible Preferred Stock, $0.001 par value; 44,000 shares designated, zero shares issued or outstanding. | — | | | — | |
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Common stock, $0.001 par value per share; 750,000,000 shares authorized; 64,465,734 and 63,287,965 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively. | 64,466 | | | 63,288 | |
Additional paid-in capital | 217,734,093 | | | 138,620,254 | |
Accumulated deficit | (115,582,890) | | | (110,614,035) | |
Total Vertex Energy, Inc. shareholders' equity | 102,216,050 | | | 28,069,893 | |
Non-controlling interest | 1,967,258 | | | 1,997,204 | |
Total equity | 104,183,308 | | | 30,067,097 | |
TOTAL LIABILITIES, TEMPORARY EQUITY, AND EQUITY | $ | 280,497,572 | | | $ | 266,060,119 | |
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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| | Three Months Ended March 31, | | | | |
| | 2022 | | 2021 | | | | | | | | |
Revenues | | $ | 40,216,796 | | | $ | 25,045,243 | | | | | | | | | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 38,565,484 | | | 22,808,703 | | | | | | | | | |
Depreciation and amortization attributable to costs of revenues | | 114,053 | | | 112,497 | | | | | | | | | |
Gross profit | | 1,537,259 | | | 2,124,043 | | | | | | | | | |
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Operating expenses: | | | | | | | | | | | | |
Selling, general and administrative expenses | | 8,782,395 | | | 2,858,062 | | | | | | | | | |
Depreciation and amortization attributable to operating expenses | | 26,916 | | | 26,916 | | | | | | | | | |
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Total operating expenses | | 8,809,311 | | | 2,884,978 | | | | | | | | | |
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Loss from operations | | (7,272,052) | | | (760,935) | | | | | | | | | |
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Other income (expense): | | | | | | | | | | | | |
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Other income | | 414,972 | | | — | | | | | | | | | |
Gain on sale of assets | | 57,402 | | | 1,424 | | | | | | | | | |
Loss on change in value of derivative warrant liability | | (3,578,947) | | | (1,780,203) | | | | | | | | | |
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Interest expense | | (4,229,884) | | | (112,142) | | | | | | | | | |
Total other expense | | (7,336,457) | | | (1,890,921) | | | | | | | | | |
Loss from continuing operations before income tax | | (14,608,509) | | | (2,651,856) | | | | | | | | | |
Income tax benefit (expense) | | — | | | — | | | | | | | | | |
Loss from continuing operations | | (14,608,509) | | | (2,651,856) | | | | | | | | | |
Income from discontinued operations, net of tax | | 13,799,642 | | | 5,617,194 | | | | | | | | | |
Net income (loss) | | (808,867) | | | 2,965,338 | | | | | | | | | |
Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | | (68,164) | | | 382,666 | | | | | | | | | |
Net income attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations | | 3,806,753 | | | 1,608,303 | | | | | | | | | |
Net income (loss) attributable to Vertex Energy, Inc. | | (4,547,456) | | | 974,369 | | | | | | | | | |
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Accretion of redeemable noncontrolling interest to redemption value from continued operations | | (421,399) | | | (373,748) | | | | | | | | | |
Accretion of discount on Series B and B1 Preferred Stock | | — | | | (223,727) | | | | | | | | | |
Dividends on Series B and B1 Preferred Stock | | — | | | 258,138 | | | | | | | | | |
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Net loss available to shareholders from continuing operations | | (14,961,744) | | | (3,373,859) | | | | | | | | | |
Net income available to shareholders from discontinued operations, net of tax | | 9,992,889 | | | 4,008,891 | | | | | | | | | |
Net income (loss) available to common shareholders | | $ | (4,968,855) | | | $ | 635,032 | | | | | | | | | |
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Basic income (loss) per common share | | | | | | | | | | | | |
Continuing operations | | $ | (0.24) | | | $ | (0.07) | | | | | | | | | |
Discontinued operations, net of tax | | $ | 0.16 | | | $ | 0.08 | | | | | | | | | |
Basic income (loss) per common share | | $ | (0.08) | | | $ | 0.01 | | | | | | | | | |
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Diluted income (loss) per common share | | | | | | | | | | | | |
Continuing operations | | $ | (0.24) | | | $ | (0.07) | | | | | | | | | |
Discontinued operations, net of tax | | $ | 0.16 | | | $ | 0.08 | | | | | | | | | |
Diluted income (loss) per common share | | $ | (0.08) | | | $ | 0.01 | | | | | | | | | |
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Shares used in computing earnings per share | | | | | | | | | | | | |
Basic | | 63,372,005 | | | 47,709,450 | | | | | | | | | |
Diluted | | 63,372,005 | | | 49,006,195 | | | | | | | | | |
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
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Three Months Ended March 31, 2022 |
| 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, 2022 | 63,287,965 | | | $ | 63,288 | | | 385,601 | | | $ | 386 | | | — | | | $ | — | | | $ | 138,620,254 | | | $ | (110,614,035) | | | $ | 1,997,204 | | | $ | 30,067,097 | |
Exercise of options | 60,000 | | | 60 | | | — | | | — | | | — | | | — | | | 75,540 | | | — | | | — | | | 75,600 | |
Exercise of warrants | 1,112,728 | | | 1,113 | | | — | | | — | | | — | | | — | | | (1,113) | | | — | | | — | | | — | |
Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 249,940 | | | — | | | — | | | 249,940 | |
Conversion of Series A Preferred stock to common | 5,041 | | | 5 | | | (5,041) | | | (5) | | | — | | | — | | | — | | | — | | | — | | | — | |
Reclassification of derivative liabilities | — | | | — | | | — | | | — | | | — | | | — | | | 78,789,472 | | | — | | | — | | | 78,789,472 | |
Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (421,399) | | | — | | | (421,399) | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,547,456) | | | 3,738,589 | | | (808,867) | |
Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,768,535) | | | (3,768,535) | |
Balance on March 31, 2022 | 64,465,734 | | | $ | 64,466 | | | 380,560 | | | $ | 381 | | | — | | | $ | — | | | $ | 217,734,093 | | | $ | (115,582,890) | | | $ | 1,967,258 | | | $ | 104,183,308 | |
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Three Months Ended March 31, 2021 |
| Common Stock | | Series A Preferred | | Series C Preferred | | | | | | | | |
| Shares | | $0.001 Par | | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Additional Paid-In Capital | | Retained Earnings | | Non-controlling Interest | | Total Equity |
Balance on January 1, 2021 | 45,554,841 | | | $ | 45,555 | | | 419,859 | | | $ | 420 | | | — | | | $ | — | | | $ | 94,569,674 | | | $ | (90,008,778) | | | $ | 1,317,878 | | | $ | 5,924,749 | |
Exercise of options | 22,992 | | | 23 | | | — | | | — | | | — | | | — | | | (23) | | | — | | | — | | | — | |
Exercise of B1 warrants | 1,079,753 | | | 1,080 | | | — | | | — | | | — | | | — | | | 2,756,877 | | | — | | | — | | | 2,757,957 | |
Exchanges of Series B Preferred stock to common | 2,359,494 | | | 2,359 | | | — | | | — | | | — | | | — | | | 4,114,570 | | | 630,321 | | | — | | | 4,747,250 | |
Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 150,514 | | | — | | | — | | | 150,514 | |
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Conversion of Series B Preferred stock to common | 638,224 | | | 638 | | | — | | | — | | | — | | | — | | | 1,977,856 | | | — | | | — | | | 1,978,494 | |
Conversion of Series B1 Preferred stock to common | 2,087,195 | | | 2,087 | | | — | | | — | | | — | | | — | | | 3,253,937 | | | — | | | — | | | 3,256,024 | |
Dividends on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (372,183) | | | — | | | (372,183) | |
Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (223,727) | | | — | | | (223,727) | |
Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (373,748) | | | — | | | (373,748) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 974,369 | | | 1,990,969 | | | 2,965,338 | |
Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,542,402) | | | (1,542,402) | |
Balance on March 31, 2021 | 51,742,499 | | | $ | 51,742 | | | 419,859 | | | $ | 420 | | | — | | | $ | — | | | $ | 106,823,405 | | | $ | (89,373,746) | | | $ | 1,766,445 | | | $ | 19,268,266 | |
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See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (UNAUDITED)
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| Three Months Ended | |
| March 31, 2022 | | March 31, 2021 | |
Cash flows from operating activities | | | | |
Net income (loss) | $ | (808,867) | | | $ | 2,965,338 | | |
Income from discontinued operations, net of tax | 13,799,642 | | | 5,617,194 | | |
Loss from continuing operations | (14,608,509) | | | (2,651,856) | | |
Adjustments to reconcile net loss from continuing operations to cash provided by (used in) operating activities, net of acquisitions | | | | |
Stock based compensation expense | 249,940 | | | 150,514 | | |
Depreciation and amortization | 140,969 | | | 139,413 | | |
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Gain on sale of assets | (57,402) | | | (1,424) | | |
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Reduction of allowance for bad debt | (13,272) | | | — | | |
Increase in fair value of derivative warrant liability | 3,578,947 | | | 1,780,203 | | |
Loss (gain) on commodity derivative contracts | (257,516) | | | 721,531 | | |
Net cash settlements on commodity derivatives | 640 | | | (1,306,344) | | |
Amortization of debt discount and deferred costs | 1,770,756 | | | — | | |
Changes in operating assets and liabilities | | | | |
Accounts receivable and other receivables | (647,503) | | | 564,925 | | |
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Inventory | (9,316,962) | | | 107,718 | | |
Prepaid expenses and other current assets | (697,848) | | | 670,125 | | |
Accounts payable | 7,807,105 | | | 814,872 | | |
Accrued expenses | (753,259) | | | (121,174) | | |
Other assets | (1,300,000) | | | — | | |
Net cash provided by (used in) operating activities from continuing operations | (14,103,914) | | | 868,503 | | |
Cash flows from investing activities | | | | |
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Purchase of fixed assets | (53,936) | | | (464,039) | | |
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Investment in Mobile Refinery assets | (6,426,607) | | | — | | |
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Proceeds from sale of fixed assets | 131,689 | | | 1,600 | | |
Net cash used in investing activities from continuing operations | (6,348,854) | | | (462,439) | | |
Cash flows from financing activities | | | | |
Payments on finance leases | (39,101) | | | (67,382) | | |
Proceeds from exercise of options and warrants to common stock | 75,600 | | | 1,652,022 | | |
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Line of credit (payments) proceeds, net | — | | | (133,446) | | |
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Payments on note payable | (1,375,917) | | | (1,036,581) | | |
Net cash provided by (used in) financing activities from continuing operations | (1,339,418) | | | 414,613 | | |
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Discontinued operations: | | | | |
Net cash provided by operating activities | 10,114,115 | | | 1,320,593 | | |
Net cash used in investing activities | (342,573) | | | (554,940) | | |
Net cash used in financing activities | (59,045) | | | (54,670) | | |
Net cash provided by discontinued operations | 9,712,497 | | | 710,983 | | |
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Net change in cash, cash equivalents and restricted cash | (12,079,689) | | | 1,531,660 | | |
Cash, cash equivalents, and restricted cash at beginning of the period | 136,626,939 | | | 10,995,169 | | |
Cash, cash equivalents, and restricted cash at end of period | $ | 124,547,250 | | | $ | 12,526,829 | | |
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SUPPLEMENTAL INFORMATION | | | |
Cash paid for interest | $ | 21,294 | | | $ | 236,677 | |
Cash paid for taxes | $ | — | | | $ | — | |
NON-CASH INVESTING AND FINANCING TRANSACTIONS | | | |
Equity component of the convertible note issuance | $ | 78,789,472 | | | $ | — | |
Conversion of Series A Preferred Stock into common stock | $ | 5 | | | $ | — | |
Conversion of Series B Preferred Stock into common stock | $ | — | | | $ | 1,978,494 | |
Conversion of Series B1 Preferred Stock into common stock | $ | — | | | $ | 3,256,024 | |
Exchanges of Series B Preferred Stock into common stock | $ | — | | | $ | 4,397,236 | |
Accretion of discount on Series B and B1 Preferred Stock | $ | — | | | $ | 223,727 | |
Dividends-in-kind accrued on Series B and B1 Preferred Stock | $ | — | | | $ | (258,138) | |
Cashless warrant exercise | $ | 1,113 | | | $ | — | |
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Accretion of redeemable noncontrolling interest to redemption value | $ | 421,399 | | | $ | 373,748 | |
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See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying unaudited interim consolidated 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, 2021, contained in the Company's annual report, as filed with the SEC on Form 10-K on March 11, 2022 (the "Form 10-K"). The December 31, 2021 balance sheet was derived from the audited financial statements of our 2021 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 2021 as reported in Form 10-K have been omitted.
UMO Business
On June 29, 2021, Vertex Energy entered into an Asset Purchase Agreement (the “Sale Agreement”) with Vertex Energy Operating, LLC, Vertex’s wholly-owned subsidiary (“Vertex Operating”) and Vertex Refining LA, LLC (“Vertex LA”) (wholly-owned by Vertex Operating), Vertex Refining OH, LLC (“Vertex OH”) (wholly-owned by HPRM, LLC, of which Vertex Energy owns a 35% interest), Cedar Marine Terminals, L.P. (“CMT”) (indirectly wholly-owned), and H & H Oil, L.P. (“H&H”) (indirectly wholly-owned)(collectively, the “Vertex Entities”, and together, Vertex, Vertex Operating and the Vertex Entities, the “Seller Parties”), as sellers, and Safety-Kleen Systems, Inc., as purchaser (“Safety-Kleen”).
During the third quarter of 2021, the Company classified the used motor oil (UMO) business (the "UMO Business") as held for sale based on management’s intention and shareholders’ approval to sell this business. The Company’s historical financial statements have been revised to present the operating results of the UMO business as discontinued operations. The results of operations of this business are presented as “Income (loss) from discontinued operations” in the statement of operations and the related cash flows of this business have been reclassified to discontinued operations for all periods presented. The assets and liabilities of the UMO business have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance sheet for all periods presented.
On January 24, 2022, each of the Company and its subsidiaries party to the Sale Agreement and Safety-Kleen entered into an Asset Purchase Termination Agreement (the “Termination Agreement”) pursuant to which the Sale Agreement was terminated. Pursuant to the terms of the Termination Agreement, the Company agreed to pay a termination fee to Safety-Kleen of $3,000,000. Immediately upon receipt of such termination fee, which the Company paid simultaneously with the execution of the Termination Agreement, the Sale Agreement was terminated and is of no further force or effect, and with no further liability to any party thereunder, other than certain confidentiality obligations of the parties and ongoing liability for any willful or intentional breach of, or non-compliance with, the Sale Agreement.
The Company is still exploring opportunities to sell the UMO Business and believes it will sell such assets within a year.
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.
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| March 31, 2022 | | December 31, 2021 |
Cash and cash equivalents | $ | 24,050,252 | | | $ | 36,129,941 | |
Restricted cash | 100,496,998 | | | 100,496,998 | |
Cash and cash equivalents and restricted cash as shown in the consolidated statements of cash flows | $ | 124,547,250 | | | $ | 136,626,939 | |
The Company has placed $100,125 of restricted cash in a money market account, to serve as collateral for payment of a credit card, and $100,396,873 of restricted cash in an escrow account in connection with the issuance of the convertible notes, which has been released in conjunction with the purchase of the Mobile Refinery (defined below) on April 1, 2022.
Accounts Receivable
Accounts receivable represents amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, do not bear interest and are not collateralized. The Company uses its best estimate to determine the required allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, economic trends and conditions affecting its customer base, significant one-time events and historical write-off experience. Specific provisions are recorded for individual receivables when we become aware of a customer’s inability to meet its financial obligations. The Company reviews the adequacy of its reserves and allowances quarterly.
Receivable balances greater than 90 days past due are individually reviewed for collectability and if deemed uncollectible, are charged off against the allowance accounts after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance was $986,412 and $999,683 at March 31, 2022 and December 31, 2021, respectively.
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. The Company determined that no impairment existed during the three months ended March 31, 2022 and 2021.
Impairment of long-lived assets
The Company evaluates the carrying value and recoverability of its long-lived assets when circumstances warrant such evaluation. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. The Company determined that no long-lived asset impairment existed during the three months ended March 31, 2022 and 2021.
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 Vertex Refining Myrtle Grove LLC (“MG SPV”) and HPRM LLC, a Delaware limited liability company (“Heartland SPV”), which entities were formed as special purpose vehicles in connection with the transactions described in greater detail below, 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. Applicable accounting guidance requires an equity instrument that is redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. Based on this guidance, the Company has classified the MG SPV and Heartland SPV non-controlling interests between the liabilities and equity sections of the accompanying consolidated balance sheets. If an equity instrument subject to the guidance is currently redeemable, the instrument is adjusted to its maximum redemption amount at the balance sheet date. If the equity instrument subject to the guidance is not currently redeemable but it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the guidance permits either of the following measurement methods: (a) accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, or (b) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument. Because the MG SPV and Heartland SPV equity instruments will become redeemable solely based on the passage of time, the Company determined that it is probable that the MG SPV and Heartland SPV equity instruments will become redeemable. The Company has elected to apply the second of the two measurement options described above. An adjustment to the carrying amount of a non-controlling interest from the application of the above guidance does not impact net loss in the consolidated financial statements. Rather, such adjustments are treated as equity transactions and adjustment to net loss in determining net loss available to common stockholders for the purpose of calculating earnings per share.
Variable Interest Entities
The Company determines whether each business entity in which it has equity interests, debt, or other investments constitutes a variable interest entity (“VIE”) based on consideration of the following criteria: (i) the entity lacks sufficient equity at-risk to finance its activities without additional subordinated financial support, or (ii) equity holders, as a group, lack the characteristics of a controlling financial instrument.
If an entity is determined to be a VIE, the Company then determines whether to consolidate the entity as the primary beneficiary. The primary beneficiary has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the entity.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the disposal group; (2) the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; (3) an active program to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group have been initiated; (4) the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale, within one year, except if events or circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year; (5) the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A disposal group that is classified as held for sale is initially measured at the lower of its carrying amount or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. No loss was recognized during the periods presented.
Subsequent changes in the fair value of a disposal group less any costs to sell are reported as an adjustment to the carrying amount of the disposal group, as long as the new carrying amount does not exceed the carrying amount of the asset at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group for all periods presented in the line items assets held for sale and liabilities held for sale, respectively, in the consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that can be clearly distinguished, operationally and for financial reporting purposes, that either has been disposed of or is classified as held for sale is reported in discontinued operations, if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.
Recently adopted accounting pronouncements
In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity to simplify the accounting for convertible debt and other equity-linked instruments. The new guidance simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity. Instead, the entity will account for the convertible debt or convertible preferred stock securities as a single unit of account, unless the conversion feature requires bifurcation and recognition as derivatives. Additionally, the guidance requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares. The Company adopted this new guidance as of January 1, 2022, under the modified retrospective method.
NOTE 3. CONCENTRATIONS, SIGNIFICANT CUSTOMERS, COMMITMENTS AND CONTINGENCIES
At March 31, 2022 and 2021 and for each of the three months then ended, the Company’s revenues and receivables were comprised of the following customer concentrations:
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| Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
| % of Revenues | | % of Receivables | | % of Revenues | | % of Receivables |
Customer 1 | 22% | | 24% | | 23% | | 20% |
Customer 2 | 19% | | 18% | | 15% | | 10% |
Customer 3 | 12% | | —% | | 12% | | 18% |
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For each of the three months ended March 31, 2022 and 2021, the Company’s segment revenues were comprised of the following customer concentrations:
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| % of Revenue by Segment | | % Revenue by Segment |
| Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
| Black Oil | | Refining | | Recovery | | Black Oil | | Refining | | Recovery |
Customer 1 | —% | | 26% | | —% | | —% | | 30% | | —% |
Customer 2 | —% | | 22% | | —% | | —% | | 20% | | —% |
Customer 3 | —% | | 13% | | —% | | —% | | 15% | | —% |
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The Company had one vendor that represented 70% and 62% of total purchases, and 65% and 72% of total payables for the three months ended March 31, 2022 and 2021, respectively.
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 other claims and legal action. In the opinion of management, the outcome of these claims and actions will not have a material adverse impact upon the financial position of the Company. We are currently party to the following material litigation proceedings:
Vertex Refining LA, LLC (“Vertex Refining LA”), the wholly-owned subsidiary of Vertex Operating was named as a defendant, along with numerous other parties, in 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.
On November 17, 2020, Vertex filed a lawsuit against Penthol LLC (“Penthol”) in the 61st Judicial District Court of Harris County, Texas, Cause No. 2020-65269, for breach of contract and simultaneously sought a Temporary Restraining Order and Temporary Injunction enjoining Penthol from, among other things, circumventing Vertex in violation of the terms of that certain June 5, 2016 Sales Representative and Marketing Agreement entered into between Vertex Operating and Penthol (the “Penthol Agreement”). Vertex seeks permanent injunctive relief, damages, attorney’s fees, costs of court, and all other relief to which it may be entitled. On February 8, 2021, Penthol filed a complaint against Vertex Operating in the United States District Court for the Southern District of Texas; Civil Action No. 4:21-CV-416 (the “Complaint”). Penthol’s Complaint sought damages from Vertex Operating for alleged violations of the Sherman Act, breach of contract, business disparagement, and misappropriation of trade secrets under the Defend Trade Secrets Act and Texas Uniform Trade Secrets Act. On August 12, 2021, United States District Judge Andrew S. Hanen dismissed Penthol’s Sherman Act claim. Penthol’s remaining claims are pending. Penthol is seeking a declaration that Vertex has materially breached the agreement; an injunction that prohibits Vertex from using Penthol’s alleged trade secrets and requires Vertex to return any of Penthol’s alleged trade secrets; awards of actual, consequential and exemplary damages, attorneys’ fees and costs of court; and other relief to which it may be entitled. Vertex denies Penthol’s allegations in the Complaint. Vertex contends Penthol’s claims are completely without merit, and that Penthol’s termination of the Penthol Agreement was wrongful and resulted in damages to Vertex that it is seeking to recover in the Harris County lawsuit. Further, Vertex contends that Penthol’s termination of the Penthol Agreement constitutes a breach by Penthol under the express terms of the Penthol Agreement, and that Vertex remains entitled to payment of the amounts due Vertex under the Penthol Agreement for unpaid commissions and unpaid performance incentives. Vertex disputes Penthol’s allegations of wrongdoing and intends to vigorously defend itself in this matter. On February 26, 2021, Penthol filed its second amended answer and counterclaims, alleging that Vertex improperly terminated the Penthol Agreement and that Vertex tortiously interfered with Penthol’s prospective and existing business relationships. Vertex denies these allegations and is vigorously defending them. This case is pending but is currently set for trial in February 2023.
We cannot predict the impact (if any) that any of the matters described above may have on our business, results of operations, financial position, or cash flows. Because of the inherent uncertainties of such matters, including the early stage and lack of specific damage claims in the Penthol matter, we cannot estimate the range of possible losses from them (except as otherwise indicated).
Related Parties
From time to time, the Company consults Ruddy Gregory, PLLC., a related party law firm of which James Gregory, a member of the Board of Directors, serves as a partner. During the three months ended March 31, 2022 and 2021, we paid $128,984 and $33,228, respectively, to such law firm for services rendered ,which services includes the drafting and negotiation of, and due diligence associated with, the Sale Agreement and Refinery Purchase Agreement (defined and discussed below), and related transactions, including the Loan and Security Agreement and Supply and Offtake Agreement, discussed below.
May 2021 Purchase Agreement
On May 26, 2021, Vertex Operating, entered into a Sale and Purchase Agreement (the “Refinery Purchase Agreement”) with Equilon Enterprises LLC d/b/a Shell Oil Products US, Shell Oil Company and Shell Chemical LP, subsidiaries of Shell plc
(“Shell”), to purchase Shell’s Mobile, Alabama refinery, certain real property associated therewith, and related assets, including all inventory at the refinery as of closing and certain equipment, rolling stock, and other personal property associated with the Mobile refinery (collectively, the “Mobile Refinery” and the “Mobile Acquisition”). The Mobile Refinery is located on an 800+ acre site in the city and county of Mobile, Alabama. The 91,000 barrel-per-day nameplate capacity Mobile Refinery is capable of sourcing a flexible mix of cost-advantaged light-sweet domestic and international feedstocks. Approximately 70% of the refinery’s annual production is distillate, gasoline and jet fuel, with the remainder being vacuum gas oil, liquefied petroleum gas (LPG) and other products. The facility distributes its finished product across the southeastern United States through a high-capacity truck rack, together with deep and shallow water distribution points capable of supplying waterborne vessels.
In addition to refining assets, the Mobile Acquisition included the acquisition by the Company of approximately 3.2 million barrels of inventory and product storage, logistics and distribution assets, together with more than 800+ acres of developed and undeveloped land.
The initial base purchase price for the assets is $75 million. In addition, we agreed to pay for the hydrocarbon inventory located at the Mobile Refinery, as valued at closing, and the purchase price is subject to other customary purchase price adjustments and reimbursement for certain capital expenditures, resulting in an expected total purchase price of approximately $99.9 million.
In connection with Vertex Operating’s execution of the Refinery Purchase Agreement, and as a required term and condition thereof, Vertex Operating provided Shell a promissory note in the amount of $10 million (the “Deposit Note”). Pursuant to the terms of the Refinery Purchase Agreement, the terms of such agreement (other than exclusivity through December 31, 2021, or such earlier date that the Refinery Purchase Agreement is terminated), were not legally binding on Shell until such time as Vertex Operating funded the Deposit Note in cash (which note has been paid in full to date). The Deposit Note did not accrue interest unless or until an event of default occurred under such note, at which time interest was to accrue at 12% per annum until paid. The entire balance of the Deposit Note was due upon the earlier of (i) 45 calendar days following the date of the Deposit Note (i.e., July 10, 2021); and (ii) five calendar days following the closing of any transaction between Vertex Operating and any third party, which Deposit Note was paid in full prior to such applicable due date. This deposit is recorded in other assets in the consolidated balance sheet at March 31, 2022 and December 31, 2021.
The Refinery Purchase Agreement contemplates the Company and Shell entering into various supply and offtake agreements at closing.
The Mobile Acquisition closed on April 1, 2022, and the funds paid for such acquisition included funds raised through the sale of the Convertible Senior Notes issued on November 1, 2021 (see “Note 6. Financing Arrangements").
Moving forward, Vertex plans to complete an $85 million capital project designed to modify the Mobile Refinery’s hydrocracking unit to produce renewable diesel fuel on a standalone basis, with funds raised through a Term Loan issued on April 1, 2022 (see “Note 16. Subsequent Events”).
In connection with the entry into the Refinery Purchase Agreement, Vertex Operating and Shell entered into a Swapkit Purchase Agreement (the “Swapkit Agreement”) which was funded at closing, and totaled $8.7 million.
Commitment Letter and Escrow Agreement
On February 17, 2022, the Company and Vertex Refining entered into a commitment letter with a syndicate of lenders (the “Lenders”) in respect of a three-year, $125 million first-lien senior secured term loan facility (the “Term Loan”). The closing date and the funding of the Term Loan were subject to the closing of Vertex’s planned acquisition of the Mobile refinery, in addition to various conditions precedent, as set forth in more detail in the Commitment Letter.
On March 2, 2022, (1) the Company, (2) Vertex Refining, (3) the Lenders and (4) Cantor Fitzgerald Securities (the “Escrow Agent”), entered into an Escrow Agreement (the “Escrow Agreement”). Pursuant to the Escrow Agreement, on March 2, 2022 each of the Lenders deposited their pro rata portion of the $125 million loan amount, less certain upfront fees, into an escrow account, which was released on April 1, 2022, the date that the Mobile Acquisition (defined below) was consummated. More detailed information regarding the acquisition and Term Loan is described in "Loan and Security Agreement" in "Note 16, Subsequent Events". The Company paid $2.5 million of fees related to the Term Loan in March 2022.
NOTE 4. REVENUES
Disaggregation of Revenue
The following tables present our revenues disaggregated by geographical market and revenue source:
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| Three Months Ended March 31, 2022 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
Primary Geographical Markets | | | | | | | |
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Southern United States | $ | 1,550,287 | | | $ | 34,718,918 | | | $ | 3,947,591 | | | $ | 40,216,796 | |
Sources of Revenue | | | | | | | |
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Pygas | $ | — | | | $ | 4,690,268 | | | $ | — | | | $ | 4,690,268 | |
Industrial fuel | — | | | 572,281 | | | — | | | 572,281 | |
Distillates | — | | | 29,456,369 | | | — | | | 29,456,369 | |
Oil collection services | 213,536 | | | — | | | | | 213,536 | |
Metals | — | | | — | | | 3,414,286 | | | 3,414,286 | |
Other re-refinery products | — | | | — | | | 533,305 | | | 533,305 | |
VGO/Marine fuel sales | 1,336,751 | | | — | | | — | | | 1,336,751 | |
Total revenues | $ | 1,550,287 | | | $ | 34,718,918 | | | $ | 3,947,591 | | | $ | 40,216,796 | |
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| Three Months Ended March 31, 2021 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
Primary Geographical Markets | | | | | | | |
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Southern United States | $ | 122,986 | | | $ | 19,273,952 | | | $ | 5,648,305 | | | $ | 25,045,243 | |
Sources of Revenue | | | | | | | |
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Pygas | $ | — | | | $ | 2,972,431 | | | $ | — | | | $ | 2,972,431 | |
Industrial fuel | — | | | 311,693 | | | — | | | 311,693 | |
Distillates | — | | | 15,989,828 | | | — | | | 15,989,828 | |
Oil collection services | 122,986 | | | — | | | 3,423 | | | 126,409 | |
Metals | — | | | — | | | 5,644,882 | | | 5,644,882 | |
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Total revenues | $ | 122,986 | | | $ | 19,273,952 | | | $ | 5,648,305 | | | $ | 25,045,243 | |
NOTE 5. ACCOUNTS RECEIVABLE
Accounts receivable, net, consists of the following at March 31, 2022 and December 31, 2021:
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| March 31, 2022 | | December 31, 2021 |
Accounts receivable trade | $ | 6,944,054 | | | $ | 6,296,550 | |
Allowance for doubtful accounts | (986,412) | | | (999,683) | |
Accounts receivable trade, net | $ | 5,957,642 | | | $ | 5,296,867 | |
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. FINANCING ARRANGEMENTS
Insurance Premiums
The Company financed insurance premiums through various financial institutions bearing interest rates from 3.49% to 4.09% per annum. All such premium finance agreements have maturities of less than one year and have a balance of $1,008,621 at March 31, 2022 and $2,375,071 at December 31, 2021.
Finance Leases
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 $263,065 at March 31, 2022.
The Company's outstanding debt facilities as of March 31, 2022 and December 31, 2021 are summarized as follows:
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Creditor | Loan Type | | Origination Date | | Maturity Date | | Loan Amount | | Balance on March 31, 2022 | Balance on December 31, 2021 |
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John Deere Note | Note | | May 27, 2020 | | June 24, 2024 | | $ | 152,643 | | | $ | 84,537 | | $ | 94,005 | |
AVT Equipment Lease-HH | Finance Lease | | May 22, 2020 | | May 22, 2023 | | $ | 551,609 | | | 263,065 | | 302,166 | |
SBA Loan | SBA Loan | | July 18, 2020 | | July 18, 2050 | | $ | 58,700 | | | 58,700 | | 58,700 | |
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Various institutions | Insurance premiums financed | | Various | | < 1 year | | $ | 5,604,748 | | | 1,008,621 | | 2,375,071 | |
Total | | | | | | | | | $ | 1,414,923 | | $ | 2,829,942 | |
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Future contractual maturities of notes payable as of March 31, 2022 are summarized as follows:
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Creditor | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
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John Deere Note | $ | 38,460 | | | $ | 39,414 | | | $ | 6,663 | | | $ | — | | | $ | — | | | $ | — | |
AVT Equipment Lease-HH | 263,065 | | | — | | | — | | | — | | | — | | | — | |
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SBA Loan | — | | | 1,266 | | | 1,315 | | | 1,365 | | | 1,417 | | | 53,337 | |
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Various institutions | 1,008,621 | | | — | | | — | | | — | | | — | | | — | |
Totals | $ | 1,310,146 | | | $ | 40,680 | | | $ | 7,978 | | | $ | 1,365 | | | $ | 1,417 | | | $ | 53,337 | |
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| | | | | | | | | | | |
Indenture and Convertible Senior Notes
On November 1, 2021, we issued $155.0 million aggregate principal amount at maturity of our 6.25% Convertible Senior Notes due 2027 (the “Convertible Senior Notes”) pursuant to an Indenture (the “Indenture”), dated November 1, 2021, between the Company and U.S. Bank National Association, as trustee (the “Trustee”), in a private offering (the “Note Offering”) to persons reasonably believed to be “qualified institutional buyers” and/or to “accredited investors” in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Securities Purchase Agreements. The issue price is 90% of the face amount of each note. Interest payments on the Notes are paid semiannually on April 1 and October 1 of each year, beginning on April 1, 2022. On April 1, 2022, a total of $4,036,458 of interest was paid on our outstanding Convertible Senior Notes.
A total of seventy-five percent (75%) of the net proceeds from the offering were placed into an escrow account to be released to the Company, upon the satisfaction of certain conditions, including the satisfaction or waiver of all of the conditions precedent to the Company’s obligation to consummate the Mobile Acquisition (collectively, the “Escrow Release Conditions”). The Mobile Acquisition was consummated on April 1, 2022, and the proceeds from the sale of the Convertible Senior Notes which were held in escrow were released on April 1, 2022.
Prior to July 1, 2027, the Convertible Senior Notes will be convertible at the option of the holders of the Convertible Senior Notes only upon the satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election, provided that until such time as the Company’s stockholders have approved the issuance of more than 19.99% of our common stock issuable upon conversion of the Convertible Senior Notes in accordance with the rules of The Nasdaq Capital Market.
Initially, a maximum of 36,214,960 shares of common stock may be issued upon conversion of the Convertible Senior Notes, based on the initial maximum conversion rate of 233.6449 shares of the Company’s common stock per $1,000 principal amount of Convertible Senior Notes, which is subject to customary and other adjustments described in the Indenture.
On January 20, 2022, our shareholders approved the issuance of shares of our common stock issuable upon conversion of the Convertible Senior Notes, in accordance with Nasdaq Listing Rules 5635 (a) and (d). Accordingly $79 million of derivative Convertible Senior Note liabilities were reclassified to additional paid in capital.
The components of the Convertible Senior Notes are presented as follows:
| | | | | | | | |
| | March 31, 2022 |
Principal Amounts | | $ | 155,000,000 | |
Unamortized discount and issuance costs | | (89,213,315) | |
Net Carrying Amount | | $ | 65,786,685 | |
Our Convertible Senior Notes will mature on October 1, 2027, unless earlier repurchased, redeemed or converted. Interest is payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The following table represents the future interest payment.
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Interest payable | | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Interest payable | | $ | 9,687,500 | | | $ | 9,714,041 | | | $ | 9,687,500 | | | $ | 9,687,500 | | | $ | 9,687,500 | | | $ | 4,857,021 | |
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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 months ended March 31, 2022 and 2021 excludes: 1) options to purchase 1,153,215 and 4,065,059 shares, respectively, of common stock, 2) warrants to purchase 0 and 1,983,510 shares, respectively, of common stock, 3) Series B Preferred Stock which is convertible into 0 and 2,035,666 shares, respectively, of common stock, 4) Series B1 Preferred Stock which is convertible into 0 and 5,497,450 shares, respectively, of common stock, and 5) Series A Preferred Stock which is convertible into 380,560 and 419,859 shares of common stock, and 6) 36,214,960 shares of common stock which may be issued upon conversion of the Senior Convertible Notes, based on the initial maximum conversion rate of 233.6449 shares of the Company’s common stock per $1,000 principal amount of the Senior Convertible Notes.
In accordance with Accounting Standards Codification (ASC) 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, our Series A Preferred Stock, Series C Preferred Stock, and Series B and B1 Preferred Stock are considered participating securities. Basic earnings per common share are calculated by dividing the net income, adjusted for preferred dividends and income allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the dilutions that would occur if any potential dilutive instruments were exercised or converted into common shares. The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock method or two-class method. Other potentially dilutive securities include preferred stock, stock options and warrants, and restricted stock. These are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods. During the periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
The following is a reconciliation of the numerator and denominator for basic and diluted earnings per share for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Basic loss per Share | | | | | | | | |
Numerator: | | | | | | | | |
Net loss available to shareholders from continuing operations | | $ | (14,961,744) | | | $ | (3,373,859) | | | | | |
Net income available to shareholders from discontinued operations, net of tax | | 9,992,889 | | | 4,008,891 | | | | | |
Net income (loss) available to common shareholders | | $ | (4,968,855) | | | $ | 635,032 | | | | | |
Denominator: | | | | | | | | |
Weighted-average common shares outstanding | | 63,372,005 | | | 47,709,450 | | | | | |
Continuing operations | | $ | (0.24) | | | $ | (0.07) | | | | | |
Discontinued operations, net of tax | | $ | 0.16 | | | $ | 0.08 | | | | | |
Basic earnings (loss) per share | | $ | (0.08) | | | $ | 0.01 | | | | | |
| | | | | | | | |
Diluted Earnings per Share | | | | | | | | |
Numerator: | | | | | | | | |
Net loss available to shareholders from continuing operations | | $ | (14,961,744) | | | $ | (3,373,859) | | | | | |
Net income available to shareholders from discontinued operations, net of tax | | 9,992,889 | | | 4,008,891 | | | | | |
Net income (loss) available to common shareholders | | $ | (4,968,855) | | | $ | 635,032 | | | | | |
Denominator: | | | | | | | | |
Weighted-average shares outstanding | | 63,372,005 | | | 47,709,450 | | | | | |
Effect of dilutive securities | | | | | | | | |
Stock options and warrants | | — | | | 876,886 | | | | | |
Preferred stock | | — | | | 419,859 | | | | | |
Diluted weighted-average shares outstanding | | 63,372,005 | | | 49,006,195 | | | | | |
Continuing operations | | $ | (0.24) | | | $ | (0.07) | | | | | |
Discontinued operations, net of tax | | $ | 0.16 | | | $ | 0.08 | | | | | |
Diluted earnings (loss) per share | | $ | (0.08) | | | $ | 0.01 | | | | | |
NOTE 8. COMMON STOCK
During the three months ended March 31, 2022, the Company issued 5,041 shares of common stock in connection with the conversion of Series A Convertible Preferred Stock, pursuant to the terms of such securities, and issued 1,112,728 shares of the Company's common stock in exchange for warrants to purchase 1,500,000 shares of the Company's common stock with an exercise price of $2.25 per share. In addition, the Company issued 60,000 shares of common stock in connection with the exercise of options.
During the three months ended March 31, 2021, the Company issued 6,164,666 shares of common stock in connection with the conversion and exercises of Series B & B1 Convertible Preferred Stock and warrants into common stock of the Company, pursuant to the terms of such securities. In addition, the Company issued 22,992 shares of common stock in connection with the exercise of options.
Warrant Exchange Agreement
On March 24, 2022, the Company entered into an Exchange Agreement with Tensile Capital Partners Master Fund LP (the “Holder” and "Tensile"). Pursuant to the Exchange Agreement, the Holder agreed to exchange outstanding warrants to purchase 1,500,000 shares of the Company’s common stock with an exercise price of $2.25 per share and an expiration date of July 25, 2029, for 1,112,728 shares of the Company’s common stock, effectively resulting in a net cashless exercise of the warrants (which were cancelled in connection with the transaction), with the value of such surrendered shares based on the five day trailing volume weighted average price of the Company’s common stock.
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 March 31, 2022 and December 31, 2021, there were 380,560 and 385,601 shares, respectively, of Series A Preferred Stock issued and outstanding. As of March 31, 2022 and December 31, 2021, there were 0 shares of Series B and B1 Preferred Stock 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 for the three months ended March 31, 2021:
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| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | March 31, 2021 |
Balance at beginning of period | | | $ | 12,718,339 | |
Less: conversions of shares to common | | | (1,978,494) | |
Less: exchanges of shares to common | | | (4,747,250) | |
| | | |
| | | |
Plus: dividends in kind | | | 317,970 | |
| | | |
Balance at end of period | | | $ | 6,310,565 | |
During the three months ended March 31, 2021 we paid dividends in-kind in additional shares of Series B Preferred Stock of $317,970. Because such preferred stock was not redeemed on June 24, 2020, the preferred stock accrued a 10% per annum dividend (payable in-kind at the option of the Company), until such preferred stock was redeemed or converted into common stock. Effective on June 25, 2021, the automatic conversion provisions of the Series B Preferred Stock were triggered, and the outstanding shares of the Company’s Series B Preferred Stock automatically converted into common stock of the Company.
Series B1 Preferred Stock and Temporary Equity
The following table represents the activity related to the Series B1 Preferred Stock, classified as Temporary Equity, for the three months ended March 31, 2021:
| | | | | | | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | March 31, 2021 |
Balance at beginning of period | | | $ | 11,036,173 | |
Less: conversions of shares to common | | | (3,256,024) | |
Plus: discount accretion | | | 223,727 | |
Plus: dividends in kind | | | 288,594 | |
Balance at end of period | | | $ | 8,292,470 | |
During the three months ended March 31, 2021 we paid dividends in-kind in additional shares of Series B1 Preferred Stock of 288,594. Because such preferred stock was not redeemed on June 24, 2020, the preferred stock accrued a 10% per annum dividend (payable in-kind at the option of the Company), until such preferred stock was redeemed or converted into common stock. Effective on June 24, 2021, the automatic conversion provisions of the Series B1 Preferred Stock were triggered, and the outstanding shares of the Company’s Series B1 Preferred Stock automatically converted into common stock of the Company.
The following is an analysis of changes in the derivative liability for the three months ended March 31, 2021:
| | | | | | | | | |
Level Three Roll-Forward | | | |
| | | March 31, 2021 |
| | | |
| | | |
| | | |
Balance at beginning of period | | | $ | 330,412 | |
Value of warrants exercised | | | (1,105,935) | |
Change in valuation of warrants | | | 1,780,203 | |
Balance at end of period | | | $ | 1,004,680 | |
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| | | |
The Series B Warrants expired pursuant to their terms on December 24, 2020. The Series B1 Warrants expired pursuant to their terms on November 13, 2021.
NOTE 10. SEGMENT REPORTING
The Company’s reportable segments include the (1) Black Oil, (2) Refining and Marketing, and (3) Recovery segments.
(1) The Black Oil segment consists primarily of the sale of (a) petroleum products which include base oil and industrial fuels—which consist of used motor oils, cutterstock and fuel oil generated by our facilities; (b) oil collection services—which consist of used oil sales, burner fuel sales, antifreeze sales and service charges; (c) the sale of other re-refinery products including asphalt, condensate, recovered products, and used motor oil; (d) transportation revenues; and (e) the sale of VGO (vacuum gas oil)/marine fuel.
(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 months ended March 31, 2022 and 2021 is as follows:
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THREE MONTHS ENDED MARCH 31, 2022 |
| | Black Oil | | Refining & Marketing | | Recovery | | Total |
Revenues: | | | | | | | | |
| | | | | | | | |
Pygas | | $ | — | | | $ | 4,690,268 | | | $ | — | | | $ | 4,690,268 | |
Industrial fuel | | — | | | 572,281 | | | — | | | 572,281 | |
Distillates (1) | | — | | | 29,456,369 | | | — | | | 29,456,369 | |
Oil collection services | | 213,536 | | | — | | | | | 213,536 | |
Metals (2) | | — | | | — | | | 3,414,286 | | | 3,414,286 | |
Other re-refinery products (3) | | — | | | — | | | 533,305 | | | 533,305 | |
VGO/Marine fuel sales | | 1,336,751 | | | — | | | — | | | 1,336,751 | |
Total revenues | | 1,550,287 | | | 34,718,918 | | | 3,947,591 | | | 40,216,796 | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 1,649,972 | | | 33,086,160 | | | 3,829,352 | | | 38,565,484 | |
Depreciation and amortization attributable to costs of revenues | | 16,411 | | | 23,370 | | | 74,272 | | | 114,053 | |
Gross profit (loss) | | (116,096) | | | 1,609,388 | | | 43,967 | | | 1,537,259 | |
Selling, general and administrative expenses | | 7,411,220 | | | 1,124,336 | | | 246,839 | | | 8,782,395 | |
Depreciation and amortization attributable to operating expenses | | 26,916 | | | — | | | — | | | 26,916 | |
Income (loss) from operations | | $ | (7,554,232) | | | $ | 485,052 | | | $ | (202,872) | | | $ | (7,272,052) | |
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THREE MONTHS ENDED MARCH 31, 2021 |
| | Black Oil | | Refining & Marketing | | Recovery | | Total |
Revenues: | | | | | | | | |
| | | | | | | | |
Pygas | | $ | — | | | $ | 2,972,431 | | | $ | — | | | $ | 2,972,431 | |
Industrial fuel | | — | | | 311,693 | | | — | | | 311,693 | |
Distillates (1) | | — | | | 15,989,828 | | | — | | | 15,989,828 | |
Oil collection services | | 122,986 | | | — | | | 3,423 | | | 126,409 | |
Metals (2) | | — | | | — | | | 5,644,882 | | | 5,644,882 | |
Other re-refinery products (3) | | — | | | — | | | — | | | — | |
VGO/Marine fuel sales | | — | | | — | | | — | | | — | |
Total revenues | | 122,986 | | | 19,273,952 | | | 5,648,305 | | | 25,045,243 | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 280,378 | | | 17,949,695 | | | 4,578,630 | | | 22,808,703 | |
Depreciation and amortization attributable to costs of revenues | | 20,382 | | | 31,876 | | | 60,239 | | | 112,497 | |
Gross profit (loss) | | (177,774) | | | 1,292,381 | | | 1,009,436 | | | 2,124,043 | |
Selling, general and administrative expenses | | 1,942,399 | | | 759,409 | | | 156,254 | | | 2,858,062 | |
Depreciation and amortization attributable to operating expenses | | 26,916 | | | — | | | — | | | 26,916 | |
Income (loss) from operations | | $ | (2,147,089) | | | $ | 532,972 | | | $ | 853,182 | | | $ | (760,935) | |
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(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 March 31, 2022 puts the Company in an accumulated loss position for the cumulative 12 quarters then ended. For tax reporting purposes, we have net operating losses (“NOLs”) of approximately $85.6 million as of March 31, 2022 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 $0.8 million from January 1, 2022 through March 31, 2022.
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 option and futures arrangements for oil. For option and 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 March 31, 2022 and December 31, 2021, are summarized in the following table. The notional amount is equal to the total net volumetric derivative position during the period indicated. The fair value of the crude oil futures agreements is based on the difference between the strike price and the New York Mercantile Exchange and Brent Complex futures price for the applicable trading months.
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As of March 31, 2022 |
Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | | Remaining Volume (Barrels) | Fair Value |
| | | | | | |
| | | | | | |
Options | Mar 2022 - May 2022 | $ | 4.83 | | | | 20,000 | | $ | 230,200 | |
Futures | Mar 2022 - Jun 2022 | $ | 28.27 | | | | 136,000 | | $ | 133,390 | |
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| | | | | | | | | | | | | | | | |
As of December 31, 2021 |
Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | | Remaining Volume (Barrels) | Fair Value |
| | | | | | |
Options | Dec. 2021-Mar. 2022 | $ | 3.18 | | | | 18,000 | | $ | 136,440 | |
Futures | Dec. 2021-Mar. 2022 | $ | 31.59 | | | | 20,000 | | $ | 71,000 | |
Futures | Dec. 2021-Mar. 2022 | $ | 32.48 | | | | 50,000 | | $ | (111,460) | |
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The carrying values of the Company’s derivatives positions and their locations on the consolidated balance sheets as of March 31, 2022 and December 31, 2021 are presented in the table below.
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Balance Sheet Classification | Contract Type | 2022 | 2021 |
| | | |
| Crude oil options | $ | 230,200 | | $ | 136,440 | |
| Crude oil futures | $ | 133,390 | | $ | (40,460) | |
Derivative commodity asset | | $ | 363,590 | | $ | 95,980 | |
For the three months ended March 31, 2022 and 2021, we recognized $257,516 of gain and $721,531 of loss, respectively, on commodity derivative contracts on the consolidated statements of operations as part of our cost of revenues.
NOTE 13. LEASES
Finance Leases
Finance lease right-of-use lease assets are included in assets held for sale, and finance lease liabilities are included in finance lease short-term liability on the unaudited consolidated balance sheets. The associated amortization expenses for the three months ended March 31, 2022 and 2021 were $0 and $1,086, respectively, and are included in depreciation and amortization on the unaudited consolidated statements of operations. The associated interest expense for the three months ended March 31, 2022 and 2021 were $6,134 and $9,303, respectively, and are included in interest expense on the unaudited consolidated statements of operations. Please see “Note 6. Financing Arrangements” for more details. Operating Leases
Operating leases are included in operating lease right-of-use lease assets, and operating current and long-term lease liabilities on the consolidated balance sheets. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Lease expense for equipment is included in cost of revenues and other rents are included in selling, general and administrative expense on the unaudited consolidated statements of operations and are reported net of lease income. Lease income is not material to the results of operations for the three months ended March 31, 2022 and 2021. Total operating lease costs for both the three months ended March 31, 2022 and 2021 were $240,000 and $207,000, respectively.
Cash Flows
Cash paid for amounts included in operating lease liabilities was $0.2 million and $0.2 million during the three months ended March 31, 2022 and 2021, and is included in operating cash flows. Cash paid for amounts included in finance lease was $39,101 and $67,382 during the three months ended March 31, 2022 and 2021, respectively, and is included in financing cash flows.
Maturities of our lease liabilities for all operating leases are as follows as of March 31, 2022:
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March 31, 2022 |
| Facilities | | Equipment | | Plant | | | | Total |
Year 1 | $ | 250,849 | | | $ | 7,500 | | | $ | 701,224 | | | | | $ | 959,573 | |
Year 2 | 142,660 | | | 7,500 | | | 701,224 | | | | | 851,384 | |
Year 3 | 60,534 | | | 7,500 | | | 701,224 | | | | | 769,258 | |
Year 4 | 16,000 | | | 625 | | | 701,224 | | | | | 717,849 | |
Year 5 | — | | | — | | | 701,224 | | | | | 701,224 | |
Thereafter | — | | | — | | | 3,506,120 | | | | | 3,506,120 | |
Total lease payments | $ | 470,043 | | | $ | 23,125 | | | $ | 7,012,240 | | | | | $ | 7,505,408 | |
Less: interest | (41,988) | | | (1,956) | | | (2,570,210) | | | | | (2,614,154) | |
Present value of operating lease liabilities | $ | 428,055 | | | $ | 21,169 | | | $ | 4,442,030 | | | | | $ | 4,891,254 | |
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of March 31, 2022:
| | | | | | | | |
Remaining lease term and discount rate: | | March 31, 2022 |
Weighted average remaining lease terms (years) | | |
Lease facilities | | 1.87 |
Lease equipment | | 3.08 |
Lease plant | | 10.00 |
| | |
Weighted average discount rate | | |
Lease facilities | | 8.00 | % |
Lease equipment | | 8.00 | % |
Lease plant | | 9.37 | % |
| | |
The plant lease has multiple 5-year extension options for a total of 20 years. The extension option has been included in the lease right-of-use asset and lease obligation.
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
MG SPV was owned 85.00% by Vertex Operating and 15.00% by Tensile-MG at March 31, 2022. At March 31, 2022, $0.10 million reported as cash and cash equivalents on the balance sheet is restricted to MG Refinery investments or operating expenses.
Myrtle Grove Redeemable Noncontrolling Interest
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 $38,219 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 $421,399 increased the carrying amount of redeemable noncontrolling interests to the redemption value as of March 31, 2022 of $7,195,260. 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 March 31, 2022 and 2021.
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| March 31, 2022 | March 31, 2021 | |
Beginning balance | $ | 6,812,080 | | $ | 5,472,841 | | |
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| | | |
Net loss attributable to redeemable non-controlling interest | (38,219) | | (65,901) | | |
| | | |
Accretion of non-controlling interest to redemption value | 421,399 | | 373,748 | | |
Ending balance | $ | 7,195,260 | | $ | 5,780,688 | | |
On April 1, 2022, the Company acquired a 15% interest in MG SPV from Tensile for $7.2 million.
Heartland Share Purchase and Subscription Agreement
The Heartland SPV is currently owned 35% by Vertex Operating and 65% by Tensile-Heartland Acquisition Corporation ("Tensile-Heartland"), an affiliate of Tensile. 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.
Heartland Variable interest entity
The Company has assessed the Heartland SPV under the variable interest guidance in ASC 810, and concluded that Heartland SPV is a variable interest entity. 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 redeemable noncontrolling interests in the consolidated balance sheets.
The following table summarizes the carrying amounts of Heartland SPV’s assets and liabilities included in assets held for sale and liabilities held for sale in the Company’s consolidated balance sheets at March 31, 2022 and December 31, 2021:
| | | | | | | | |
| March 31, 2022 | December 31, 2021 |
Cash and cash equivalents | $ | 17,089,714 | | $ | 13,322,507 | |
Accounts receivable, net | 10,103,011 | | 7,078,559 | |
| | |
Inventory | 1,369,203 | | 1,654,706 | |
Prepaid expense and other current assets | 7,729,233 | | 8,078,890 | |
Total current assets | 36,291,161 | | 30,134,662 | |
| | |
Fixed assets, net | 7,068,164 | | 7,404,375 | |
Finance lease right-of-use assets | 391,483 | | 436,039 | |
Operating lease right-of-use assets | 110,028 | | 166,362 | |
Intangible assets, net | 750,985 | | 813,713 | |
Other assets | 106,643 | | 106,643 | |
Total assets | $ | 44,718,464 | | $ | 39,061,794 | |
| | |
Accounts payable | $ | 2,393,475 | | $ | 2,051,721 | |
Accrued expenses | 1,232,177 | | 1,658,427 | |
Finance lease liability-current | 236,890 | | 295,935 | |
Operating lease liability-current | 110,028 | | 166,362 | |
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Total liabilities | $ | 3,972,570 | | $ | 4,172,445 | |
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
In accordance with ASC 480-10-S99-3A, the Company applied a two-step approach to measure noncontrolling interests associated with Heartland SPV at the balance sheet date. First, the Company applied the measurement guidance in ASC 810-10 by attributing a portion of the subsidiary’s net income of $3,806,753 to the noncontrolling interest. Second, the Company applied the subsequent measurement guidance in ASC 480-10-S99-3A, which indicates that the noncontrolling interest’s carrying amount is the higher of (1) the cumulative amount that would result from applying the measurement guidance in ASC 810-10 in the first step or (2) the redemption value. At March 31, 2022, the cumulative amount resulting from the application of the measurement guidance in ASC 810-10 exceeded the redemption value of $34,365,273.
The table below presents the reconciliation of changes in redeemable noncontrolling interest relating to Heartland SPV as of March 31, 2022 and 2021.
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| March 31, 2022 | March 31, 2021 |
Beginning balance | $ | 36,634,604 | | $ | 26,138,833 | |
| | |
| | |
Net income attributable to redeemable non-controlling interest | 3,806,753 | | 1,608,303 | |
Accretion of non-controlling interest to redemption value | — | | — | |
Ending balance | $ | 40,441,357 | | $ | 27,747,136 | |
The amount of accretion of redeemable noncontrolling interest to redemption value of $421,399 and $373,748 are presented as an adjustment to net income (loss) attributable to Vertex Energy, Inc., to arrive at net income (loss) available to common shareholders on the consolidated statements of operations which represent the MG SPV and Heartland SPV accretion of redeemable noncontrolling interest to redemption value combined for the three months ended March 31, 2022 and 2021, respectively.
Heartland and Myrtle Grove Purchase Agreements
On February 25, 2022, Vertex Splitter entered into (1) a Purchase and Sale Agreement with Tensile-Vertex Holdings LLC (“Tensile-Vertex”), an affiliate of Tensile and Tensile-Heartland (the “Heartland Purchase Agreement”); and (2) a Purchase and Sale Agreement with Tensile-Vertex and Tensile-MG (the “Myrtle Grove Purchase Agreement”, and together with the Heartland Purchase Agreement, the “Purchase Agreements”).
As discussed above, Tensile-Heartland holds 65% of Heartland SPV and Tensile-MG owned 15% of MG SPV, and Tensile-Vertex holds 100% of both Tensile-Heartland and Tensile-MG.
Pursuant to the Heartland Purchase Agreement, the Company, through Vertex Splitter, agreed to acquire 100% of the outstanding securities of Tensile-Heartland and pursuant to the Myrtle Grove Purchase Agreement, the Company, through Vertex Splitter, agreed to acquire 100% of the outstanding securities of Tensile-MG, from Vertex-Tensile, the result of which will be that Vertex Splitter will own 100% of each of Heartland SPV and MG SPV.
Pursuant to the Heartland Purchase Agreement, the purchase price payable by Vertex Splitter to Vertex-Tensile, for 100% of Tensile-Heartland is $35 million (the “Base Amount”), plus an amount accrued and accruing from and after May 31, 2021, on the Base Amount on a daily basis at the rate of 22.5% per annum compounded on the last day of each calendar quarter plus an amount equal to any and all cash and cash equivalents of Tensile-Heartland, as of the closing date, which we currently anticipate will total an aggregate of approximately $44 million. The purchase contemplated by the Heartland Purchase Agreement is required to take place on June 30, 2022, or earlier as mutually agreed by the parties, subject to customary conditions to closing. The Heartland Purchase Agreement includes customary representations of the parties, requires Vertex Splitter to maintain officer and director insurance for Tensile-Heartland for at least six years following the closing; requires that they bear their own fees and expenses, except that each party is required to pay the fees and expenses of the other party upon termination of the agreement in certain situations; includes customary indemnification obligations; and includes mutual releases of the parties, effective upon closing.
The Heartland Purchase Agreement may be terminated prior to closing, by the mutual consent of the parties; by Vertex Splitter if Vertex-Tensile has failed to consummate the agreement, or breached a covenant, representation or warranty set forth in the agreement, that prevents such closing, and such breach is not cured, if capable of being cured, within 30 days after notice thereof; by Vertex-Tensile if Vertex Splitter has failed to consummate the agreement, or breached a covenant, representation or warranty set forth in the agreement, that prevents such closing, and such breach is not cured, if capable of being cured, within 30 days after notice thereof; or by either party if there is a final, non-appealable judgment preventing the closing.
Pursuant to the Myrtle Grove Purchase Agreement, the purchase price payable by Vertex Splitter to Vertex-Tensile, for 100% of Tensile-MG was approximately $7.2 million. The Myrtle Grove Purchase closed on April 1, 2022 and the parties waived the requirement that the closing occur prior to March 31, 2022.
Tensile-Vertex, Vertex Splitter and the Company (collectively, Vertex Splitter and the Company, the “Vertex Parties”) also entered into a Side Letter Re Purchase and Sale Agreements (the “Side Letter”), pursuant to which the parties agreed that in the event that (i) the closing of the transactions contemplated by the Myrtle Grove Purchase Agreement does not occur on or prior to March 31, 2022 (provided that the parties waived such requirement in connection with the April 1, 2022 closing of the
Myrtle Grove Purchase Agreement), and/or (ii) the closing of the transactions contemplated by the Heartland Purchase Agreement does not occur on or prior to June 30, 2022, then, in addition to any of the rights of Tensile-Vertex under the Purchase Agreements: (a) the Vertex Parties will use their best efforts to cause the closings under the Purchase Agreements to occur, including without limitation by raising debt financing, selling equity in a private or public transaction, selling assets and/or otherwise doing all things necessary or appropriate to raise the funds necessary to make the payments required to be made by Vertex Splitter under the Purchase Agreements, in each case on commercially reasonable terms and conditions, subject to certain exceptions; (b) upon the written election of Tensile-Vertex, the Vertex Parties will and will cause their affiliates to consent to the distribution or other payment of any and all cash and cash equivalents of Heartland SPV (including any proceeds from the repayment of that certain $7,000,000 promissory note, issued by Vertex Operating to Heartland SPV on July 1, 2021, as amended to date (the “Heartland Note”)) and any direct and indirect subsidiaries to Tensile-Vertex, with such distribution or other payment to be structured as specified by Tensile-Vertex so as to be tax efficient for Tensile-Vertex; and (c) Tensile-Vertex may, with written notice, cause Heartland SPV to initiate a process intended to result in a sale of Heartland SPV, with Tensile-Vertex being entitled, upon the consummation of such sale, of the greater of (i) 65% of the total net equity proceeds of such sale, and (ii) the amount due to Tensile-Vertex under the Heartland Purchase Agreement as of the date of the consummation of such sale.
Tensile Transactions
On July 1, 2021, Heartland SPV loaned Vertex Operating $7,000,000, which was evidenced by a Promissory Note (the “Heartland Note”). The Heartland Note accrues interest at the applicable federal rate of interest from time to time, increasing to 12% upon an event of default. Amounts borrowed under the Heartland Note were originally due ninety days after the date of the note, or within five (5) days of the closing of the Sale Agreement relating to our UMO Business (whichever was earlier), and may be prepaid at any time without penalty. In the event the Heartland Note is not paid on or before the applicable due date, we agreed to use our best efforts to raise the funds necessary to repay the note as soon as possible.
Also on February 25, 2022, Vertex Operating, the Company and Heartland SPV, entered into a Second Amendment to Promissory Note (the “Second Note Amendment”), which amended the Heartland Note to extend the due date of the Heartland Note until the earlier of (i) June 30, 2022; and (ii) five calendar days following the closing of a sale of substantially all the assets of Vertex OH, and/or the sale of membership interests in Vertex OH possessing voting control (with the consent of the Company), provided that the Heartland Note may be prepaid in whole or in part at any time without premium or penalty and without the consent of Heartland SPV. The Heartland Note accrues interest at the applicable federal rate of interest from time to time, increasing to 12% upon an event of default.
NOTE 15. DISCONTINUED OPERATIONS
During the third quarter of 2021, the Company initiated and began executing a strategic plan to sell its UMO Business. An investment banking advisory services firm was engaged and actively marketed this segment. On September 28, 2021, the shareholders approved the proposed sale of its portfolio of used motor oil collection and recycling assets to Safety-Kleen.
The Company met all of the criteria to classify the UMO Business’s assets and liabilities as held for sale in the third quarter 2021. The Company has classified the assets, liabilities, and results of operations for this business as “Discontinued Operations” for all periods presented.
Disposal of the UMO Business represented a strategic shift that will have a major effect on the Company’s operations and financial results.
On June 29, 2021, the Company announced that it had entered into a definitive agreement to sell its portfolio of used motor oil collection and recycling assets (the UMO business) to Safety-Kleen, a subsidiary of Clean Harbors, Inc. (“Clean Harbors”) for total cash consideration of $140 million, subject to working capital and other adjustments, and subject to certain closing conditions, including regulatory approvals and a shareholder vote. After retiring term debt, together with the payment of transaction-related fees and financial obligations, total net cash proceeds from the transaction to Vertex were expected to be approximately $90 million.
The Board of Directors considered a number of factors before deciding to enter into the Sale Agreement, including, among other factors, the price to be paid by Safety-Kleen for the UMO Business, the scope of the sale process with respect to the UMO Business that led to entering into the Sale Agreement, the future business prospects of the UMO Business, including the costs to remain competitive and grow, the opinion of H.C. Wainwright & Co., LLC that the terms were fair, from a financial point of
view, the then planned acquisition of the Mobile Refinery, and the planned change in business focus associated therewith, and the terms and conditions of the Sale Agreement.
The Company met all of the criteria to classify the UMO Business’s assets and liabilities as held for sale in the third quarter 2021. The Company has classified the assets, liabilities, and results of operations for this business as “Discontinued Operations” for all periods presented.
On January 25, 2022, the Company entered into a mutual agreement with Safety-Kleen to terminate the Sale Agreement. In connection with the termination agreement, the Company paid Safety-Kleen a break-up fee of $3 million.
Vertex is continuing to explore opportunities for the sale of the UMO business.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the three months ended March 31, 2022, and 2021.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Revenues | $ | 53,030,228 | | | $ | 33,148,051 | | | | | |
Cost of revenues (exclusive of depreciation shown separately below) | 32,391,095 | | | 20,646,872 | | | | | |
Depreciation and amortization attributable to costs of revenues | 1,304,034 | | | 1,235,323 | | | | | |
Gross profit | 19,335,099 | | | 11,265,856 | | | | | |
Operating expenses: | | | | | | | |
Selling, general and administrative expenses (exclusive of acquisition related expenses) | 5,084,332 | | | 5,068,518 | | | | | |
Depreciation and amortization expense attributable to operating expenses | 445,263 | | | 455,953 | | | | | |
Total operating expenses | 5,529,595 | | | 5,524,471 | | | | | |
Income from operations | 13,805,504 | | | 5,741,385 | | | | | |
Other income (expense) | | | | | | | |
| | | | | | | |
| | | | | | | |
Interest expense | (5,862) | | | (124,191) | | | | | |
Total other expense | (5,862) | | | (124,191) | | | | | |
Income before income tax | 13,799,642 | | | 5,617,194 | | | | | |
Income tax benefit (expense) | — | | | — | | | | | |
Income from discontinued operations, net of tax | $ | 13,799,642 | | | $ | 5,617,194 | | | | | |
The assets and liabilities held for sale on the Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | |
ASSETS | | | | |
Accounts receivable, net | $ | 15,968,359 | | | $ | 9,583,488 | | |
Inventory | 7,434,056 | | | 5,547,704 | | |
Prepaid expenses | 582,027 | | | 449,522 | | |
Total current assets | 23,984,442 | | | 15,580,714 | | |
| | | | |
Fixed assets, at cost | 64,051,165 | | | 63,836,354 | | |
Less accumulated depreciation | (33,177,074) | | | (32,044,584) | | |
Fixed assets, net | 30,874,091 | | | 31,791,770 | | |
Finance lease right-of-use assets | 740,839 | | | 812,974 | | |
Operating lease right-of use assets | 27,650,255 | | | 28,260,318 | | |
Intangible assets, net | 6,661,820 | | | 7,107,083 | | |
Other assets | 563,293 | | | 563,293 | | |
Assets held for sale | $ | 90,474,740 | | | $ | 84,116,152 | | |
| | | | |
LIABILITIES AND EQUITY | | | | |
Current liabilities | | | | |
Accounts payable | $ | 11,797,738 | | | $ | 7,764,209 | | |
Accrued expenses | 2,011,877 | | | 1,323,850 | | |
| | | | |
Finance lease liability-current | 236,890 | | | 295,935 | | |
Operating lease liability-current | 27,650,255 | | | 28,260,318 | | |
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Liabilities held for sale, current | $ | 41,696,760 | | | $ | 37,644,312 | | |
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NOTE 16. SUBSEQUENT EVENTS
Loan and Security Agreement
On April 1, 2022 (the “Closing Date”), Vertex Refining; the Company, as a guarantor; substantially all of the Company’s direct and indirect subsidiaries, as guarantors (together with the Company, the “Guarantors”); certain funds and accounts under management by BlackRock Financial Management, Inc. or its affiliates, as lenders (“BlackRock”), certain funds managed or advised by Whitebox Advisors, LLC, as lenders (“Whitebox”), certain funds managed by Highbridge Capital Management, LLC, as lenders (“Highbridge”), Chambers Energy Capital IV, LP, as a lender (“Chambers”), CrowdOut Capital LLC, as a lender (“CrowdOut Capital”), CrowdOut Credit Opportunities Fund LLC, as a lender (collectively with BlackRock, Whitebox, Highbridge, Chambers and CrowdOut Capital, the “Lenders”); and Cantor Fitzgerald Securities, in its capacity as administrative agent and collateral agent for the Lenders (the “Agent”), entered into a Loan and Security Agreement (the “Loan and Security Agreement”).
Pursuant to the Loan and Security Agreement, the Lenders agreed to provide a $125 million term loan to Vertex Refining (the “Term Loan”), the proceeds of which, less agreed upon fees and discounts, were held in escrow prior to the Closing Date, pursuant to an Escrow Agreement, discussed in "Note 3. Concentrations, Significant Customers, Commitments and Contingencies". On the Closing Date, net proceeds from the term loans, less the agreed upon fees and discounts, as well as certain transaction expenses, were released from escrow to Vertex Refining in an aggregate amount of $94,309,958.
The amounts borrowed under the Loan and Security Agreement will bear interest at a rate per annum equal to the sum of (i) the greater of (x) the per annum rate publicly quoted from time to time by The Wall Street Journal as the “Prime Rate” in the United States minus 1.50% as in effect on such day and (y) the Federal Funds rate for such day plus 0.50%, subject in the case of this clause (i), to a floor of 1.0% plus (ii) 9.25%. The funds borrowed in connection with the Term Loan were issued with an original issue discount of 1.5%. The Company also paid certain fees and transaction expenses in connection with the release of the funds in connection with the Term Loan. Amounts owed under the Loan and Security Agreement, if not earlier repaid, are due on April 1, 2025 (or the next business day thereafter). Interest on the Term Loan is payable in cash (i) quarterly, in arrears, on the last business day of each calendar quarter, commencing on the last business day of the calendar quarter ending June 30, 2022, (ii) in connection with any payment, prepayment or repayment of the Term Loan (including as discussed in greater detail
below), and (iii) at maturity (whether upon demand, by acceleration or otherwise). Pursuant to the Loan and Security Agreement, on the last day of March, June, September and December of each year (or if such day is not a business day, the next succeeding business day), beginning on March 31, 2023 and ending on December 31, 2024, Vertex Refining is required to repay $1,562,500 of the principal amount owed under the Loan and Security Agreement (i.e., 1.25% of the original principal amount per quarter), subject to reductions in the event of any prepayment of the Loan and Security Agreement.
In the event of any payment, repayment or prepayment (other than with respect to a sale of the Company’s used motor oil assets or a change of control which are discussed below, and other than in connection with prepayments required to be made with funds received from insurance settlements and recoveries which are not subject to a prepayment premium), including in the event of acceleration of the Term Loan, certain asset sales (other than the used motor oil assets), certain equity issuances, and voluntary prepayments (a) during the first 18 months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 150% of the applicable interest rate, multiplied by the amount of such prepayment amount; (b) during the 19th through 24th months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 50% of the applicable interest rate, multiplied by the amount of such prepayment amount; and (c) at any time during the 25th month after the Closing Date, but prior to the date that is 90 days before the maturity date of amounts owed pursuant to the Loan and Security Agreement, Vertex Refining agreed to pay an additional amount to the Lenders equal to 25% of the applicable interest rate, multiplied by the amount of such prepayment amount. Upon the sale of the Company’s used motor oil assets (as discussed below), or the required repayment upon a change of control (also discussed below), Vertex Refining agreed to pay an additional amount to the Lenders equal to 1% of the aggregate principal amount of the amount prepaid (as applicable, the “Prepayment Premium”). The Prepayment Premium is also due upon a change of control, which includes the direct or indirect transfer of all or substantially all of the assets of the Loan Parties (defined below); the adoption of a plan of liquidation or dissolution relating to the Company; the acquisition in one or a series of transactions of 33% or more of the equity interests of the Company by a person or entity; the Company’s failure to own 100% of Vertex Refining and the other Loan Parties, unless permitted by the Lenders; during any period of twelve consecutive months commencing on or after the Closing Date, the occurrence of a change in the composition of the Board of Directors of the Company such that a majority of the members of such Board of Directors are no longer directors; or a “change of control” or any comparable term under, and as defined in, any other indebtedness exceeding $2 million of the Loan Parties, shall have occurred (each a “Change of Control”).
The Company used a portion of the proceeds from the Term Loan borrowing to pay a portion of the purchase price associated with the acquisition of the Mobile Refinery acquired by Vertex Refining on April 1, 2022, as discussed in greater detail below, and to pay certain fees and expenses associated with the closing of the Loan and Security Agreement and is required to use the remainder of the funds for (i) the planned renewable diesel conversion of the Mobile Refinery, and (ii) working capital and liquidity needs.
The amounts borrowed pursuant to the terms of the Loan and Security Agreement are secured by substantially all of the present and after-acquired assets of the Company and its subsidiaries. Additionally, Vertex Refining’s obligations under the Loan and Security Agreement are jointly and severally guaranteed by substantially all of the Company’s subsidiaries and the Company (collectively, Vertex Refining, the Company and the Company’s subsidiaries which have guaranteed Vertex Refining’s obligations under the Loan and Security Agreement, the “Loan Parties”).
The Loan and Security Agreement includes customary representations and warranties, and affirmative and negative covenants of the Loan Parties for a facility of this size and type, including prohibiting the Loan Parties from creating any indebtedness without the consent of the Lenders, subject to certain exceptions, and requiring the Loan Parties to have no less than $17.5 million of unrestricted cash for more than three consecutive business days.
The Loan and Security Agreement includes customary events of default for transactions of this type, including failures to pay amounts due, bankruptcy proceedings, covenant defaults, attachment or seizure of a material portion of the collateral securing the Loan and Security Agreement, cross defaults, if there is a default in any agreement governing indebtedness in excess of $3,000,000, resulting in the right to accelerate such indebtedness, certain judgments against a Loan Party, misrepresentations by the Loan Parties in the transaction documents, insolvency, cross default of the Offtake and Supply Agreement (defined and described below), a Change of Control, termination of certain intercreditor agreements, and the loss or termination of certain material contacts. Upon the occurrence of an event of default the Agent may declare the entire amount of obligations owed under the Loan and Security Agreement immediately due and payable and take certain other actions provided for under the Loan and Security Agreement, including enforcing security interests and guarantees.
The Loan and Security Agreement includes customary indemnification obligations for a facility of this size and type, requiring us to indemnify the Agent and the Lenders for certain expenses, losses and claims.
In connection with the Loan and Security Agreement, and as additional consideration for the Lenders agreeing to loan funds to the Company thereunder, the Company granted warrants to purchase 2,750,000 shares of common stock of the Company to the Lenders (and/or their affiliates) on the Closing Date, as discussed in greater detail below.
The amounts owed under the Loan and Security Agreement are also secured by various deeds of trusts and mortgages for the real property(s) described therein, over the Mobile Refinery and substantially all other material owned and leased real property of the Guarantors including properties in Texas and Louisiana.
Intellectual Property Security Agreement
In connection with the entry into the Loan and Security Agreement, Vertex Operating entered into an Intellectual Property Security Agreement in favor of the Agent, pursuant to which it granted a security interest in substantially all of its intellectual property (including patents and trademarks) in favor of the Lenders to secure the obligations of the Loan Parties under the Loan and Security Agreement.
Collateral Pledge Agreement
In connection with the entry into the Loan and Security Agreement, the Company, Vertex Refining and each of the Guarantors, entered into a Collateral Pledge Agreement in favor of the Agent, pursuant to which they granted the Agent a security interest in all now owned or hereafter acquired promissory notes and instruments evidencing indebtedness to any Guarantor and all now owned or hereafter acquired equity interests owned by such Guarantor.
Intercreditor Agreement
In connection with the entry into the Loan and Security Agreement and the Supply and Offtake Agreement (as defined below), Agent, Macquarie (as defined below), Vertex Refining and each of the Guarantors (collectively, the “Grantors”) entered into an intercreditor agreement (the “Intercreditor Agreement”) pursuant to which the Agent and Macquarie acknowledged each other’s liens on the assets of Vertex Refining. The intercreditor arrangements may limit our ability to amend the Loan and Security Agreement and the Supply and Offtake Agreement and related agreements, provides for certain restrictions on the exercise of remedies (through “standstill” and access periods) and governs certain creditor rights in bankruptcy proceedings relating to Grantors.
Completion of Mobile Refinery Acquisition
On April 1, 2022, Vertex Operating assigned its rights to the Refinery Purchase Agreement to Vertex Refining and on the same date, Vertex Refining completed the Mobile Acquisition. On the Effective Date, a total of $75.0 million (less $10 million previously paid) was paid by Vertex Refining in consideration for the acquisition of the Mobile Refinery, which amount is subject to customary purchase price adjustments and reimbursement for certain capital expenditures in the amount of approximately $440,000, $15.9 million was paid to Shell for previously agreed upon capital expenditures and miscellaneous prepaid and reimbursable items, and $164.2 million was paid to Shell by Vertex Refining in connection with the purchase of certain crude oil inventory and finished products owned by Shell and located at the Mobile Refinery on the Closing Date (approximately $154 million of which was funded by Macquarie as a result of the simultaneous sale of such inventory to Macquarie pursuant to an Inventory Sales Agreement between Vertex Refining and Macquarie). The Company also paid $8.7 million at closing pursuant to the terms of a Swapkit Purchase Agreement entered into with Shell on May 26, 2021 (the “Swapkit Agreement”), pursuant to which the Company agreed to fund a technology solution comprising the ecosystem required for the Company to run the Mobile Refinery after closing (the “Swapkit”). The purchase price allocation is pending and subject to change based upon the finalization of a third party valuation report.
Following the closing of the Mobile Acquisition, the Company (through one or more of its subsidiaries and affiliates) plans to complete an $85 million capital project designed to modify the Mobile Refinery’s hydrocracking unit to produce renewable diesel fuel on a standalone basis.
Funds for the purchase of the Mobile Refinery, Swapkit Agreement, provision of cash collateral required pursuant to terms of the Supply and Offtake Agreement (discussed below), capital expenditures and transaction expenses, came from funds previously held in escrow in connection with our November 2021 sale of $155 million principal at maturity of Convertible Senior Notes ($100.4 million), the Term Loan and cash on hand. Following the transactions described above, including the Term Loan, and our acquisition of Tensile-MG (as defined and discussed below), our unrestricted cash increased by approximately $75 million, which funds are anticipated to be used for (i) the planned renewable diesel conversion of the Mobile Refinery, and (ii) working capital and liquidity needs.
Completion of Myrtle Grove Purchase Agreement
On April 1, 2022, the Company, through Vertex Splitter acquired the 15% noncontrolling interest of MG SPV held by Tensile-MG from Vertex-Tensile for $7.2 million, which was based on the value of the Class B Unit preference of MG SPV held by Tensile-MG, plus capital invested by Tensile-MG in MG SPV (which had not been returned as of the date of payment), plus cash and cash equivalents held by Tensile-MG as of the closing date. As a result, the Company acquired 100% of MG SPV, which in turn owns the Company’s Belle Chasse, Louisiana, re-refining complex.
Inventory and Finished Products Purchase and Sale
As a required condition to the closing of the Mobile Acquisition, on the Closing Date, Vertex Refining paid approximately $164.2 million for the acquisition from Shell, of all Mobile Refinery Inventory (defined below). Also on April 1, 2022, pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all the Mobile Refinery Inventory from Vertex Refining for $154 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement, discussed in detail below.
Supply and Offtake Agreement
On April 1, 2022 (the “Commencement Date”), Vertex Refining entered into a Supply and Offtake Agreement (the “Supply and Offtake Agreement”) with Macquarie Energy North America Trading Inc., a Delaware corporation (“Macquarie”), pertaining to crude oil supply and offtake of finished products located at the Mobile Refinery acquired on April 1, 2022. On the Commencement Date, pursuant to an Inventory Sales Agreement and in connection with the Supply and Offtake Agreement, Macquarie purchased from Vertex Refining all crude oil and finished products within the categories covered by the Supply and Offtake Agreement and the Inventory Sales Agreement, which were held at the Mobile Refinery and a certain specified third party storage terminal, which were previously purchased by Vertex Refining as part of the acquisition of the Mobile Refinery as discussed in greater detail above.
Pursuant to the Supply and Offtake Agreement, beginning on the Commencement Date and subject to certain exceptions, substantially all of the crude oil located at the Mobile Refinery and at a specified third party storage terminal from time to time will be owned by Macquarie prior to its sale to Vertex Refining for consumption within the Mobile Refinery processing units. Also pursuant to the Supply and Offtake Agreement, and subject to the terms and conditions and certain exceptions set forth therein, Macquarie will purchase from Vertex Refining substantially all of the Mobile Refinery’s output of certain refined products and will own such refined products while they are located within certain specified locations at the Mobile Refinery. Macquarie will have title to and risk of loss of crude oil and refined products purchased from Vertex Refining while within certain specified locations at the Mobile Refinery and a specified third party storage terminal.
Pursuant to the Supply and Offtake Agreement and subject to the terms and conditions therein, Macquarie may during the term of the Supply and Offtake Agreement procure crude oil and refined products from certain third parties which may be sold to Vertex Refining or third parties pursuant to the Supply and Offtake Agreement and may sell Refined Products to Vertex Refining or third parties (including customers of Vertex Refining).
The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are guaranteed by the Company. The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are also secured by a Pledge and Security Agreement in favor of Macquarie, discussed below, executed by Vertex Refining. In addition, the Supply and Offtake Agreement also requires that Vertex Refining post and maintain cash collateral (in the form of an independent amount) as security for Vertex Refining’s obligations under the Supply and Offtake Agreement and the related transaction documents. The amount of cash collateral is subject to adjustments during the term.
Pursuant to the Supply and Offtake Agreement, Vertex Refining and Macquarie agreed to cooperate to develop and document, by no later than 180 days after the Commencement Date, procedures relating to the unwinding and termination of the agreement and related agreements, in the event of the expiration or early termination of the Supply and Offtake Agreement. The parties also agreed to use commercially reasonable efforts to negotiate mutually agreeable terms for Macquarie’s intermediating of renewable feedstocks and renewable diesel that will be utilized and/or produced by Vertex Refining in connection with and following a planned renewable diesel conversion project at the Mobile Refinery (including providing Macquarie a right of first refusal in connection therewith), for 90 days after the Commencement Date (the “RD Period”). If, by the end of the RD Period, Macquarie and Vertex Refining, each acting in good faith and in a commercially reasonable manner, have not been able to
reach commercial agreement regarding the entry into a renewable diesel intermediation, Vertex Refining may elect to terminate the Supply and Offtake Agreement by providing notice of any such election to Macquarie; provided that no such election may be effective earlier than the date falling 90 calendar days following the date on which such notice is delivered. The agreement is also subject to termination upon the occurrence of certain events, including the termination of certain agreements relating to the delivery of crude oil to and the offtake of products from the Mobile Refinery. Upon an early termination of the Supply and Offtake Agreement, Vertex Refining is required to pay amounts relating to such termination to Macquarie including, among other things, outstanding unpaid amounts, amounts owing with respect to terminating transactions under the Supply and Offtake Agreement and related transaction documents, unpaid ancillary costs, and breakage costs, losses and out-of-pocket costs with respect to the termination, liquidation, maintenance or reestablishment, or redeployment of certain hedges put in place by Macquarie in connection with the transactions contemplated by the agreement, and Vertex Refining is required to pay other termination fees and amounts to Macquarie in the event of any termination of the agreement. Additionally, upon the termination of the Supply and Offtake Agreement, the outstanding obligations of Vertex Refining and Macquarie to each other will be calculated and reduced to an estimated net settlement payment which will be subject to true-up when the final settlement payment has been calculated following termination.
The Supply and Offtake Agreement requires Vertex Refining to prepare and deliver certain forecasts, projections and estimates and comply with financial statement delivery obligations and other disclosure obligations. The agreement also requires Vertex Refining to provide Macquarie notice of certain estimated monthly crude oil delivery, crude oil consumption, product production, target inventory levels and product offtake terms, which Macquarie has the right to reject, subject to certain disclosure requirements.
The Supply and Offtake Agreement has a 24 month term following the Commencement Date, subject to the performance of customary covenants, and certain events of default and termination events provided therein (certain of which are discussed in greater detail below), for a facility of this size and type. Additionally, either party may terminate the agreement at any time, for any reason, with no less than 180 days prior notice to the other.
The Supply and Offtake Agreement includes certain customary representations, warranties, indemnification obligations and limitations of liability of the parties for a facility of this size and type, and also requires Vertex Refining to be responsible for certain ancillary costs relating to the Supply and Offtake Agreement and the transactions contemplated thereby. The Supply and Offtake Agreement requires Vertex Refining to comply with various indemnity, insurance and tax obligations, and also includes a prohibition on any amendments to Vertex Refining’s financing agreements which, among other things, adversely affect Macquarie’s rights and remedies under the Supply and Offtake Agreement and related transaction documents without the prior consent of Macquarie; a prohibition on Vertex Refining entering into any financing agreement which would cause Vertex Refining’s specified indebtedness to exceed $10 million without Macquarie’s prior consent, subject to certain exceptions; and a requirement that Vertex Refining not have less than $17.5 million in unrestricted cash for any period of more than three consecutive business days. The Supply and Offtake Agreement includes events of default and termination events, including if the Company ceases to beneficially own, directly or indirectly, 100% of the capital stock of Vertex Refining; the change in ownership of the Company or Vertex Refining resulting in one person or group acquiring 50% or more of the capital stock of the Company or Vertex Refining (as applicable); or a change in a majority of the Board of Directors of the Company or Vertex Refining during any 12 consecutive months, without certain approvals, including the approval of the Board of Directors of the Company or Vertex Refining (as applicable) immediately prior to such change; and a cross default to indebtedness (other than indebtedness under financing agreements) of the Company or Vertex Refining for over $20 million, a cross default to indebtedness under financing agreements of Vertex Refining or the Company, or a final judgment or order being rendered against Vertex Refining or the Company in an amount exceeding $20 million.
The price for crude oil purchased by the Company from Macquarie and for products sold by the Company to Macquarie within each agreed product group, in each case, is equal to a pre-determined benchmark, plus a pre-agreed upon differential, subject to adjustments and monthly true-ups.
Vertex Refining will be required to pay Macquarie various monthly fees in connection with the Supply and Offtake Agreement and related arrangements, including, without limitation, (1) an inventory management fee, calculated based on the value of the inventory owned by Macquarie in connection with the Supply and Offtake Agreement, (2) a lien inventory fee based upon the value of certain inventory on which Macquarie has a lien, (3) a per barrel crude handling fee based upon the volume of crude oil Macquarie sells to Vertex Refining, (4) per barrel crude oil and products intermediation fees for each barrel of crude oil which Macquarie buys from a third party and each barrel of products Macquarie sells to a third party, in each case, in connection with the Supply and Offtake Agreement, and (5) a services fee in respect of which Macquarie agrees to make Crude Oil and Products available to the Company in accordance with the weekly nomination procedure as set forth in the Supply and Offtake Agreement. Vertex Refining will also be responsible for certain payments relating to Macquarie’s hedging of the inventory it owns in connection with the Supply and Offtake Agreement, including the costs of rolling hedges forward each month, as well
as any costs (or gains) resulting from a mismatch between the Company’s projected target inventory levels (which provide the basis for Macquarie’s hedge position) and actual month end inventory levels.
In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into various ancillary agreements which relate to supply, storage, marketing and sales of crude oil and refined products including, but not limited to the following: Inventory Sales Agreement, Master Crude Oil and Products Agreement, Storage and Services Agreement, and a Pledge and Security Agreement (collectively with the Supply and Offtake Agreement, the “Supply Transaction Documents”). The Company agreed to guarantee the obligations of Vertex Refining and any of its subsidiaries arising under the Supply Transaction Documents pursuant to the entry into a Guaranty in favor of Macquarie.
Tripartite Agreements
Also on the Commencement Date, Vertex Refining, Macquarie and certain parties subject to crude oil supply and products offtake agreements with Vertex Refining, relating to the Mobile Refinery, entered into various tripartite agreements (the “Tripartite Agreements”), whereby Vertex Refining granted Macquarie the right, on a rolling daily or monthly basis, as applicable, to elect to assume Vertex Refining’s rights and obligations under such crude oil supply and products offtake agreements in connection with the performance of the Supply and Offtake Agreement, and the counterparties thereto are deemed to have consented to Macquarie’s assuming such obligations. Such Tripartite Agreements also provided for certain interpretations of the provisions of such supply and offtake agreements between Vertex Refining and such third parties in connection with Macquarie’s right to elect to assume Vertex Refining’s rights and obligations under such agreements. The Tripartite Agreements remain in place until the termination of the agreements to which they relate, or the earlier termination thereof as set forth in the Tripartite Agreements, including in the event of certain events of default by the parties thereto under the modified crude oil supply and products offtake agreements or the Supply and Offtake Agreement and related transaction documents and also in the event of the termination of the Supply and Offtake Agreement. Macquarie, Vertex Refining and a third party offtaker also entered into a tripartite agreement pursuant to which certain storage capacity within the Mobile Refinery which Macquarie had leased pursuant to the Storage and Services Agreement was effectively made available to such third party consistent with the terms agreed by such party and Vertex Refining in its underlying products offtake agreement. Macquarie, Vertex Refining and a third party storage terminal operator also entered into a tripartite agreement relating to the storage of Macquarie-owned crude oil in such terminal in connection with the Supply and Offtake Agreement.
Guaranty
Vertex Refining’s obligations under the Supply and Offtake Agreement and related transaction documents (other than the hedges which are secured and guaranteed on a pari passu basis under the Loan and Security Agreement) were unconditionally guaranteed by the Company pursuant to the terms of a Guaranty entered into on April 1, 2022, by the Company in favor of Macquarie (the “Guaranty”).
Pledge and Security Agreement
In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into a Pledge and Security Agreement in favor of Macquarie, pursuant to which it provided Macquarie a first priority security interest in all inventory, including all crude oil, product, and all proceeds with respect of the forgoing, subject to certain exceptions. The Pledge and Security Agreement includes customary representations, warranties and covenants of Vertex Refining for a facility of this size and type.
Inventory Sales Agreement
On April 1, 2022, pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all crude oil and finished products (including, jet fuel, diesel and gasoline) located at the Mobile Refinery and held in inventory on such date, which purchase was based on agreed upon market values (the “Mobile Refinery Inventory”) from Vertex Refining for $154 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell, as discussed in detail above), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement.
Crude Supply Agreement
On the Commencement Date, Vertex Refining and Shell Trading (US) Company (“STUSCO”) entered into a Crude Oil & Hydrocarbon Feedstock Supply Agreement (the “Crude Supply Agreement”) pursuant to which STUSCO agreed to sell to Vertex Refining, and Vertex Refining agreed to buy from STUSCO, all of the crude oil and hydrocarbon feedstock
requirements of the Mobile Refinery, subject to certain exceptions set forth therein. The agreement provides that STUSCO is the exclusive supplier for the Mobile Refinery’s requirement for crude oil and hydrocarbon feedstock.
The initial term of the Crude Supply Agreement will continue for five (5) years beginning on the Commencement Date, unless earlier terminated, and will automatically renew for one (1) year renewal terms thereafter subject to timely notice of either party that it elects not to so renew.
Pursuant to the Crude Supply Agreement, STUSCO will procure crude oil based upon a monthly mandate from Vertex Refining as to the Mobile Refinery’s requirements for each delivery month, based on a pre-agreed price, based on internal market prices, subject in certain cases to markup.
Vertex Refining will prepay STUSCO for crude oil deliveries on a provisional basis during a predetermined delivery period during each delivery month, subject to final true up.
The Crude Supply Agreement also contains customary and typical general terms and conditions for transactions of this nature.
Pursuant to a tripartite agreement, Macquarie may intermediate Vertex Refining’s purchases of crude oil from STUSCO under the Crude Supply Agreement, from time to time, by assuming Vertex Refining’s rights and obligations under the Crude Supply Agreement in respect of purchases of crude oil and feedstock in a given delivery month. If Macquarie assumes Vertex Refining’s rights and obligations, Macquarie will be responsible for paying the purchase price for such crude oil and feedstocks to STUSCO in accordance with the terms of the tripartite agreement. In the event that Macquarie intermediates a purchase and sale, the terms and conditions for Vertex Refining’s payments to Macquarie for such crude oil and feedstocks will be determined pursuant to the Supply and Offtake Agreement.
Storage & Services Agreement
On the Commencement Date, Vertex Refining and Macquarie entered into a Storage & Services Agreement (the “Storage & Services Agreement”), whereby Vertex Refining granted Macquarie certain access, storage, usage and information rights in respect of the Mobile Refinery and certain storage facilities and agreed to provide Macquarie certain services in connection with, among other things, such rights under certain other agreements, including the Supply and Offtake Agreement and various tripartite agreements.
Pursuant to the Storage & Services Agreement, Macquarie will pay Vertex Refining a monthly storage fee for provision of the storage and related services.
Pursuant to the Storage & Services Agreement, Macquarie will have the exclusive and uninterrupted license and right to use certain storage facilities specified in the Supply and Offtake Agreement (the “Included Locations”), including the right to inject, store and withdraw crude oil and products (as applicable) in and from the Included Locations. Vertex Refining will be responsible for the care, custody and control of, and will hold as bailee, the property of Macquarie and certain other eligible hydrocarbons which are held within the Included Locations, and will be solely responsible for pumping, unloading, receipt, movements, blending, transportation, storage, measuring, gauging, sampling, analysis, treatment, refining, loading, and delivery of and use of such property, subject to the terms of the Supply and Offtake Agreement and other applicable transaction documents.
Pursuant to the Storage & Services Agreement and in addition to customary services provided by a storage provider, Macquarie has appointed Vertex Refining to perform certain obligations assumed by Macquarie in connection with supply, offtake and exchange arrangements related to the Supply and Offtake Agreement and related transaction documents, including, without limitation, giving, receiving, accepting and rejecting nominations for delivering, loading, unloading, receiving and transporting crude oil and products; the provision of facilities for the delivery, loading, unloading and transportation of crude oil and products; arranging, coordinating quantity and quality sampling, measurements, analysis and inspections for crude oil and products; preparing and handling shipping documentation; providing information with respect to, and submitting claims in relation to, quality, quantity and demurrage; and notifying Macquarie of the occurrence of certain specified events. Vertex Refining periodically will be required to provide various reports to Macquarie regarding the inventory held in the Included Locations.
The Storage & Services Agreement includes certain accelerated export rights pursuant to which, upon the occurrence of certain events, including during the continuation of an event of default under the Supply and Offtake Agreement, Macquarie can instruct Vertex Refining to withdraw all or any amount of Macquarie’s property from the Included Locations.
Macquarie has certain rights to inspect and access the Included Locations and conduct audits on accounting records and other documents maintained by Vertex Refining relating to the Storage & Services Agreement, in each case subject to the terms and conditions of the Storage & Services Agreement.
Vertex Refining will be required to maintain and operate the Included Locations in accordance with various customary covenants contained within the Storage & Services Agreement, including, without limitation, in respect of the maintenance of the Included Locations and related facilities, the standard of care pursuant to which Vertex Refining will perform services under the Storage & Services Agreement, insurance requirements, and compliance with laws. Vertex Refining made various representations and warranties to Macquarie which are required to continue to be met during the term of the agreement, which are customary and typical for storage agreements relating to an intermediation facility, including maintaining insurance. The Supply & Storage Agreement also includes certain customary limitations on liability and damages.
In addition to certain obligations to indemnify Macquarie for loss, damage or degradation of Macquarie’s property held at the Included Locations, Vertex Refining agreed to indemnify Macquarie against various liabilities which may arise relating to its performance under the Storage & Services Agreement, as well as, among other liabilities, any liabilities directly or indirectly arising from or in connection with environmental conditions at the facility, environmental law, required permits, and law applicable to the operation of Vertex Refining’s refinery and storage facilities.
The term of the Storage & Services Agreement will continue until the earlier to occur of (i) the date upon which all of Macquarie’s property in the Included Locations has been sold to Vertex Refining or another person or (ii) the date upon which Macquarie has certified that all of its property has been removed from the Included Locations.
ULSD/Gasoline Offtake Agreement
On the Commencement Date, Vertex Refining and Equilon Enterprises LLC, dba Shell Oil Products US (“Shell”) entered into a refined products offtake agreement for the sale of ultra low sulfur diesel (“ULSD”) and gasoline (the “ULSD/Gasoline Offtake Agreement”) pursuant to which Shell agreed to purchase from Vertex Refining, and Vertex Refining agreed to sell to Shell, ULSD and gasoline produced by the Mobile Refinery according to an agreed nomination and confirmation process, subject to certain exceptions set forth therein.
The initial term of the ULSD/Gasoline Offtake Agreement will continue for five years beginning on the Commencement Date, unless earlier terminated as provided in the ULSD/Gasoline Offtake Agreement, and will automatically renew for one year renewal terms thereafter, unless terminated by either party by written notice as set forth therein.
With respect to purchases and sales of ULSD, during the first three years of the term, Shell is required to purchase and Vertex Refining is required to sell certain pre-determined amounts of barrels (subject to minimums and maximums) per month. Thereafter, Vertex Refining may elect to sell Shell the same amounts or certain other pre-determined amounts, at Shell’s option. Volumes in excess of the foregoing limits for ULSD may be sold subject to mutual agreement.
With respect to purchases and sales of gasoline, during the first three years of the term, Shell will purchase all gasoline produced at the refinery up to a certain maximum number of barrels per day, and all premium gasoline up to a pre-determined maximum number of barrels per day. Thereafter, Vertex Refining may elect to sell Shell the same amounts or certain pre-determined amounts of barrels (subject to minimums and maximums) per month, at Shell’s option. Volumes in excess of the foregoing limits for gasoline may be sold subject to mutual agreement.
In the event that Shell does not purchase and take delivery of certain required quantities of product nominated for purchase in a given month, Vertex Refining is entitled to sell the resulting shortfall volumes and obtain cover damages from Shell (excluding shortfall volumes resulting from force majeure events). In the event that Vertex Refining does not supply certain required quantities of product nominated for sale in a given month, Shell is entitled to procure replacement product to cover the shortfall volumes and obtain damages from Vertex Refining (excluding shortfall volumes resulting from force majeure events) in connection therewith.
Products will be provisionally priced and invoiced over certain pre-determined periods, subject to final true up. Prices will be calculated based upon published indices and an agreed fixed per gallon differentials.
The ULSD/Gasoline Offtake Agreement also contains customary and typical general terms and conditions for transactions of this nature.
Warrant Agreement
In connection with the entry into the Loan and Security Agreement, and as a required term and condition thereof, on April 1, 2022, the Company granted warrants (the “Warrants”) to purchase 2,750,000 shares of the Company’s common stock to the Lenders and their assigns. The terms of the Warrants are set forth in a Warrant Agreement entered into on April 1, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent (the “Warrant Agreement”). The Warrants have a five-year term and a $4.50 per share exercise price, and include weighted average anti-dilutive rights.
Option Exercises
In April, 2022, the Company issued 37,500 shares of common stock in connection with the cash exercise of options to purchase 37,500 shares of common stock, which shares were covered by a Form S-8 Registration Statement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Part II”, “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 14, 2022 (the “Annual Report”).
Our logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service marks that are the property of others. Solely for convenience, trademarks, tradenames and service marks referred to in this Report may appear without the ®, ™ and SM symbols. References to our trademarks, tradenames and service marks are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the refining, re-refining, used oil and oil and gas industries in general from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it.
Our fiscal year ends on December 31st. Interim results are presented on a quarterly basis for the quarters ended March 31, June 30, and September 30th, the first quarter, second quarter and third quarter, respectively, with the quarter ending December 31st being referenced herein as our fourth quarter. Fiscal 2022 means the year ended December 31, 2022, and fiscal 2021 means the year ended December 31, 2021.
Please see the “Glossary” beginning on page 4 of the Annual Report, 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;
“Olefin” means unsaturated hydrocarbons containing a double bond between two carbon atoms. Examples are butylene and propylene.
“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.
Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying unaudited consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
•Description of Business Activities. Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A.
•Results of Operations. An analysis of our financial results comparing the three months ended March 31, 2022, and 2021.
•Liquidity and Capital Resources. An analysis of changes in our consolidated balance sheets and cash flows and discussion of our financial condition.
•Critical Accounting Policies and Use of Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
Description of Business Activities
The below is a discussion of our business activities during the quarters ended March 31, 2022 and 2021. Effective April 1, 2022, we completed the acquisition of the Mobile Refinery (as discussed and defined below). Moving forward, in addition to the business activities described below, our operations will also include the operation of the Mobile Refinery. The Mobile Refinery and related logistics assets (“Logistics Assets”) are a group of downstream assets that operate ten miles north of Mobile, in Saraland, Alabama, which include the Mobile Refinery and Blakeley Island Terminal, a deep water draft, bulk loading terminal facility, for crude oil and associated refined petroleum products located in Mobile, Alabama, with 600,000 Bbls of storage for loading/unloading of vessels along with a pipeline tie-in, as well as the related logistics infrastructure of a high capacity truck with 3-4 loading heads per truck, each rated at 600 gallons per minute (the “Mobile Truck Rack”). The Mobile Refinery currently processes heavy and sour crude to produce heavy olefin feed, regular gasoline, premium gasoline, jet fuel and diesel fuel. It is anticipated that this activity will fall in the financial results of our Refining and Marketing segment during the three months ended June 30, 2022. It is anticipated that the Mobile Refinery will substantially change our overall revenue, cost of revenue, net income and earnings before interest, taxes, depreciation, and amortization moving forward. The below description is of our business activities during the periods reported (the three months ended March 31, 2022 and 2021), and does not include significant information regarding the Mobile Refinery and Logistic Assets since those were acquired after the end of the period covered by this Report, on April 1, 2022.
We are an environmental services company that recycles industrial waste streams and off-specification commercial chemical products. Our primary focus is recycling used motor oil and other petroleum by-products. We are engaged in operations across the entire petroleum recycling value chain including collection, aggregation, transportation, storage, re-refinement, and sales of aggregated feedstock and re-refined products to end users. We operate in three segments:
(1) Black Oil,
(2) Refining and Marketing, and
(3) Recovery.
We currently provide our services in 15 states, primarily in the Gulf Coast, Midwest and Mid-Atlantic regions of the United States. For the rolling twelve-month period ending March 31, 2022, we aggregated approximately 87.8 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 80.0 million gallons of used motor oil with our proprietary vacuum gas oil (“VGO”) and Base Oil processes.
Our Black Oil segment collects and purchases used motor oil directly from third-party generators, aggregates used motor oil from an established network of local and regional collectors, and sells used motor oil to our customers for use as a feedstock or replacement fuel for industrial burners. We operate a refining facility that uses our proprietary Thermal Chemical Extraction Process (“TCEP”) and we also utilize third-party processing facilities. TCEP’s original purpose was to re-fine used oil into marine cutterstock; however, between the third quarter of 2015 and the third quarter of 2019, and since the first quarter of 2020, the original purpose of TCEP has not been economically viable and we have instead been using TCEP to re-fine used oil into marine cutterstock; prior to shipping to our facility in Marrero, Louisiana.
We also acquired our Marrero, Louisiana facility, which facility re-refines used motor oil and also produces VGO and the Myrtle Grove re-refining complex in Belle Chasse, Louisiana which we call our Myrtle Grove facility (which is now owned by a special purpose entity which we owned 85% interest of through March 31, 2022, and own a 100% interest in, as of April 1, 2022) in May 2014.
Our Refining and Marketing segment aggregates and manages the re-refinement of used motor oil and other petroleum by-products and sells the re-refined products to end customers.
Our Recovery segment includes a generator solutions company for the proper recovery and management of hydrocarbon streams as well as metals which includes transportation and marine salvage services throughout the Gulf Coast.
Black Oil Segment
Discontinued operations of Vertex includes the Black Oil Segment, also referred to as the UMO Business, Refer to Note 15, "Discontinued Operations" in the Notes to Financial Statements for additional information. Our Black Oil segment is engaged in operations across the entire used motor oil recycling value chain including collection, aggregation, transportation, storage, refinement, and sales of aggregated feedstock and re-refined products to end users. We collect and purchase used oil directly from generators such as oil change service stations, automotive repair shops, manufacturing facilities, petroleum refineries, and petrochemical manufacturing operations. We own a fleet of 43 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. Prior to the completion of the Mobile Refinery Acquisition, and during the period covered by this Report, we owned a fleet of 30 transportation trucks and more than 80 above ground storage tanks with over 8.6 million gallons of storage capacity. These assets are used by both the Black Oil segment and the Refining and Marketing segment. In addition, we also utilize third parties for the transportation and storage of used oil feedstocks. Typically, we sell used oil to our customers in bulk to ensure efficient delivery by truck, rail, or barge. In many cases, we have contractual purchase and sale agreements with our suppliers and customers, respectively. We believe these contracts are beneficial to all parties involved because it ensures that a minimum volume is purchased from collectors and generators, a minimum volume is sold to our customers, and we are able to minimize our inventory risk by a spread between the costs to acquire used oil and the revenues received from the sale and delivery of used oil. Also, as discussed above under “Description of Business Activities”, from time to time, when market conditions warrant (i.e., when oil prices are sufficiently high), we have used our proprietary TCEP technology to re-refine used oil into marine fuel cutterstock, provided that we are currently using such technology solely to pre-treat our used motor oil feedstock prior to shipping to our facility in Marrero, Louisiana. In addition, at our Marrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product that is sold to refineries as well as to the marine fuels market. At our Columbus, Ohio facility (Heartland Petroleum), the ownership of 65% of which was transferred to Tensile in connection with the Heartland SPV (discussed above), effective January 1, 2020, we produce a base oil product that is sold to lubricant packagers and distributors.
Refining and Marketing Segment
Our Refining and Marketing segment is engaged in the aggregation of feedstock, re-refining it into higher value end products, and selling these products to our customers, as well as related transportation and storage activities. We aggregate a diverse mix of feedstocks including used motor oil, petroleum distillates, transmix and other off-specification chemical products. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and are also transferred from our Black Oil segment. We have a toll-based processing agreement in place with Monument Chemical Port Arthur, LLC ("Monument Chemical") to re-refine feedstock streams, under our direction, into various end products that we specify. Monument Chemical uses industry standard processing technologies to re-refine our feedstocks into pygas, gasoline blendstock and marine fuel cutterstock. We sell all of our re-refined products directly to end-customers or to processing facilities for further refinement. In addition, we are distributing refined motor fuels such as gasoline, blended gasoline products and diesel used as engine fuels, to third party customers who typically resell these products to retailers and end consumers.
Recovery Segment
The Company’s Recovery Segment includes a generator solutions company for the proper recovery and management of hydrocarbon streams, and other petroleum-based products, together with the recovery and processing of metals.
Thermal Chemical Extraction Process
We own the intellectual property for our patented TCEP. TCEP is a technology which utilizes thermal and chemical dynamics to extract impurities from used oil which increases the value of the feedstock. We intend to continue to develop our TCEP technology and design with the goal of producing additional re-refined products, including lubricating base oil.
TCEP differs from conventional re-refining technologies, such as vacuum distillation and hydrotreatment, by relying more heavily on chemical processes to remove impurities rather than temperature and pressure. Therefore, the capital requirements to build a TCEP plant are typically much less than a traditional re-refinery because large feed heaters, vacuum distillation columns, and a hydrotreating unit are not required. The end product currently produced by TCEP is used as fuel oil
cutterstock. Conventional re-refineries produce lubricating base oils or product grades slightly lower than base oil that can be used as industrial fuels or transportation fuel blendstocks.
We currently estimate the cost to construct a new, fully-functional, commercial facility using our TCEP technology, with annual processing capacity of between 25 and 50 million gallons at another location would be approximately $10 - $15 million, which could fluctuate based on throughput capacity. The facility infrastructure would require additional capitalized expenditures which would depend on the location and site specifics of the facility. Our TCEP technology converts feedstock into a low sulfur marine fuel that can be sold into the new 0.5% low sulfur marine fuel specification mandated under International Maritime Organization (IMO) rules which went into effect on January 1, 2020. As described above, due to the decline in oil prices and challenges in obtaining feedstock in the early part of 2020, we have been using TCEP for the purposes of pre-treating our used motor oil feedstock prior to shipping to our facility in Marrero, Louisiana since the first quarter of 2020. We may construct additional TCEP facilities in the future if oil prices continue to increase.
Products and Services
We generate substantially all of our revenue from the providing of oil collection services and sale of nine 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.
Olefins
Hydrotreated VGO.
The way that the product categories above fit into our three operating segments (1) Black Oil; (2) Refining and Marketing; and (3) Recovery, are indicated below:
| | | | | | | | | | | |
| Black Oil(1) | Refining and Marketing(2) | Recovery(3) |
Base oil | X | | X |
Pygas | | X | |
Industrial fuel | X | X | |
Distillates | | X | |
Oil collection services | X | | |
Metals | | | X |
Other re-refinery products | X | | X |
VGO/Marine fuel sales | X | | |
(1) As discussed in greater detail above under “Black Oil Segment”, the Black Oil segment consists primarily of the sale of (a) petroleum products which include base oil and industrial fuels—which consist of used motor oils, cutterstock and fuel oil generated by our facilities; (b) oil collection services—which consist of used oil sales, burner fuel sales, antifreeze sales and service charges; (c) the sale of other re-refinery products including asphalt, condensate, recovered products, and used motor oil; (d) transportation revenues; and (e) the sale of VGO (vacuum gas oil)/marine fuel.
(2) As discussed in greater detail above under “Refining and Marketing Segment”, the Refining and Marketing segment consists primarily of the sale of pygas; industrial fuels, which are produced at a third-party facility ("Monument Chemical"); and distillates.
(3) As discussed in greater detail above under “Recovery Segment”, the Recovery segment consists primarily of revenues generated from the sale of ferrous and non-ferrous recyclable Metal(s) products that are recovered from manufacturing and consumption.
Recent Events
Approval of Issuance of Shares
On January 20, 2022, our shareholders approved the issuance of shares of our common stock issuable upon the conversion of our $155 million aggregate principal amount at maturity 6.25% Convertible Senior Notes due 2027 in accordance with Nasdaq Listing Rules 5635 (a) and (d). As a result, as described in that certain Indenture, dated November 1, 2021, between the Company and U.S. Bank National Association, as trustee, setting forth the terms of the Convertible Senior Notes, the Default Settlement Method (as defined in the Indenture) of the Convertible Senior Notes automatically changed to Physical Settlement (as defined in the Indenture).
Voluntary Termination of Sales Agreement with Safety-Kleen
In September of 2021, the U.S. Federal Trade Commission (FTC) submitted a second request for additional review, prompting a prolonged period of costly support efforts on both the part of the Company and Safety-Kleen Systems, Inc., as purchaser (“Safety-Kleen”) relating to FTC approval for the Sale Transaction (i.e., the planned sale of our UMO Business to Safety-Kleen). Given the considerable time and resources required to continue these support efforts, the Company determined that it was no longer in the Company's best interest to pursue the transaction further.
On January 25, 2022, the Company entered into a mutual agreement with Safety-Kleen to terminate the Sale Agreement. In connection with the termination agreement, the Company paid Safety-Kleen a break-up fee of $3 million.
We are continuing to explore opportunities for the sale of the UMO Business.
Idemitsu Offtake Agreement
On February 14, 2022, Vertex Refining Alabama LLC (“Vertex Refining”), a wholly-owned subsidiary of the Company, entered into a Master Offtake Agreement dated February 4, 2022 (the “Offtake Agreement”) with Idemitsu Apollo Renewable Corp. (“Idemitsu”). Pursuant to the Offtake Agreement, Vertex Refining agreed to sell Idemitsu renewable diesel which is planned to be produced by the Mobile Refinery, subject to completion of the acquisition of the Mobile Refinery and the capital project discussed above. During the term of the Offtake Agreement, Idemitsu agreed to purchase all of the renewable diesel produced at the refinery (provided it meets certain specifications), up to a maximum volume of 14,000 barrels per day.
Pursuant to the Offtake Agreement, Idemitsu shall be the exclusive offtake party for certain amounts of renewable diesel produced by Vertex Refining, up to a total of 14,000 barrels of renewable diesel, provided that if Idemitsu fails to purchase or accept any portion of such committed volume in accordance with the terms of the Offtake Agreement, Vertex Refining has the right to sell such product and regulatory credits to a third-party. Vertex Refining is also required to transfer all regulatory credits associated with the product purchased to Idemitsu pursuant to the terms of the Offtake Agreement.
The obligations of the parties under the Offtake Agreement are subject to certain conditions precedent and also include a requirement that Idemitsu pay for certain minimum volumes of renewable diesels per month and that Vertex Refining supply certain minimum volumes per month, subject to certain make whole payments or reimbursements due from the appropriate party.
In the event the refinery produces and Vertex Refining offers for sale during the term of the agreement, renewable products other than renewable diesel (“Other Renewable Products”), prior to offering the Other Renewable Products to any third party, Vertex Refining is required to first offer such products to Idemitsu and Idemitsu has a 14 day right of first refusal to purchase such Other Renewable Products.
Idemitsu agreed to pay to Vertex Refining a per gallon of product purchased at an indexed, spot-market price at the time of production.
Pursuant to the Offtake Agreement, Idemitsu has the right, but not the obligation, to purchase from Vertex Refining, quantities of ultra low sulfur diesel (“ULSD”), up to an amount required by Idemitsu to blend with the renewal diesel to a ratio of 0.1% ULSD or greater; provided that Vertex Refining has such volumes available for sale. The purchase price for any ULSD purchased by Idemitsu from Vertex shall be the monthly average of the daily prompt CME Group ULSD futures (heating oil) settlement for each day during the month in which delivery occurred.
As a condition to the effectiveness of the Offtake Agreement, Idemitsu’s parent entity, Idemitsu Kosan Co., Ltd. (“Idemitsu Parent”), must enter into a Continuing Guaranty in favor of Vertex Refining (the “Guaranty”) prior to COD. Pursuant to the Guaranty, Idemitsu's Parent will guaranty the full and prompt payment when due, whether upon acceleration, demand or otherwise, and at all times thereafter, of the indebtedness of Idemitsu under the Offtake Agreement and related agreements and the punctual performance of all of such payment obligations under the Offtake Agreement, with such liability limited to the lesser of (i) the amounts owed to Vertex Refining under the Offtake Agreement and related agreements; and (ii) $100,000,000. The Guaranty will have customary covenants and requirements, including requiring Idemitsu's Parent to subordinate any debt owed by Idemitsu to Idemitsu's Parent to the obligations to Vertex Refining under the Guaranty.
Commitment Letter
On February 17, 2022, the Company and the Company’s wholly-owned subsidiary, Vertex Refining, entered into a Commitment Letter with a syndicate of lenders in respect of a three-year, $125 million first-lien senior secured term loan facility (the “Term Loan”). The closing date and the funding of the Term Loan are subject to the closing of the Mobile Acquisition, in addition to various conditions precedent, as set forth in more detail in the Commitment Letter.
On March 2, 2022, (1) the Company, (2) Vertex Refining, (3) the Lenders and (4) Cantor Fitzgerald Securities (the “Escrow Agent”), entered into an Escrow Agreement (the “Escrow Agreement”). Pursuant to the Escrow Agreement, on March 2, 2022 each of the Lenders deposited their pro rata portion of the $125 million loan amount, less certain upfront fees, into an escrow account. The Company was required to pay a ‘ticking fee’ equal to 10.5% per annum on the gross aggregate amount of escrow account proceeds, beginning on March 2, 2022, which was the date funds were deposited, into the escrow account. As described in greater detail below, the escrow account proceeds were released to the Company on April 1, 2022, in connection with the closing of the Mobile Acquisition.
Exchange Agreement
On March 24, 2022, we entered into an Exchange Agreement (the “Exchange Agreement”) with Tensile Capital Partners Master Fund LP (the “Holder”). Pursuant to the Exchange Agreement, the Holder agreed to exchange outstanding warrants to purchase 1,500,000 shares of the Company’s common stock with an exercise price of $2.25 per share and an expiration date of July 25, 2029, for 1,112,728 shares of the Company’s common stock, effectively resulting in a net cashless exercise of the warrants (which were cancelled in connection with the transaction), with the value of such surrendered shares based on the five day trailing volume weighted average price of the Company’s common stock. The Exchange Agreement included customary representations and warranties of the parties.
Heartland and Myrtle Grove Purchase Agreements
On February 25, 2022, Vertex Splitter Corporation (“Vertex Splitter”), a wholly-owned subsidiary of the Company entered into (1) a Purchase and Sale Agreement with Tensile-Vertex Holdings LLC (“Tensile-Vertex”), an affiliate of Tensile and Tensile-Heartland (the “Heartland Purchase Agreement”); and (2) a Purchase and Sale Agreement with Tensile-Vertex and Tensile-MG (the “Myrtle Grove Purchase Agreement”, and together with the Heartland Purchase Agreement, the “Purchase Agreements”).
As the time of the entry into the agreement, Tensile-Heartland held 65% of Heartland SPV and Tensile-MG owned 15% of MG SPV, with Tensile-Vertex holding 100% of both Tensile-Heartland and Tensile-MG.
Pursuant to the Heartland Purchase Agreement, the Company, through Vertex Splitter, agreed to acquire 100% of the outstanding securities of Tensile-Heartland and pursuant to the Myrtle Grove Purchase Agreement, the Company, through Vertex Splitter, agreed to acquire 100% of the outstanding securities of Tensile-MG, from Vertex-Tensile, the result of which will be that Vertex Splitter will own 100% of each of Heartland SPV and MG SPV.
Pursuant to the Heartland Purchase Agreement, the purchase price payable by Vertex Splitter to Vertex-Tensile, for 100% of Tensile-Heartland is $35 million (the “Base Amount”), plus an amount accrued and accruing from and after May 31, 2021, on the Base Amount on a daily basis at the rate of 22.5% per annum compounded on the last day of each calendar quarter plus an amount equal to any and all cash and cash equivalents of Tensile-Heartland, as of the closing date, which we currently anticipate will total an aggregate of approximately $44 million. The purchase contemplated by the Heartland Purchase Agreement is required to take place on June 30, 2022, or earlier as mutually agreed by the parties, subject to customary conditions to closing. The Heartland Purchase Agreement includes customary representations of the parties, requires Vertex Splitter to maintain officer and director insurance for Tensile-Heartland for at least six years following the closing; requires that they bear their own fees and expenses, except that each party is required to pay the fees and expenses of the other party upon termination of the agreement in certain situations; includes customary indemnification obligations; and includes mutual releases of the parties, effective upon closing.
The Heartland Purchase Agreement may be terminated prior to closing, by the mutual consent of the parties; by Vertex Splitter if Vertex-Tensile has failed to consummate the agreement, or breached a covenant, representation or warranty set forth in the agreement, that prevents such closing, and such breach is not cured, if capable of being cured, within 30 days after notice thereof; by Vertex-Tensile if Vertex Splitter has failed to consummate the agreement, or breached a covenant, representation or warranty set forth in the agreement, that prevents such closing, and such breach is not cured, if capable of being cured, within 30 days after notice thereof; or by either party if there is a final, non-appealable judgment preventing the closing.
Pursuant to the Myrtle Grove Purchase Agreement, the purchase price payable by Vertex Splitter to Vertex-Tensile, for 100% of Tensile-MG was estimated to be approximately $7 million, and was to be based on the value of the Class B Unit preference of MG SPV held by Tensile-MG, plus capital invested by Tensile-MG in MG SPV (which has not been returned as of the date of payment), plus cash and cash equivalents held by Tensile-MG as of the closing date. The purchase contemplated by the Myrtle Grove Purchase Agreement was required to take place on March 31, 2022, or earlier as mutually agreed by the parties, subject to customary conditions to closing.
On April 1, 2022, the Company, through Vertex Splitter acquired 100% of Tensile-MG from Vertex-Tensile for $7.2 million, which was based on the value of the Class B Unit preference of MG SPV held by Tensile-MG, plus capital invested by Tensile-MG in MG SPV (which had not been returned as of the date of payment), plus cash and cash equivalents held by Tensile-MG as of the closing date. As a result, the Company indirectly acquired 100% of MG SPV, which in turn owns the Company’s Belle Chasse, Louisiana, re-refining complex, and consequently the Company, as of April 1, 2022, owns 100% of the Belle Chasse, Louisiana, re-refining complex.
The Myrtle Grove Purchase Agreement included customary representations of the parties for a transaction of that size and type, requires Vertex Splitter to maintain officer and director insurance for Tensile-MG for at least six years following the
closing; requires that each party bear their own fees and expenses; includes customary indemnification obligations; and includes mutual releases of the parties, which were effective upon closing.
Heartland Note Amendment
Also on February 25, 2022, Vertex Operating, the Company and Heartland SPV, entered into a Second Amendment to Promissory Note (the “Second Note Amendment”), which amended the Heartland Note, to extend the due date of the Heartland Note until the earlier of (i) June 30, 2022; and (ii) five (5) calendar days following the closing of a sale of substantially all the assets of Vertex Refining OH, LLC (“Vertex OH”), and/or the sale of membership interests in Vertex OH possessing voting control (with the consent of the Company), provided that the Heartland Note may be prepaid in whole or in part at any time without premium or penalty and without the consent of Heartland SPV. The Heartland Note accrues interest at the applicable federal rate of interest from time to time, increasing to 12% upon an event of default.
Loan and Security Agreement
On April 1, 2022 (the “Closing Date”), Vertex Refining; the Company, as a guarantor; substantially all of the Company’s direct and indirect subsidiaries, as guarantors (together with the Company, the “Guarantors”); certain funds and accounts under management by BlackRock Financial Management, Inc. or its affiliates, as lenders (“BlackRock”), certain funds managed or advised by Whitebox Advisors, LLC, as lenders (“Whitebox”), certain funds managed by Highbridge Capital Management, LLC, as lenders (“Highbridge”), Chambers Energy Capital IV, LP, as a lender (“Chambers”), CrowdOut Capital LLC, as a lender (“CrowdOut Capital”), CrowdOut Credit Opportunities Fund LLC, as a lender (collectively with BlackRock, Whitebox, Highbridge, Chambers and CrowdOut Capital, the “Lenders”); and Cantor Fitzgerald Securities, in its capacity as administrative agent and collateral agent for the Lenders (the “Agent”), entered into a Loan and Security Agreement (the “Loan and Security Agreement”).
Pursuant to the Loan and Security Agreement, the Lenders agreed to provide a $125 million term loan to Vertex Refining (the “Term Loan”), the proceeds of which, less agreed upon fees and discounts, were held in escrow prior to the Closing Date, pursuant to the Escrow Agreement, discussed above. On the Closing Date, net proceeds from the term loans, less the agreed upon fees and discounts, as well as certain transaction expenses, were released from escrow to Vertex Refining in an aggregate amount of $94,309,958.
The amounts borrowed under the Loan and Security Agreement bear interest at a rate per annum equal to the sum of (i) the greater of (x) the per annum rate publicly quoted from time to time by The Wall Street Journal as the “Prime Rate” in the United States minus 1.50% as in effect on such day and (y) the Federal Funds rate for such day plus 0.50%, subject in the case of this clause (i), to a floor of 1.0%, plus (ii) 9.25%. The funds borrowed in connection with the Term Loan were issued with an original issue discount of 1.5%. The Company also paid certain fees and transaction expenses in connection with the release of the funds in connection with the Term Loan. Amounts owed under the Loan and Security Agreement, if not earlier repaid, are due on April 1, 2025 (or the next business day thereafter). Interest on the Term Loan is payable in cash (i) quarterly, in arrears, on the last business day of each calendar quarter, commencing on the last business day of the calendar quarter ending June 30, 2022, (ii) in connection with any payment, prepayment or repayment of the Term Loan (including as discussed in greater detail below), and (iii) at maturity (whether upon demand, by acceleration or otherwise). Pursuant to the Loan and Security Agreement, on the last day of March, June, September and December of each year (or if such day is not a business day, the next succeeding business day), beginning on March 31, 2023 and ending on December 31, 2024, Vertex Refining is required to repay $1,562,500 of the principal amount owed under the Loan and Security Agreement (i.e., 1.25% of the original principal amount per quarter), subject to reductions in the event of any prepayment of the Loan and Security Agreement.
In the event of any payment, repayment or prepayment (other than with respect to a sale of the Company’s used motor oil assets or a change of control which are discussed below, and other than in connection with prepayments required to be made with funds received from insurance settlements and recoveries which are not subject to a prepayment premium), including in the event of acceleration of the Term Loan, certain asset sales (other than the used motor oil assets), certain equity issuances, and voluntary prepayments (a) during the first 18 months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 150% of the applicable interest rate, multiplied by the amount of such prepayment amount; (b) during the 19th through 24th months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 50% of the applicable interest rate, multiplied by the amount of such prepayment amount; and (c) at any time during the 25th month after the Closing Date, but prior to the date that is 90 days before the maturity date of amounts owed pursuant to the Loan and Security Agreement, Vertex Refining agreed to pay an additional amount to the Lenders equal to 25% of the applicable interest rate, multiplied by the amount of such prepayment amount. Upon the sale of the Company’s used motor oil assets (as discussed below), or the required repayment upon a change of control (also discussed below) Vertex Refining agreed to pay an additional amount to the Lenders equal to 1% of the aggregate principal amount of the amount prepaid (as applicable,
the “Prepayment Premium”). The Prepayment Premium is also due upon a change of control, which includes the direct or indirect transfer of all or substantially all of the assets of the Loan Parties (defined below); the adoption of a plan of liquidation or dissolution relating to the Company; the acquisition in one or a series of transactions of 33% or more of the equity interests of the Company by a person or entity; the Company’s failure to own 100% of Vertex Refining and the other Loan Parties, unless permitted by the Lenders; during any period of twelve consecutive months commencing on or after the Closing Date, the occurrence of a change in the composition of the Board of Directors of the Company such that a majority of the members of such Board of Directors are no longer directors; or a “change of control” or any comparable term under, and as defined in, any other indebtedness exceeding $2 million of the Loan Parties, shall have occurred (each a “Change of Control”).
The Company used a portion of the proceeds from the Term Loan borrowing to pay a portion of the purchase price associated with the acquisition of the Mobile, Alabama refinery (the “Mobile Refinery”) acquired by Vertex Refining on April 1, 2022, as discussed in greater detail below, and to pay certain fees and expenses associated with the closing of the Loan and Security Agreement and is required to use the remainder of the funds for (i) the planned renewable diesel conversion of the Mobile Refinery, and (ii) working capital and liquidity needs.
The amounts borrowed pursuant to the terms of the Loan and Security Agreement are secured by substantially all of the present and after-acquired assets of the Company and its subsidiaries. Additionally, Vertex Refining’s obligations under the Loan and Security Agreement are jointly and severally guaranteed by substantially all of the Company’s subsidiaries and the Company (collectively, Vertex Refining, the Company and the Company’s subsidiaries which have guaranteed Vertex Refining’s obligations under the Loan and Security Agreement, the “Loan Parties”).
The Loan and Security Agreement includes customary representations and warranties, and affirmative and negative covenants of the Loan Parties for a facility of this size and type, including prohibiting the Loan Parties from creating any indebtedness without the consent of the Lenders, subject to certain exceptions, and requiring the Loan Parties to have no less than $17.5 million of unrestricted cash for more than three consecutive business days.
The Loan and Security Agreement includes customary events of default for transactions of this type, including failures to pay amounts due, bankruptcy proceedings, covenant defaults, attachment or seizure of a material portion of the collateral securing the Loan and Security Agreement, cross defaults, if there is a default in any agreement governing indebtedness in excess of $3,000,000, resulting in the right to accelerate such indebtedness, certain judgments against a Loan Party, misrepresentations by the Loan Parties in the transaction documents, insolvency, cross default of the Offtake and Supply Agreement (defined and described below), a Change of Control, termination of certain intercreditor agreements, and the loss or termination of certain material contacts. Upon the occurrence of an event of default the Agent may declare the entire amount of obligations owed under the Loan and Security Agreement immediately due and payable and take certain other actions provided for under the Loan and Security Agreement, including enforcing security interests and guarantees.
The Loan and Security Agreement includes customary indemnification obligations for a facility of this size and type, requiring us to indemnify the Agent and the Lenders for certain expenses, losses and claims.
In connection with the Loan and Security Agreement, and as additional consideration for the Lenders agreeing to loan funds to the Company thereunder, the Company granted warrants to purchase 2,750,000 shares of common stock of the Company to the Lenders (and/or their affiliates) on the Closing Date, as discussed in greater detail below.
The amounts owed under the Loan and Security Agreement are also secured by various deeds of trusts and mortgages for the real property(s) described therein, over the Mobile Refinery and substantially all other material owned and leased real property of the Guarantors including properties in Texas and Louisiana.
Intellectual Property Security Agreement
In connection with the entry into the Loan and Security Agreement, Vertex Energy Operating, LLC (“Vertex Operating”), the Company’s wholly-owned subsidiary, entered into an Intellectual Property Security Agreement in favor of the Agent, pursuant to which it granted a security interest in substantially all of its intellectual property (including patents and trademarks) in favor of the Lenders to secure the obligations of the Loan Parties under the Loan and Security Agreement.
Collateral Pledge Agreement
In connection with the entry into the Loan and Security Agreement, the Company, Vertex Refining and each of the Guarantors, entered into a Collateral Pledge Agreement in favor of the Agent, pursuant to which they granted the Agent a
security interest in all now owned or hereafter acquired promissory notes and instruments evidencing indebtedness to any Guarantor and all now owned or hereafter acquired equity interests owned by such Guarantor.
Intercreditor Agreement
In connection with the entry into the Loan and Security Agreement and the Supply and Offtake Agreement (as defined below), the Agent, Macquarie (as defined below), Vertex Refining and each of the Guarantors (collectively, the “Grantors”) entered into an intercreditor agreement (the “Intercreditor Agreement”) pursuant to which the Agent and Macquarie acknowledged each other’s liens on the assets of Vertex Refining. The intercreditor arrangements may limit our ability to amend the Loan and Security Agreement and the Supply and Offtake Agreement and related agreements, provides for certain restrictions on the exercise of remedies (through “standstill” and access periods) and governs certain creditor rights in bankruptcy proceedings relating to Grantors.
Completion of Mobile Refinery Acquisition
On April 1, 2022, Vertex Operating assigned its rights to the May 26, 2021 Sale and Purchase Agreement (the “Refinery Purchase Agreement”) to Vertex Refining and on the same date, Vertex Refining completed the Mobile Acquisition. On the Effective Date, a total of $75.0 million (less $10 million previously paid) was paid by Vertex Refining in consideration for the acquisition of the Mobile Refinery, which amount is subject to customary purchase price adjustments and reimbursement for certain capital expenditures in the amount of approximately $440,000, $15.9 million was paid to Equilon Enterprises LLC d/b/a Shell Oil Products US, Shell Oil Company and Shell Chemical LP, subsidiaries of Shell plc (“Shell”) for previously agreed upon capital expenditures and miscellaneous prepaid and reimbursable items, and $164.2 million was paid to Shell by Vertex Refining in connection with the purchase of certain crude oil inventory and finished products owned by Shell and located at the Mobile Refinery on the Closing Date (approximately $154 million of which was funded by Macquarie as a result of the simultaneous sale of such inventory to Macquarie pursuant to an Inventory Sales Agreement between Vertex Refining and Macquarie). The Company also paid $8.7 million at closing pursuant to the terms of a Swapkit Purchase Agreement entered into with Shell on May 26, 2021 (the “Swapkit Agreement”), pursuant to which the Company agreed to fund a technology solution comprising the ecosystem required for the Company to run the Mobile Refinery after closing (the “Swapkit”).
Following the closing of the Mobile Acquisition, the Company (through one or more of its subsidiaries and affiliates) plans to complete an $85 million capital project designed to modify the Mobile Refinery’s hydrocracking unit to produce renewable diesel fuel on a standalone basis.
Funds for the purchase of the Mobile Refinery, Swapkit Agreement, provision of cash collateral required pursuant to terms of the Supply and Offtake Agreement (discussed below), capital expenditures and transaction expenses, came from funds previously held in escrow in connection with our November 2021 sale of $155 million principal at maturity of 6.25% senior unsecured notes due 2027 ($100.4 million), the Term Loan and cash on hand. Following the transactions described above, including the Term Loan, and our acquisition of Tensile-MG (as defined and discussed below), our unrestricted cash increased by approximately $75 million, which funds are anticipated to be used for (i) the planned renewable diesel conversion of the Mobile Refinery, and (ii) working capital and liquidity needs.
Inventory and Finished Products Purchase and Sale
As a required condition to the closing of the Mobile Acquisition, on the Closing Date, Vertex Refining paid approximately $164.2 million for the acquisition from Shell, of all Mobile Refinery Inventory (defined and discussed below). Also on April 1, 2022, pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all the Mobile Refinery Inventory from Vertex Refining for $154 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement, discussed in detail below.
Supply and Offtake Agreement
On April 1, 2022 (the “Commencement Date”), Vertex Refining entered into a Supply and Offtake Agreement (the “Supply and Offtake Agreement”) with Macquarie Energy North America Trading Inc., a Delaware corporation (“Macquarie”), pertaining to crude oil supply and offtake of finished products located at the Mobile Refinery acquired on April 1, 2022. On the Commencement Date, pursuant to an Inventory Sales Agreement and in connection with the Supply and Offtake Agreement, Macquarie purchased from Vertex Refining all crude oil and finished products within the categories covered by the Supply and Offtake Agreement and the Inventory Sales Agreement, which were held at the Mobile Refinery and a certain specified third
party storage terminal, which were previously purchased by Vertex Refining as part of the acquisition of the Mobile Refinery as discussed in greater detail above.
Pursuant to the Supply and Offtake Agreement, beginning on the Commencement Date and subject to certain exceptions, substantially all of the crude oil located at the Mobile Refinery and at a specified third party storage terminal from time to time will be owned by Macquarie prior to its sale to Vertex Refining for consumption within the Mobile Refinery processing units. Also pursuant to the Supply and Offtake Agreement, and subject to the terms and conditions and certain exceptions set forth therein, Macquarie will purchase from Vertex Refining substantially all of the Mobile Refinery’s output of certain refined products and will own such refined products while they are located within certain specified locations at the Mobile Refinery. Macquarie will have title to and risk of loss of crude oil and refined products purchased from Vertex Refining while within certain specified locations at the Mobile Refinery and a specified third party storage terminal.
Pursuant to the Supply and Offtake Agreement and subject to the terms and conditions therein, Macquarie may during the term of the Supply and Offtake Agreement procure crude oil and refined products from certain third parties which may be sold to Vertex Refining or third parties pursuant to the Supply and Offtake Agreement and may sell Refined Products to Vertex Refining or third parties (including customers of Vertex Refining).
The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are guaranteed by the Company. The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are also secured by a Pledge and Security Agreement in favor of Macquarie, discussed below, executed by Vertex Refining. In addition, the Supply and Offtake Agreement also requires that Vertex Refining post and maintain cash collateral (in the form of an independent amount) as security for Vertex Refining’s obligations under the Supply and Offtake Agreement and the related transaction documents. The amount of cash collateral is subject to adjustments during the term.
Pursuant to the Supply and Offtake Agreement, Vertex Refining and Macquarie agreed to cooperate to develop and document, by no later than 180 days after the Commencement Date, procedures relating to the unwinding and termination of the agreement and related agreements, in the event of the expiration or early termination of the Supply and Offtake Agreement. The parties also agreed to use commercially reasonable efforts to negotiate mutually agreeable terms for Macquarie’s intermediating of renewable feedstocks and renewable diesel that will be utilized and/or produced by Vertex Refining in connection with and following a planned renewable diesel conversion project at the Mobile Refinery (including providing Macquarie a right of first refusal in connection therewith), for 90 days after the Commencement Date (the “RD Period”). If, by the end of the RD Period, Macquarie and Vertex Refining, each acting in good faith and in a commercially reasonable manner, have not been able to reach commercial agreement regarding the entry into a renewable diesel intermediation, Vertex Refining may elect to terminate the Supply and Offtake Agreement by providing notice of any such election to Macquarie; provided that no such election may be effective earlier than the date falling 90 calendar days following the date on which such notice is delivered. The agreement is also subject to termination upon the occurrence of certain events, including the termination of certain agreements relating to the delivery of crude oil to and the offtake of products from the Mobile Refinery. Upon an early termination of the Supply and Offtake Agreement, Vertex Refining is required to pay amounts relating to such termination to Macquarie including, among other things, outstanding unpaid amounts, amounts owing with respect to terminating transactions under the Supply and Offtake Agreement and related transaction documents, unpaid ancillary costs, and breakage costs, losses and out-of-pocket costs with respect to the termination, liquidation, maintenance or reestablishment, or redeployment of certain hedges put in place by Macquarie in connection with the transactions contemplated by the agreement, and Vertex Refining is required to pay other termination fees and amounts to Macquarie in the event of any termination of the agreement. Additionally, upon the termination of the Supply and Offtake Agreement, the outstanding obligations of Vertex Refining and Macquarie to each other will be calculated and reduced to an estimated net settlement payment which will be subject to true-up when the final settlement payment has been calculated following termination.
The Supply and Offtake Agreement requires Vertex Refining to prepare and deliver certain forecasts, projections and estimates and comply with financial statement delivery obligations and other disclosure obligations. The agreement also requires Vertex Refining to provide Macquarie notice of certain estimated monthly crude oil delivery, crude oil consumption, product production, target inventory levels and product offtake terms, which Macquarie has the right to reject, subject to certain disclosure requirements.
The Supply and Offtake Agreement has a 24 month term following the Commencement Date, subject to the performance of customary covenants, and certain events of default and termination events provided therein (certain of which are discussed in greater detail below), for a facility of this size and type. Additionally, either party may terminate the agreement at any time, for any reason, with no less than 180 days prior notice to the other.
The Supply and Offtake Agreement includes certain customary representations, warranties, indemnification obligations and limitations of liability of the parties for a facility of this size and type, and also requires Vertex Refining to be responsible for certain ancillary costs relating to the Supply and Offtake Agreement and the transactions contemplated thereby. The Supply and Offtake Agreement requires Vertex Refining to comply with various indemnity, insurance and tax obligations, and also includes a prohibition on any amendments to Vertex Refining’s financing agreements which, among other things, adversely affect Macquarie’s rights and remedies under the Supply and Offtake Agreement and related transaction documents without the prior consent of Macquarie; a prohibition on Vertex Refining entering into any financing agreement which would cause Vertex Refining’s specified indebtedness to exceed $10 million without Macquarie’s prior consent, subject to certain exceptions; and a requirement that Vertex Refining not have less than $17.5 million in unrestricted cash for any period of more than three consecutive business days. The Supply and Offtake Agreement includes events of default and termination events, including if the Company ceases to beneficially own, directly or indirectly, 100% of the capital stock of Vertex Refining; the change in ownership of the Company or Vertex Refining resulting in one person or group acquiring 50% or more of the capital stock of the Company or Vertex Refining (as applicable); or a change in a majority of the Board of Directors of the Company or Vertex Refining during any 12 consecutive months, without certain approvals, including the approval of the Board of Directors of the Company or Vertex Refining (as applicable) immediately prior to such change; and a cross default to indebtedness (other than indebtedness under financing agreements) of the Company or Vertex Refining for over $20 million, a cross default to indebtedness under financing agreements of Vertex Refining or the Company, or a final judgment or order being rendered against Vertex Refining or the Company in an amount exceeding $20 million.
The price for crude oil purchased by the Company from Macquarie and for products sold by the Company to Macquarie within each agreed product group, in each case, is equal to a pre-determined benchmark, plus a pre-agreed upon differential, subject to adjustments and monthly true-ups.
Vertex Refining will be required to pay Macquarie various monthly fees in connection with the Supply and Offtake Agreement and related arrangements, including, without limitation, (1) an inventory management fee, calculated based on the value of the inventory owned by Macquarie in connection with the Supply and Offtake Agreement, (2) a lien inventory fee based upon the value of certain inventory on which Macquarie has a lien, (3) a per barrel crude handling fee based upon the volume of crude oil Macquarie sells to Vertex Refining, (4) per barrel crude oil and products intermediation fees for each barrel of crude oil which Macquarie buys from a third party and each barrel of products Macquarie sells to a third party, in each case, in connection with the Supply and Offtake Agreement, and (5) a services fee in respect of which Macquarie agrees to make Crude Oil and Products available to the Company in accordance with the weekly nomination procedure as set forth in the Supply and Offtake Agreement. Vertex Refining will also be responsible for certain payments relating to Macquarie’s hedging of the inventory it owns in connection with the Supply and Offtake Agreement, including the costs of rolling hedges forward each month, as well as any costs (or gains) resulting from a mismatch between the Company’s projected target inventory levels (which provide the basis for Macquarie’s hedge position) and actual month end inventory levels.
In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into various ancillary agreements which relate to supply, storage, marketing and sales of crude oil and refined products including, but not limited to the following: Inventory Sales Agreement, Master Crude Oil and Products Agreement, Storage and Services Agreement, and a Pledge and Security Agreement (collectively with the Supply and Offtake Agreement, the “Supply Transaction Documents”). The Company agreed to guarantee the obligations of Vertex Refining and any of its subsidiaries arising under the Supply Transaction Documents pursuant to the entry into a Guaranty in favor of Macquarie.
Tripartite Agreements
Also on the Commencement Date, Vertex Refining, Macquarie and certain parties subject to crude oil supply and products offtake agreements with Vertex Refining, relating to the Mobile Refinery, entered into various tripartite agreements (the “Tripartite Agreements”), whereby Vertex Refining granted Macquarie the right, on a rolling daily or monthly basis, as applicable, to elect to assume Vertex Refining’s rights and obligations under such crude oil supply and products offtake agreements in connection with the performance of the Supply and Offtake Agreement, and the counterparties thereto are deemed to have consented to Macquarie’s assuming such obligations. Such Tripartite Agreements also provided for certain interpretations of the provisions of such supply and offtake agreements between Vertex Refining and such third parties in connection with Macquarie’s right to elect to assume Vertex Refining’s rights and obligations under such agreements. The Tripartite Agreements remain in place until the termination of the agreements to which they relate, or the earlier termination thereof as set forth in the Tripartite Agreements, including in the event of certain events of default by the parties thereto under the modified crude oil supply and products offtake agreements or the Supply and Offtake Agreement and related transaction documents and also in the event of the termination of the Supply and Offtake Agreement. Macquarie, Vertex Refining and a third party offtaker also entered into a tripartite agreement pursuant to which certain storage capacity within the Mobile Refinery which Macquarie had leased pursuant to the Storage and Services Agreement was effectively made available to such
third party consistent with the terms agreed by such party and Vertex Refining in its underlying products offtake agreement. Macquarie, Vertex Refining and a third party storage terminal operator also entered into a tripartite agreement relating to the storage of Macquarie-owned crude oil in such terminal in connection with the Supply and Offtake Agreement.
Guaranty
Vertex Refining’s obligations under the Supply and Offtake Agreement and related transaction documents (other than the hedges which are secured and guaranteed on a pari passu basis under the Loan and Security Agreement) were unconditionally guaranteed by the Company pursuant to the terms of a Guaranty entered into on April 1, 2022, by the Company in favor of Macquarie (the “Guaranty”).
Pledge and Security Agreement
In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into a Pledge and Security Agreement in favor of Macquarie, pursuant to which it provided Macquarie a first priority security interest in all inventory, including all crude oil, product, and all proceeds with respect of the forgoing, subject to certain exceptions. The Pledge and Security Agreement includes customary representations, warranties and covenants of Vertex Refining for a facility of this size and type.
Inventory Sales Agreement
On April 1, 2022, pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all crude oil and finished products (including, jet fuel, diesel and gasoline) located at the Mobile Refinery and held in inventory on such date, which purchase was based on agreed upon market values (the “Mobile Refinery Inventory”) from Vertex Refining for $154 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell, as discussed in detail above), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement.
Warrant Agreement and Registration Rights Agreement
In connection with the entry into the Loan and Security Agreement, and as a required term and condition thereof, on April 1, 2022, the Company granted warrants (the “Warrants”) to purchase 2,750,000 shares of the Company’s common stock to the Lenders and their assigns. The terms of the Warrants are set forth in a Warrant Agreement entered into on April 1, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent (the “Warrant Agreement”).
The Warrants have a five-year term and a $4.50 per share exercise price, and include weighted average anti-dilutive rights in the event any shares of common stock or other equity or equity equivalent securities payable in common stock are granted, issued or sold (or the Company enters into any agreement to grant, issue or sell), or in accordance with the terms of the Warrant Agreement, are deemed to have granted, issued or sold, in each case, at a price less than the exercise price, which automatically decreases the exercise price of the Warrants upon the occurrence of such event, as described in greater detail in the Warrant Agreement, and increases the number of shares of common stock issuable upon exercise of the Warrants, such that the aggregate exercise price of all Warrants remains the same before and after any such dilutive event. Until or unless the Company receives shareholder approval under applicable Nasdaq listing rules for the issuance of more than 19.9% of the Company’s outstanding shares of common stock on the date the Warrant Agreement was entered into (i.e., 12,828,681 shares of common stock, based on 64,465,734 shares of outstanding common stock on such date)(the “Share Cap”), the Company may not issue more shares of common stock upon exercise of the Warrants than totals the Share Cap, and is required to pay the Lenders cash, based on the fair market value of any shares required to be issued upon exercise of the Warrants (as calculated in the Warrant Agreement), which would exceed the Share Cap. Upon the occurrence of a fundamental transaction (as described in the Warrant Agreement) the Warrant Agreement (a) provides each holder a put right and (b) provides the Company with a call right in respect of the Warrants. Upon the exercise of a put right by the holder or a call right by the Company, the Company is obligated to repurchase the Warrants for the Black Scholes Value of the Warrants repurchased, as calculated in the Warrant Agreement. The Warrants also include cashless exercise rights and a provision preventing a holder of the Warrants from exercising any portion of their Warrants if such holder (together with its affiliates) would beneficially own in excess of 4.99% or 9.99% (as applicable pursuant to the Warrant Agreement) of the number of shares of Company common stock outstanding immediately after giving effect to the exercise, subject to certain rights of the holders to increase or decrease such percentage.
In connection with the grant of the Warrants, the Company and the holders of such Warrants entered into a Registration Rights Agreement dated April 1, 2022 (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Company agreed to file a registration statement (the “Initial Registration Statement”) with the Securities and
Exchange Commission (the “SEC” or the “Commission”) as soon as reasonably practicable and in no event later than 75 days following April 1, 2022, for purposes of registering the resale of the shares of common stock issuable upon exercise of the Warrants. The Company also agreed to use commercially reasonable efforts to cause the SEC to declare the Registration Statement effective as soon as practicable and no later than 45 days following the filing of the Initial Registration Statement; provided, that such date is extended until 120 days after the filing date if the Initial Registration Statement is reviewed by the staff of the Commission. The Registration Rights Agreement also provides the holders of the Warrants certain piggyback and demand registration rights (including pursuant to an underwritten offering, in the event the gross proceeds from such underwritten offering are expected to exceed $35 million).
If, subject to certain limited exceptions described in the Registration Rights Agreement, (i) the Initial Registration Statement required to be filed pursuant to the Registration Rights Agreement is not filed on or prior to the required filing deadline (or without complying with the terms of the Registration Rights Agreement), (ii) a registration statement registering for resale all of the registrable securities is not declared effective by the Commission by the required effectiveness deadline, or (iii) during the period commencing on the effective date of the Initial Registration Statement and ending on the earlier of the date when there are no registrable securities or the third anniversary of the effective date of the Initial Registration Statement, a registration statement is not continuously effective to allow the sale of the shares underlying the Warrants, for more than 10 consecutive calendar days or more than an aggregate of 15 calendar days (which need not be consecutive) during any 12-month period, then, in addition to any other rights such holder of Warrants may have under the Registration Rights Agreement or applicable law, (x) on the first such applicable default date, the Company shall pay to such holder of a Warrant an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of the fair market value (such fair market value calculated as required under the Registration Rights Agreement) of the registrable securities held by such holder (the “1% Penalty”), and (y) on each monthly anniversary of such default date until all applicable defaults have been cured, shall pay the 1% Penalty, subject to a maximum penalty of 10% of the fair market value of the registrable securities held by each applicable holder of Warrants, (such fair market value calculated as required under the Registration Rights Agreement).
The Company has agreed, among other things, to indemnify the holders of the Warrants and their affiliates with respect to certain liabilities and to pay all fees and expenses incident to the Company’s obligations under the Registration Rights Agreement.
Crude Supply Agreement
On the Commencement Date, Vertex Refining and Shell Trading (US) Company (“STUSCO”) entered into a Crude Oil & Hydrocarbon Feedstock Supply Agreement (the “Crude Supply Agreement”) pursuant to which STUSCO agreed to sell to Vertex Refining, and Vertex Refining agreed to buy from STUSCO, all of the crude oil and hydrocarbon feedstock requirements of the Mobile Refinery, subject to certain exceptions set forth therein. The agreement provides that STUSCO is the exclusive supplier for the Mobile Refinery’s requirement for crude oil and hydrocarbon feedstock.
The initial term of the Crude Supply Agreement will continue for five (5) years beginning on the Commencement Date, unless earlier terminated, and will automatically renew for one (1) year renewal terms thereafter subject to timely notice of either party that it elects not to so renew.
Pursuant to the Crude Supply Agreement, STUSCO will procure crude oil based upon a monthly mandate from Vertex Refining as to the Mobile Refinery’s requirements for each delivery month, based on a pre-agreed price, based on internal market prices, subject in certain cases to markup.
Vertex Refining will prepay STUSCO for crude oil deliveries on a provisional basis during a predetermined delivery period during each delivery month, subject to final true up.
The Crude Supply Agreement also contains customary and typical general terms and conditions for transactions of this nature.
Pursuant to a tripartite agreement, Macquarie may intermediate Vertex Refining’s purchases of crude oil from STUSCO under the Crude Supply Agreement, from time to time, by assuming Vertex Refining’s rights and obligations under the Crude Supply Agreement in respect of purchases of crude oil and feedstock in a given delivery month. If Macquarie assumes Vertex Refining’s rights and obligations, Macquarie will be responsible for paying the purchase price for such crude oil and feedstocks to STUSCO in accordance with the terms of the tripartite agreement. In the event that Macquarie intermediates a purchase and sale, the terms and conditions for Vertex Refining’s payments to Macquarie for such crude oil and feedstocks will be determined pursuant to the Supply and Offtake Agreement.
Storage & Services Agreement
On the Commencement Date, Vertex Refining and Macquarie entered into a Storage & Services Agreement (the “Storage & Services Agreement”), whereby Vertex Refining granted Macquarie certain access, storage, usage and information rights in respect of the Mobile Refinery and certain storage facilities and agreed to provide Macquarie certain services in connection with, among other things, such rights under certain other agreements, including the Supply and Offtake Agreement and various tripartite agreements.
Pursuant to the Storage & Services Agreement, Macquarie will pay Vertex Refining a monthly storage fee for provision of the storage and related services.
Pursuant to the Storage & Services Agreement, Macquarie will have the exclusive and uninterrupted license and right to use certain storage facilities specified in the Supply and Offtake Agreement (the “Included Locations”), including the right to inject, store and withdraw crude oil and products (as applicable) in and from the Included Locations. Vertex Refining will be responsible for the care, custody and control of, and will hold as bailee, the property of Macquarie and certain other eligible hydrocarbons which are held within the Included Locations, and will be solely responsible for pumping, unloading, receipt, movements, blending, transportation, storage, measuring, gauging, sampling, analysis, treatment, refining, loading, and delivery of and use of such property, subject to the terms of the Supply and Offtake Agreement and other applicable transaction documents.
Pursuant to the Storage & Services Agreement and in addition to customary services provided by a storage provider, Macquarie has appointed Vertex Refining to perform certain obligations assumed by Macquarie in connection with supply, offtake and exchange arrangements related to the Supply and Offtake Agreement and related transaction documents, including, without limitation, giving, receiving, accepting and rejecting nominations for delivering, loading, unloading, receiving and transporting crude oil and products; the provision of facilities for the delivery, loading, unloading and transportation of crude oil and products; arranging, coordinating quantity and quality sampling, measurements, analysis and inspections for crude oil and products; preparing and handling shipping documentation; providing information with respect to, and submitting claims in relation to, quality, quantity and demurrage; and notifying Macquarie of the occurrence of certain specified events. Vertex Refining periodically will be required to provide various reports to Macquarie regarding the inventory held in the Included Locations.
The Storage & Services Agreement includes certain accelerated export rights pursuant to which, upon the occurrence of certain events, including during the continuation of an event of default under the Supply and Offtake Agreement, Macquarie can instruct Vertex Refining to withdraw all or any amount of Macquarie’s property from the Included Locations.
Macquarie has certain rights to inspect and access the Included Locations and conduct audits on accounting records and other documents maintained by Vertex Refining relating to the Storage & Services Agreement, in each case subject to the terms and conditions of the Storage & Services Agreement.
Vertex Refining will be required to maintain and operate the Included Locations in accordance with various customary covenants contained within the Storage & Services Agreement, including, without limitation, in respect of the maintenance of the Included Locations and related facilities, the standard of care pursuant to which Vertex Refining will perform services under the Storage & Services Agreement, insurance requirements, and compliance with laws. Vertex Refining made various representations and warranties to Macquarie which are required to continue to be met during the term of the agreement, which are customary and typical for storage agreements relating to an intermediation facility, including maintaining insurance. The Supply & Storage Agreement also includes certain customary limitations on liability and damages.
In addition to certain obligations to indemnify Macquarie for loss, damage or degradation of Macquarie’s property held at the Included Locations, Vertex Refining agreed to indemnify Macquarie against various liabilities which may arise relating to its performance under the Storage & Services Agreement, as well as, among other liabilities, any liabilities directly or indirectly arising from or in connection with environmental conditions at the facility, environmental law, required permits, and law applicable to the operation of Vertex Refining’s refinery and storage facilities.
The term of the Storage & Services Agreement will continue until the earlier to occur of (i) the date upon which all of Macquarie’s property in the Included Locations has been sold to Vertex Refining or another person or (ii) the date upon which Macquarie has certified that all of its property has been removed from the Included Locations.
ULSD/Gasoline Offtake Agreement
On the Commencement Date, Vertex Refining and Equilon Enterprises LLC, dba Shell Oil Products US (“Shell”) entered into a refined products offtake agreement for the sale of ultra low sulfur diesel (“ULSD”) and gasoline (the “ULSD/Gasoline Offtake Agreement”) pursuant to which Shell agreed to purchase from Vertex Refining, and Vertex Refining agreed to sell to Shell, ULSD and gasoline produced by the Mobile Refinery according to an agreed nomination and confirmation process, subject to certain exceptions set forth therein.
The initial term of the ULSD/Gasoline Offtake Agreement will continue for five years beginning on the Commencement Date, unless earlier terminated as provided in the ULSD/Gasoline Offtake Agreement, and will automatically renew for one year renewal terms thereafter, unless terminated by either party by written notice as set forth therein.
With respect to purchases and sales of ULSD, during the first three years of the term, Shell is required to purchase and Vertex Refining is required to sell certain pre-determined amounts of barrels (subject to minimums and maximums) per month. Thereafter, Vertex Refining may elect to sell Shell the same amounts or certain other pre-determined amounts, at Shell’s option. Volumes in excess of the foregoing limits for ULSD may be sold subject to mutual agreement.
With respect to purchases and sales of gasoline, during the first three years of the term, Shell will purchase all gasoline produced at the refinery up to certain maximum number of barrels per day, and all premium gasoline up to a pre-determined maximum number of barrels per day. Thereafter, Vertex Refining may elect to sell Shell the same amounts or certain pre-determined amounts of barrels (subject to minimums and maximums) per month, at Shell’s option. Volumes in excess of the foregoing limits for gasoline may be sold subject to mutual agreement.
In the event that Shell does not purchase and take delivery of certain required quantities of product nominated for purchase in a given month, Vertex Refining is entitled to sell the resulting shortfall volumes and obtain cover damages from Shell (excluding shortfall volumes resulting from force majeure events). In the event that Vertex Refining does not supply certain required quantities of product nominated for sale in a given month, Shell is entitled to procure replacement product to cover the shortfall volumes and obtain damages from Vertex Refining (excluding shortfall volumes resulting from force majeure events) in connection therewith.
Products will be provisionally priced and invoiced over certain pre-determined periods, subject to final true up. Prices will be calculated based upon published indices and an agreed fixed per gallon differentials.
The ULSD/Gasoline Offtake Agreement also contains customary and typical general terms and conditions for transactions of this nature.
RESULTS OF OPERATIONS
Description of Material Financial Line Items:
Revenues
During the periods covered by this Report, we generated revenues from three existing operating segments as follows:
BLACK OIL -Revenues from our Black Oil segment are comprised primarily of product sales from our re-refineries and feedstock sales (used motor oil) which are purchased from generators of used motor oil such as oil change shops and garages, as well as a network of local and regional suppliers. Volumes are consolidated for efficient delivery and then sold to third-party re-refiners and fuel oil blenders for the export market. In addition, through used oil re-refining, we re-refine used oil into different commodity products. Through the operations at our Marrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product from used oil re-refining which is then sold via barge to crude refineries to be utilized as an intermediate feedstock in the refining process. Through the operations at our Columbus, Ohio facility, we produce a base oil finished product which is then sold via truck or rail car to end users for blending, packaging and marketing of lubricants.
Discontinued operations of Vertex include the Black Oil Segment, also referred to as the “UMO Business”, Refer to Note 15, "Discontinued Operations" in the Notes to Financial Statements for additional information. REFINING AND MARKETING -The Refining and Marketing segment generates revenues relating to the sales of finished products. The Refining and Marketing segment gathers hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have become off-specification during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and then processed at a third-party facility under our direction. The end products are typically three distillate petroleum streams (gasoline blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large petroleum trading and blending companies. The end products are delivered by barge and truck to customers. In addition, we are distributing refined motor fuels such as gasoline, blended gasoline products and diesel used as engine fuels, to third party customers who typically resell these products to retailers and end consumers.
RECOVERY -The Recovery segment is a generator solutions company for the proper recovery and management of hydrocarbon streams. We own and operate a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials.
Our revenues are affected by changes in various commodity prices including crude oil, natural gas, #6 oil and metals.
The Mobile Refinery and Logistics Assets are a group of downstream assets and related logistics infrastructure of the Mobile Truck Rack. The Mobile Refinery currently processes heavy and sour crude to produce heavy olefin feed, regular gasoline, premium gasoline, jet fuel and diesel fuel.
Cost of Revenues
BLACK OIL -Cost of revenues for our Black Oil segment are comprised primarily of feedstock purchases from a network of providers. Other cost of revenues include processing costs, transportation costs, purchasing and receiving costs, analytical assessments, brokerage fees and commissions, and surveying and storage costs.
Discontinued operations of Vertex include the Black Oil Segment, also referred to as the UMO Business, Refer to Note 15, "Discontinued Operations" in the Notes to Financial Statements for additional information. REFINING AND MARKETING -The Refining and Marketing segment incurs cost of revenues relating to the purchase of feedstock, purchasing and receiving costs, and inspection and processing of the feedstock into gasoline blendstock, pygas and fuel oil cutter by a third party. Cost of revenues also includes broker’s fees, inspection and transportation costs.
RECOVERY -The Recovery segment incurs cost of revenues relating to the purchase of hydrocarbon products, purchasing and receiving costs, inspection, and transporting of metals and other salvage and materials. Cost of revenues also includes broker’s fees, inspection and transportation costs.
Our cost of revenues is affected by changes in various commodity indices, including crude oil, natural gas, #6 oil and metals. For example, if the price for crude oil increases, the cost of solvent additives used in the production of blended 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 (“Omega Refining”), Warren Ohio Holdings Co., LLC, f/k/a Heartland Group Holdings, LLC (“Heartland”), Acadiana Recovery, LLC, Nickco Recycling, Inc., Ygriega Environmental Services, LLC, Specialty Environmental Services and Crystal Energy, LLC acquisitions.
Depreciation and amortization expense attributable to cost of revenues reflects the depreciation and amortization of the fixed assets at our refineries along with rolling stock at our collection branches.
Depreciation and amortization expense attributable to operating expenses reflects depreciation and amortization related to our corporate and administrative offices along with internet technology (IT) related items and intangibles.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2021 FROM CONTINUING OPERATIONS
Set forth below are our results of operations for the three months ended March 31, 2022 as compared to the same period in 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) |
| 2022 | | 2021 |
Revenues | $ | 40,216,796 | | | $ | 25,045,243 | | | $ | 15,171,553 | | | 61 | % |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 38,565,484 | | | 22,808,703 | | | (15,756,781) | | | (69) | % |
Depreciation and amortization attributable to costs of revenues | 114,053 | | | 112,497 | | | (1,556) | | | (1) | % |
Gross profit | 1,537,259 | | | 2,124,043 | | | (586,784) | | | (28) | % |
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Operating expenses: | | | | | | | |
Selling, general and administrative expenses | 8,782,395 | | | 2,858,062 | | | (5,924,333) | | | (207) | % |
Depreciation and amortization attributable to operating expenses | 26,916 | | | 26,916 | | | — | | | — | % |
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Total operating expenses | 8,809,311 | | | 2,884,978 | | | (5,924,333) | | | (205) | % |
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Loss from operations | (7,272,052) | | | (760,935) | | | (6,511,117) | | | (856) | % |
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Other income (expense): | | | | | | | |
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Other income | 414,972 | | | — | | | 414,972 | | | 100 | % |
Gain on asset sales | 57,402 | | | 1,424 | | | 55,978 | | | 3,931 | % |
Loss on change in value of derivative warrant liability | (3,578,947) | | | (1,780,203) | | | (1,798,744) | | | (101) | % |
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Interest expense | (4,229,884) | | | (112,142) | | | (4,117,742) | | | (3,672) | % |
Total other expense | (7,336,457) | | | (1,890,921) | | | (5,445,536) | | | (288) | % |
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Loss from continuing operation before income tax | (14,608,509) | | | (2,651,856) | | | (11,956,653) | | | (451) | % |
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Income tax benefit (expense) | — | | | — | | | — | | | — | % |
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Loss from continuing operations | (14,608,509) | | | (2,651,856) | | | (11,956,653) | | | (451) | % |
Income from discontinued operations, net of tax | 13,799,642 | | | 5,617,194 | | | 8,182,448 | | | 146 | % |
Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | (68,164) | | | 382,666 | | | (450,830) | | | (118) | % |
Net income attributable to non-controlling interest and redeemable non-controlling from discontinued operations | 3,806,753 | | | 1,608,303 | | | 2,198,450 | | | 137 | % |
Net income (loss) attributable to Vertex Energy, Inc. | $ | (4,547,456) | | | $ | 974,369 | | | $ | (5,521,825) | | | (567) | % |
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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. During the three months ended March 31, 2022, compared to the same period in 2021, we saw a 3% increase in the volume of products we managed through our facilities. In addition, we saw an increase in operating costs (inclusive of depreciation and amortization) on a per barrel basis for the first quarter of 2022 as compared to the same period in 2021.
Total revenues increased by 61% for the three months ended March 31, 2022, compared to the same period in 2021, due primarily to higher commodity prices and increased volumes at our facilities. Volumes improved as a result of additional feedstock availability in the overall marketplace.
During the three months ended March 31, 2022, total cost of revenues (exclusive of depreciation and amortization) was $38,565,484 compared to $22,808,703 for the three months ended March 31, 2021, an increase of $15,756,781 or 69% from the
prior period. The main reason for the increase was the result of the increase in commodity prices, which impacted our feedstock pricing. Our cost of revenues is a function of the ultimate price we are required to pay to acquire feedstocks and other maintenance costs at our facilities.
We had selling, general and administrative expenses of $8,782,395 for the three months ended March 31, 2022, compared to $2,858,062 from the prior year’s period, an increase of $5,924,333 or 207% from the prior year’s period. This increase is primarily due to the additional selling, general and administrative expenses incurred during the period as a result of increased personnel costs, legal expenses, and insurance expenses related to our expansion of trucks and facilities which were acquired and organic growth. In addition, we had significant business development and related expenses related to the Refinery Purchase Agreement and related transactions, in addition to the termination fee related to the termination of the Safety-Kleen transaction.
For the three months ended March 31, 2022, total depreciation and amortization expense attributable to cost of revenues was $114,053, compared to $112,497 for the three months ended March 31, 2021, an increase of $1,556, mainly due to additional investments in rolling stock and facility assets during the fourth quarter of 2021, which increased depreciation and amortization in 2022.
We had gross profit as a percentage of revenue of 3.8% for the three months ended March 31, 2022, compared to gross profit as a percentage of revenues of 8.5% for the three months ended March 31, 2021. The main reason for the decrease was the increase in commodity prices during the period.
Additionally, our per barrel margin decreased 33% for the three months ended March 31, 2022, relative to the three months ended March 31, 2021. Our per barrel margin is calculated by dividing the total volume of product sold (in bbls) by total gross profit for the applicable period ($1,537,259 for the 2022 period versus $2,124,043 for the 2021 period). This decrease was a result of the decrease in our product spreads related to increases in feedstock prices and increases in operating maintenance costs at our facilities, during the three months ended March 31, 2022, compared to the same period during 2021.
Overall, commodity prices were up for the three months ended March 31, 2022, compared to the same period in 2021. For example, the average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the three months ended March 31, 2022, increased 30.90% per barrel from a three-month average of $52.54 for the three months ended March 31, 2021 to $83.44 per barrel for the three months ended March 31, 2022. The average posting (U.S. Gulfcoast Unleaded 87 Waterborne) for the three months ended March 31, 2022 increased $43.40 per barrel from a three-month average of $73.18 for the three months ended March 31, 2021 to $116.58 per barrel for the three months ended March 31, 2022.
We had loss from operations of $7,272,052 for the three months ended March 31, 2022, compared to loss from operations of $760,935 for the three months ended March 31, 2021, an increase of $6,511,117 or 856% from the prior year’s three-month period. The increase in loss from operations was mostly due to business development expenses related to the transactions contemplated by the Sale Agreement (which was terminated as of January 25, 2022) and the Refinery Purchase Agreement and related transactions.
We had interest expense of $4,229,884 for the three months ended March 31, 2022, compared to interest expense of $112,142 for the three months ended March 31, 2021, an increase in interest expense of $4,117,742 or 3,672% from the prior period, due to the interest associated with the Senior Convertible Notes, which were issued on November 1, 2021.
We had a $3,578,947 loss on change in value of derivative liability for the three months ended March 31, 2022, in connection with the Senior Convertible Notes issued on November 1, 2021, compared to a gain on change in the value of our derivative liability of $1,780,203 in the prior year’s period, which was in connection with certain warrants granted in May 2016. This change was mainly due to the fluctuation in the market price of our common stock (and more specifically the increase in the market price of our common stock during the current period, compared to the prior period), warrant exercises, and non-cash accounting adjustments in connection therewith. This resulted in a significant change in non-cash expense for the period, compared to the prior year’s period.
We had net loss from continuing operations of $14,608,509 for the three months ended March 31, 2022, compared to net loss from continuing operations of $2,651,856 for the three months ended March 31, 2021, an increase in net loss from continuing operations of $11,956,653 or 451%. The main reason for the increase in net loss for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was attributable to the increase in loss on change in value of derivative liability, interest expenses and business development expenses for the three months ended March 31, 2022, each as described in greater detail above.
Each of our segments’ income (loss) from operations during the three months ended March 31, 2022 and 2021 was as follows:
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| Three Months Ended March 31, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) |
Black Oil Segment | 2022 | | 2021 |
Revenues | $ | 1,550,287 | | | $ | 122,986 | | | $ | 1,427,301 | | | 1,161 | % |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 1,649,972 | | | 280,378 | | | (1,369,594) | | | (488) | % |
Depreciation and amortization attributable to costs of revenues | 16,411 | | | 20,382 | | | 3,971 | | | 19 | % |
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Gross loss | (116,096) | | | (177,774) | | | 61,678 | | | 35 | % |
Selling general and administrative expense | 7,411,220 | | | 1,942,399 | | | (5,468,821) | | | (282) | % |
Depreciation and amortization attributable to operating expenses | 26,916 | | | 26,916 | | | — | | | — | % |
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Loss from operations | $ | (7,554,232) | | | $ | (2,147,089) | | | $ | (5,407,143) | | | (252) | % |
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Refining and Marketing Segment | | | | | | | |
Revenues | $ | 34,718,918 | | | $ | 19,273,952 | | | $ | 15,444,966 | | | 80 | % |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 33,086,160 | | | 17,949,695 | | | (15,136,465) | | | (84) | % |
Depreciation and amortization attributable to costs of revenues | 23,370 | | | 31,876 | | | 8,506 | | | 27 | % |
Gross profit | 1,609,388 | | | 1,292,381 | | | 317,007 | | | 25 | % |
Selling general and administrative expense | 1,124,336 | | | 759,409 | | | (364,927) | | | (48) | % |
Depreciation and amortization attributable to operating expenses | — | | | — | | | — | | | — | % |
Income from operations | $ | 485,052 | | | $ | 532,972 | | | $ | (47,920) | | | (9) | % |
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Recovery Segment | | | | | | | |
Revenues | $ | 3,947,591 | | | $ | 5,648,305 | | | $ | (1,700,714) | | | (30) | % |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 3,829,352 | | | 4,578,630 | | | 749,278 | | | 16 | % |
Depreciation and amortization attributable to costs of revenues | 74,272 | | | 60,239 | | | (14,033) | | | (23) | % |
Gross profit | 43,967 | | | 1,009,436 | | | (965,469) | | | (96) | % |
Selling general and administrative expense | 246,839 | | | 156,254 | | | (90,585) | | | (58) | % |
Depreciation and amortization attributable to operating expenses | — | | | — | | | — | | | — | % |
Income (loss) from operations | $ | (202,872) | | | $ | 853,182 | | | $ | (1,056,054) | | | (124) | % |
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Our Black Oil segment generated revenues of $1.6 million for the three months ended March 31, 2022, with cost of revenues (exclusive of depreciation and amortization) of $1.6 million, and depreciation and amortization attributable to cost of revenues of $16,411. During the three months ended March 31, 2021, these revenues were $123 thousand with cost of revenues (exclusive of depreciation and amortization) of $280 thousand and depreciation and amortization attributable to cost of revenues of $20,382. Revenue from operations increased for the three months ended March 31, 2022, compared to 2021, as a result of increases in commodity prices, and a new Marine Division, which was created at the end of 2021 for blending bunker fuels into the Gulf Coast Market. The total loss was $7.6 million for the three months ended March 31, 2022, which increased $5.4 million compared to the same period ended March 31, 2021, due to the costs related to the Shell plant purchase and sale of UMO Business.
Our Refining segment includes the business operations of our Refining and Marketing operations, as well as Crystal Energy, LLC ("Crystal"). Since the acquisition of Crystal in June 2020, we have operated as a wholesale distributer of motor fuels which include gasoline, blended gasoline and diesel. Revenues of $34.7 million in the Refining segment were up 80% during the three months ended March 31, 2022, as compared to the same period in 2021 mostly as a result of the increased commodity prices and volume during the three months ended March 31, 2022. Overall volume for the Refining and Marketing segment was increased during the three months ended March 31, 2022, as compared to the same period in 2021. Our pygas volumes decreased 3% for the
three months ended March 31, 2022, as compared to the same period in 2021. Our fuel oil cutter volumes decreased 4% for the three months ended March 31, 2022, as compared to the same period in 2021, volumes in our gasoline blending business increased 9% during the three months ended March 31, 2022, as compared to the same period in 2021.
Our Recovery segment generated revenues of $3.9 million for the three months ended March 31, 2022, with cost of revenues (exclusive of depreciation and amortization) of $3.8 million, and depreciation and amortization attributable to cost of revenues of $74,272. During the three months ended March 31, 2021, these revenues were $5.6 million with cost of revenues (exclusive of depreciation and amortization) of $4.6 million , and depreciation and amortization attributable to cost of revenues of $60,239. Loss from operations of $202,872 for the three months ended March 31, 2022, compared to profit from operation of $853,182 in 2021, was a result of higher commodity costs, less metal sales in volumes, which caused lower margins related thereto. This segment periodically participates in project work that is not ongoing thus we expect to see fluctuations in revenue and gross profit from this segment from period to period.
The following table sets forth the high and low spot prices during the three months ended March 31, 2022, for our key benchmarks.
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2022 | | | | | | | | |
Benchmark | | High | | Date | | Low | | Date |
U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | | $ | 4.36 | | | March 8 | | $ | 2.15 | | | January 3 |
U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | | $ | 3.53 | | | March 8 | | $ | 2.26 | | | January 3 |
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | | $ | 112.93 | | | March 8 | | $ | 67.84 | | | January 3 |
NYMEX Crude oil (dollars per barrel) | | $ | 123.70 | | | March 8 | | $ | 76.08 | | | January 3 |
Reported in Platt’s US Marketscan (Gulf Coast) | | | | | | |
The following table sets forth the high and low spot prices during the three months ended March 31, 2021, for our key benchmarks.
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2021 | | | | | | | | |
Benchmark | | High | | Date | | Low | | Date |
U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | | $ | 1.79 | | | March 12 | | $ | 1.32 | | | January 4 |
U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | | $ | 2.13 | | | March 11 | | $ | 1.36 | | | January 4 |
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | | $ | 59.54 | | | March 5 | | $ | 45.08 | | | January 4 |
NYMEX Crude oil (dollars per barrel) | | $ | 66.09 | | | March 5 | | $ | 47.62 | | | January 4 |
Reported in Platt’s US Marketscan (Gulf Coast) | | | | | | |
We saw an increase in the first quarter of 2022, in each of the benchmark commodities we track compared to the same period in 2021. The increase in market prices was a result of a continued recovery of the economy from the pandemic together with geopolitical tensions.
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
Our primary sources of liquidity have historically included cash flow from operations, proceeds from notes offerings, bank borrowings, public equity offerings and other financial arrangements. Uses of cash have included capital expenditures, acquisitions and general working capital.
The success of our current business operations has been dependent on 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 $280.5 million as of March 31, 2022, compared to $266.1 million at December 31, 2021. The increase was mainly due to increases in accounts receivable and inventory levels, due to the increases in commodity prices and volumes, and increases in investments for the new Mobile Refinery during the three months ended March 31, 2022, compared to the prior year's period.
We had total current liabilities of $58.9 million as of March 31, 2022, compared to $49.2 million at December 31, 2021. We had total liabilities of $128.7 million as of March 31, 2022, compared to total liabilities of $192.5 million as of December 31, 2021. The increase in current liabilities was mainly due to the increase in accounts payable as a result of rises in commodity prices and volumes along with decreases in current portion of debt due in less than a year while the decrease in total liabilities was mainly due to the removal of the derivative feature associated with the Convertible Senior Notes as a result of shareholder approval for the issuance of shares of common stock upon conversion thereof during the three months ended March 31, 2022, compared to the prior year’s period.
We had working capital of $182.3 million as of March 31, 2022, compared to working capital of $185.0 million as of December 31, 2021. The decrease in working capital from December 31, 2021 to March 31, 2022 is mainly due to the increase in inventory and accounts payable, for which the inventory was purchased in March 2022 to be used for the product and sale in early of April 2022. Also we had a $3 million break fee paid for the termination of the Sales Agreement with Safety-Kleen.
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 more capital expenditures related to new TCEP facilities in the future.
The Company’s outstanding debt facilities as of March 31, 2022 and December 31, 2021 (excluding the Convertible Senior Notes) are summarized as follows:
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Creditor | Loan Type | | Origination Date | | Maturity Date | | Loan Amount | | Balance on March 31, 2022 | | Balance on December 31, 2021 |
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John Deere Note | Note | | May 27, 2020 | | June 24, 2024 | | $ | 152,643 | | | $ | 84,537 | | | $ | 94,005 | |
AVT Equipment Lease-HH | Finance Lease | | May 22, 2020 | | May 22, 2023 | | $ | 551,609 | | | 263,065 | | | 302,166 | |
SBA Loan | SBA Loan | | July 18, 2020 | | July 18, 2050 | | $ | 58,700 | | | 58,700 | | | 58,700 | |
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Various institutions | Insurance premiums financed | | Various | | < 1 year | | $ | 5,604,748 | | | 1,008,621 | | | 2,375,071 | |
Total | | | | | | | | | $ | 1,414,923 | | | $ | 2,829,942 | |
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Future contractual maturities of notes payable are summarized as follows:
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Creditor | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
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John Deere Note | $ | 38,460 | | | $ | 39,414 | | | $ | 6,663 | | | $ | — | | | $ | — | | | $ | — | |
AVT Equipment Lease-HH | 263,065 | | | — | | | — | | | — | | | — | | | — | |
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SBA Loan | — | | | 1,266 | | | 1,315 | | | 1,365 | | | 1,417 | | | 53,337 | |
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Various institutions | 1,008,621 | | | — | | | — | | | — | | | — | | | — | |
Totals | $ | 1,310,146 | | | $ | 40,680 | | | $ | 7,978 | | | $ | 1,365 | | | $ | 1,417 | | | $ | 53,337 | |
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Our Convertible Senior Notes will mature on October 1, 2027, unless earlier repurchased, redeemed or converted. The components of convertible notes are presented as follows:
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| | March 31, 2022 |
Principal Amounts | | $ | 155,000,000 | |
Unamortized discount and issuance costs | | (89,213,315) | |
Net Carrying Amount | | $ | 65,786,685 | |
Interest of the Convertible Senior Notes is payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The following table represents the future interest payment.
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Interest payable | | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
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Interest payable | | $ | 9,687,500 | | | $ | 9,714,041 | | | $ | 9,687,500 | | | $ | 9,687,500 | | | $ | 9,687,500 | | | $ | 4,857,021 | |
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Cash Flows from Operating, Investing and Financing Activities
We believe that we have sufficient liquid assets, cash flow from operations, borrowing capacity and adequate access to capital markets to meet our financial commitments, debt service obligations and anticipated capital expenditures for at least the next 12 months. We expect that our short-term liquidity needs which include debt service, working capital, funds required to complete the transactions contemplated by the Heartland Purchase Agreement, and capital expenditures related to currently planned growth projects will be met through projected cash flow from operations, borrowings under our various facilities and asset sales.
Our current near term plans include transitioning the majority of our assets and operations away from used motor oil and towards several important objectives, the combination of which we believe will advance our strategy of becoming a leading pure-play energy transition company of scale in connection with the recent acquisition of the Mobile Refinery. The refinery, which has a long track record of safe, reliable operations and consistent financial performance, has, effective on April 1, 2022, upon the closing of the acquisition, become our flagship refining asset, which we believe positions us to become a pure-play producer of renewable and conventional products. The addition of renewable fuels production associated with the refinery is anticipated to accelerate Vertex’s strategic focus on "clean" refining. By year-end 2022, assuming the completion of the planned capital project at the facility, the Mobile Refinery is projected to produce approximately 10,000 barrels per day (bpd) of renewable diesel fuel and renewable byproducts. By mid-year 2023, based on current projections, Vertex expects to increase renewable diesel production to 14,000 bpd. Upon completion of the planned renewable diesel project, Vertex expects to become one of the leading independent producers of renewable fuels in the southeastern United States.
We anticipate that the market for our common stock will be subject to wide fluctuations in response to several factors moving forward, including, but not limited to:
(1)actual or anticipated variations in our results of operations;
(2)the market for, and volatility in, the market for oil and gas;
(3)our ability or inability to generate new revenues;
(4)the status of planned acquisitions and divestitures; and
(5)the number of shares in our public float.
Furthermore, because our common stock is traded on The NASDAQ Capital Market, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, there could be extreme fluctuations in the price of our common stock.
We believe that our stock prices (bid, ask and closing prices) may not relate to the actual value of our company, and may not reflect the actual value of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in our common stock, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in our public reports and industry information.
Cash flows for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, were as follows:
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| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Beginning cash, cash equivalents and restricted cash | | $ | 136,626,939 | | | $ | 10,995,169 | |
Net cash provided by (used in): | | | | |
Operating activities | | (3,989,799) | | | 2,189,096 | |
Investing activities | | (6,691,427) | | | (1,017,379) | |
Financing activities | | (1,398,463) | | | 359,943 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | (12,079,689) | | | 1,531,660 | |
Ending cash, cash equivalents and restricted cash | | $ | 124,547,250 | | | $ | 12,526,829 | |
The analysis of cash flow activities below is combined for both continued and discontinued operations.
Our primary sources of liquidity are cash flows from the Convertible Senior Notes and Term Loan.
Net cash used by operating activities was $3,989,799 for the three months ended March 31, 2022, as compared to net cash provided by operating activities of $2,189,096 during the corresponding period in 2021. The primary reason for the increase in cash used by operating activities for the three month period ended March 31, 2022, compared to the same period in 2021, was the businesses development expenses related to the Refinery Purchase Agreement, and the cash paid for termination of the Sales Agreement with Safety-Kleen in January 2022.
Investing activities used cash of $6,691,427 for the three months ended March 31, 2022, as compared to having used $1,017,379 of cash during the corresponding period in 2021, due mainly to capital expenditures relating to our Alabama Refinery plant.
Financing activities used cash of $1,398,463 for the three months ended March 31, 2022, as compared to providing cash of $359,943 during the corresponding period in 2021. Financing activities for the three months ended March 31, 2022 were comprised of proceeds from the exercise of options and warrants of $0.1 million offset by the payment on notes payable and capital leases of
$1.5 million. Financing activities for the three months ended March 31, 2021 were comprised of proceeds from the exercise of options and warrants of $1.7 million offset by the payment on notes payable and capital leases of $1.3 million.
More information regarding our loan agreements, leases, and Convertible Senior Notes, can be found under “Note 6. Financing Arrangements” 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, intangible assets, long-lived assets valuation, variable interest entities, and legal matters. Actual results may differ from these estimates may be material. Note 2, “Summary of Critical Accounting Policies and Estimates” in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2021 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s financial statements. There have been no material changes to the Company’s critical accounting policies and estimates since the 2021 Form 10-K. 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.